Business Analysis: Speculators out in force as mining minnows become the new dot.coms

Making money on the stock market is easy. Just ask White Nile's Phil Edmonds
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When the Poseidon mineral exploration company found nickel in western Australia, its shares soared from A$1.80 to A$280 in less than six months, and a raft of speculative ventures raised money across the globe to fund exploration in the region.

When the Poseidon mineral exploration company found nickel in western Australia, its shares soared from A$1.80 to A$280 in less than six months, and a raft of speculative ventures raised money across the globe to fund exploration in the region. When Bre-X suggested it was sitting on 200 million ounces of gold in Indonesia, its shares took off and private punters were infected with gold fever. Both ended badly, the former in bankruptcy, the latter with proof of fraud. Poseidon was 1969. Bre-X was 1997.

With White Nile, the latest speculative venture from the Phil Edmonds stable, having risen 1,285 per cent in value since it was floated last week, you could be forgiven for thinking that the sector is in the throes of a mania

The Bre-X scandal (it ended with the geologist falling to his death from a helicopter and the revelation that drill samples had been tampered with) combined with the arrival of dot.commery to drive punters out of the mining sector until after the millennium. Normal service has been resumed, and the lure of discovering the next real ten-bagger (stock market parlance for a share that goes up tenfold) has brought back the speculators.

"Some of the stuff that happens on the fringes of the market can be very speculative, but a lot of it is not bullshit," says Philip Richards, the chief executive of RAB Capital, a hedge fund manager with an expertise in the mining sector. He cites Asia Energy, a company RAB backed while it was still private and whose shares are up 793p since their flotation last April. Geological studies have suggested it may be sitting on a billion tonnes of coal.

"You start with something that isn't really anything, but if you prove up the reserves you can get a share performance. Something like Asia Energy can come from something that two or three years ago was just a field in Bangladesh. Anything which can make big share gains will attract the private punter, and there is an amazing amount of chit-chat on the internet about these ventures."

The internet bulletin boards have been a key part of the surge in White Nile shares, which were suspended on Wednesday ahead of a deal to buy oil interests in south Sudan. But in truth, the circle of investors punting on White Nile is quite small, and it is the lack of available stock which has sent the share price so far, so fast. Phil Edmonds - the former England bowler, major shareholder and chairman - has attracted a loyal following after making big share price gains on previous ventures, including Central African Mining & Exploration and Southern African Resources.

He has promised news of his acquisition today, and there are high-profile players - including the notorious short seller Simon Cawkwell, aka Evil Knievil - who are betting the deal will not justify the inflated share price at which White Nile shares were suspended this week. The company as floated contained £9m in cash, but is now valued at £206m. It will therefore have to create £197m of value from the assets it is buying if it is to make any money for shareholders in the long term.

This tussle between bulls and bears is the stuff of the speculative end of the stock market, where valuations are based on hope and trust rather than measurable profit potential. We will only know in retrospect - when, in a few years we can measure the success of these ventures against their promises - whether too much money has been put into too-ropy ventures, whether this is a bubble.

Justin Urquhart Stewart, a director of Seven Investment Management, sounds a sceptical note. "I fear some small investors are about to lose some money. If you look at some of the mining stocks and oil stocks it is rather worrying that people hunting on the basis that one of them will be the next Cairn Energy [which struck black gold off the Indian coast and has soared into the FTSE 100]. People are getting mixed up in a crapshoot. Some of these companies are as likely to find Perrier water as they are oil or gas."

The consensus, though, is that mining stocks as a whole are not overvalued. Those with close-to-production mines, where cash flows are at least predictable, look lower now than they were last spring, when a flood of mining floats got away.

"In the first quarter of last year, you could have floated a dead dog," Matthew Dorman, the chief executive of Mexico-focused silver mining company Minco, said. "A lot of those that were floated at that time haven't really done anything, and the astute investor would have got in and got out on the first wave. While the bubble burst, there has not been a bursting in mining, rather a deflation."

Minco was caught up in the frenzy of last spring. "Our shares got as high as 37p and are now down at 15p, but I would say neither 37p nor 15p is a fair reflection of the assets," Mr Dorman said. The deflation last summer, when fund managers suddenly turned off the funding tap, came amid fears of a sharp slowdown in the Chinese economy, but this view has now reversed somewhat.

The era was characterised by the invention of entirely new financial valuation measures to justify the unjustifiable, valuations of the biggest mining companies are not obviously out of kilter with the fundamentals, Antony Doulton, mining specialist at Fiske, the private client stockbroker, says.

"For years there has been under-investment in new mines, with many of them being shut down, and now there are real bottlenecks that, with the quantities needed by China, are pushing up the prices of metals. We have seen a few dangerous things being ramped out of all recognition. In any boom, the wrong type of person comes to the forefront. But there are plenty of small companies that will turn into big companies."

Mr Richards of RAB Capital said: "The tech boom lasted all through the Nineties, but it was only at the end of the decade when it reached mania. I think the mining sector now is more like tech in the early Nineties than the late Nineties.

"Those who know what they are doing will make big gains, and then there will be a mania to share in those gains by people who don't know what they are doing. It probably will end in a bubble, but I think we are three or four years away from that."