VALUE INVESTING
A Value Play On Gold

By Stephen Bland (TMFPyad)
September 17, 2004

Gold exploration and Russia. Two features of a share which even individually are not exactly guaranteed to lead to a low-risk situation. Combine them and you have an ideal and powerful high-risk play. Established gold mining is risky enough. Exploring for the stuff whilst not yet having mined an ounce is infinitely more so for an investor. Stick it all in Russia, a country not exactly famed for centuries of political stability, and you have the wonderful poker hand that is Trans-Siberian Gold (LSE: TSG). (www.trans-siberiangold.com)

And yet, I wrote about this company for readers of my Value Investor newsletter in the February 2004 issue as a speculative value play. However, I did lay on with a trowel the fact that it was highly speculative. So, speculative certainly, but a value play?

It had no profits and no dividends. It did have net cash and it did have assets in excess of the share price though. Forget the cash, it will likely be consumed to fund the mining exploration and the other assets consist principally of the estimates of gold reserves in the areas it has licence to mine. Those estimates are notoriously flexible as I have noted from observing the history of mining shares, starting in my case with Aussie nickel mines back in the late sixties. But it's an old, old story.

My (highly speculative) value proposition was based on the gold in the ground being estimated to be worth well over the share price. Since February, the news has been good. The shares are now around the same level as the newsletter's buy price, about 131p, though they have fluctuated a lot in between.

The major news has been that Anglogold Ashanti (LSE: AGD), one of the world's largest gold mining groups, will subscribe a total of £17.6m to acquire a 29.9% stake in TSG in two tranches at prices of 136.95p and 149.4p thus adding money and technical support and increasing confidence that TSG will reach production. This important move increases my confidence in the shares too, if a company like that is willing to come on board. TSG has as result in my view stepped a little away from the sort of fantastically risky wildcat mineral exploration world that it inhabited and more into the established mining club. Only a bit more, but more.

Other news on the exploration indicates much higher than previously estimated gold resources. Total resources are now said to be 3.7m ounces, a lot more than was stated at the time of the listing on AIM in November 2003 and in an update issued January 2004.

Mining shares are influenced heavily by the market price of their mineral. This relationship can be very geared and moreover, that gearing is often emotional. By this I mean that the shares may be driven up and down by movements in the mineral price which won't necessarily have a similarly proportional effect on profits.

TSG is no exception and any strong movement in the gold price will likely affect the shares in a geared fashion, the price magnifying any large rises or falls in the metal. It all adds to the speculative features of this share. Added risk, but potentially added reward.

Summing up, there has been nothing but good news coming out of TSG since I first wrote it up and yet the shares have not really taken this into account to date. However, readers must note that despite all this, make no mistake, TSG still remains an extremely speculative value play. Don't go in if you can't live with that. If you do go in, be prepared for a roller coaster ride.

For the first take on Stephen's best value ideas, sign up for a free 30-day trial of his Value Investor newsletter. Issue 9 is due out today (September 17).