SGW sons of gwalia limited

SGW - Down But Not Out

  1. 9,081 Posts.
    I believe that SGW is a long-term buy for the patient investor.

    The share price fall of over 40% looks well and truly overdone.

    The wall slippage at the Tarmoola mine is a hiccup not a terminal illness. Wall slippages are not uncommon and while it will temporarily slow production and while it may be costly to repair, it is a solvable problem. True, there may be a major writedown necessary at the Tarmoola gold mine, but, as I said, the situation is not "fatal".

    The dotcom-telecom bust experienced over the last two years has meant that the tantalum market's outlook has gone well and truly off the boil. The irony is that SGW has just complted expansions at two of its tantalum mines. SGW has cut its high-priced contracts and cut its forecasts. There would be no point in enforcing the tantalum contracts (which Sons could legally do) if it meant sending its customers (Cabot Corp. & HC Stark) broke.

    So that's the double whammy responsible for the share price decline.

    Then there is the furphy of Son's gold hedging strategy. The fear whispered around in some uniformed market quarters is that SGW's hedging policy will send the company broke as the gold price escalates ... the "fear" is that Sons will "do a Pasminco".

    The reality is that SGW's hedging position is some $634m out of the money BUT the company has fixed both sides of the equation as one commentator put it
    "by locking in the gold price and the Australian dollar conversion rate". SGW will not "do a Pasminco" !!

    Those are the negatives.

    What about the positives?

    The company has sound cash flow and has been a consistent dividend payer for many years. True, the dividend has been cut but at current prices it is yielding over 7%

    Given the problems with its gold and tantalum operation it woulod not surprise to see the company extract growth via a major acquisition in the mineral sands area. SGW already has a 50% stake in the Wemen joint venture in the Murray Basin and the mineral sands industry offers SGW the chance to step out in a new direction and regain shareholder confidence. SGW may purchase the Nissho Iwai mineral sands business and may also increase its stake in Bemax Resources.

    Finally, the Tantalum market will recover. Estimates are that by 2005 most current mobile phones will be replaced. The telecommounication slump won't last forever. When it picks up a head of steam SGW will be there to capitalise on the opportunity.

    This company will not go to the wall ... it will not go broke will not do a "Pasminco".

    It is a long-established and (still) profitable company that has hit a few snags on its growth trajectory. They are solvable and are not permanent problems.

    The sell off has been hugely overdone.

    SGW is a stock to buy and lock away for the dividends and the inevitable "re-growth" that will, in time, materialise.

    Cheers, X
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Currently unlisted public company.

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