Stock Research: Salinas Energy (SAE)

Independent California oil producer
Operator
Using horizontal drilling
40,000 acre land position
30 staff: 7 in Australia, 23 in US (operational base)

Recent share price: 35 cents
Shares out: 241m
Market cap: $84m
Net cash: $7m (no debt)
Company currently buying back shares
Year end: 30th June
$55m accumulated losses

Current production/forecasts

30th June 2008
http://www.asx.com.au/asxpdf/20080630/pdf/319wzgg7ph3j0y.pdf

30,000 bbls
US$3m revenue
1,350 bopd
Still on target for 287,000 bbls for calendar 2008
At current oil prices (US$140/bbl), 2008 calendar year sales expected to exceed US$25m.

May 2008

http://www.asx.com.au/asxpdf/20080526/pdf/3199qjlv6p5q74.pdf

1,100 barrels per day production
US$20m revenues forecast for 2008 (based on US$85 less US$13 heavy oil discount oil price)
287,000 barrels production forecast for 2008
Targeting 2,000 bbls/day production by end 2008
- @US$80/bbl (net) = US$50 - US$60m annualised revenue
- @US$100/bbl (net) = US$65 - US$70m annualised revenue

BJ forecasts

Calendar 2008
287k bbls * US$90/bbl = US$26m revenue
Operating profit = ~$US$15 (60% margin, no tax)
Less development and exploration costs

Calendar 2009
US$60m revenue
Operating profit US$30m
Less development and exploration costs

Comments/Summary

* Low risk production, with some upside.
* P/E on calendar 2009 operating profit -> 3.
* Potential for P/E for current operations to be re-rated, although production profile falls (see page 11 on 26th May 2008 presentation, linked above).


* Paris Valley should be low-risk upside
* Plus exploration targets Merlot and Osso Bucco
* SAE estimates risked value of these 3 at $1 per share

Significant share price re-rating probably depends on exploration success, as increased NSA production coupled with the increased oil price is not moving the share price.

SALINAS BASIN

1. North San Ardo (NSA) field

15m barrels in place
5.5m barrels 2P recoverable reserves
Phase 1 (2 years): Primary production
Phase 2 (10 years +): Secondary production steam enhanced
Peak production in early part of each phase.
11/11 well success
2,000 bpd facilities in place
Operating costs US$11/bbl
Royalties 22%

Drilling 8 wells in 2008

2. McCool field

5m bbls in place
Heavy oil
Potential 1m bbls recoverable
Extended well testing in Q2/3 2008

3. Paris Valley (SAE 50%)

100m+ bbls in place
Targeting 25m bbls recoverable
Heavy oil

Drill late 2008

EXPLORATION

Southern San Joaquin focus
Light oil
Targeting 50% equity

2008 Prospects
a) Paloma field and Osso Bucco prospect
Recoverable potential -> Mean 11m bbls, Upside 28m bbls

b) Merlot
Recoverable potential -> Mean 18m bbls, Upside 46m bbls

Stock Research: Wotif.com (WTF)

http://finance.google.com/finance?q=ASX:WTF

Share price: $3.10
Market cap: $645m
Shares out: 208m
Net cash as at Dec 2007: $108m (less travel.com.au $44m and Asia Web Direct $17m acquisitions = ~$50m)
Trade and other payables as at December 2007: $138m, including $44m for travel.com.au
2008 P/E -> 19 (EPS ~16.5 cents)
2008 forecast dividend -> 15 cents or 4.8%
2009 forecast P/E -> 14 (EPS 22 cents), or 33% growth. Too optimistic?
2009 forecast dividend -> 19 cents or 6.1%

Comments:

Positive

- Dominant Australian online hotel room booking channel for the wotif.com.au brand.
- Asia Web Direct gives them access to that fast growing region.
- High operating margins.
- Negative cash cycle (receives cash on sale, pays hotels later)
- Some recent director buying.
- Fair value based on 2009 forecast P/E and dividend yield.

Negative

- Overpaid for travel.com (~20 to 25 times earnings)
- Integration risks with acquisitions.
- Increasing and focusing on offline marketing spend. Word of mouth growth presumably slowing, although marketing has the potential to further boost growth rates.
- Facing economic headwinds in Australia.
- Increased competition (what impact?)

Verdict

- Wait for 2008 full results, checking net cash position and integration of acquisitions.
- Shares may have further to fall, as 2009 forecasts may be optimistic coupled with economic headwinds.
- Trailing P/E of 15 = share price of $2.50, or ~20% less than today's share price.
- Forward P/E of 15 on more conservative 2009 EPS of 19.5 cents = share price of $2.90 cents, or 6.5% less than today's price.

Full year results due 27th August 2008

June 2008

FY2008 NPAT forecast(23/6/08): $34.5m vs $26.4m (+30%)
Therefore H2 2008 NAPT: $17.4m vs $14.5m (+20%)
P/E -> 18.7
PSR -> ~7.5 (~$85m annual revenue)

February 2008

Acquire Asia Web Direct for $34.2m -> $17.1m cash & 3.6m shares ($4.75 per share)
Annual EBITDA: ~$2.3m -> P/E on purchase price of 15
http://www.asx.com.au/asxpdf/20080204/pdf/3178y4v9kkyn04.pdf

Half Year ended 31st December 2007

H1 2008 TTV: $310m vs $251m
H1 2008 revenue: $41m vs $31m (+32%)
HI 2008 NPAT: $17.1m vs $11.9m (+ 44%)
Net profit margin: 41.4%
H1 Dividend: 6 cents vs 5 cents
H1 EPS: 8.3 cents vs 5.7 cents (+46%)
User sessions: 3.2m per month vs 2.5m (+28%)
Room nights sold: 2.2m (+22%)
Room rates: $144 vs $137 (+5%)
http://www.asx.com.au/asxpdf/20080220/pdf/317k0gnqzfhf6b.pdf

November 2007

Announced acquisition of travel.com.au (TVL) for $50m, trumping Webjet's offer.

In the 6 months to December 2007, TVL...

TTV: $68m
Revenues: $7.5m
EBITDA: $0.8m

One Big and One Small Stock To Buy Today

It has been a tough 12 months for stock market investors, but we firmly believe there are some excellent value stocks you can buy today.

Below we highlight the one and only banking stock we like today, plus a selection of some of our very favourite resource stocks, including one BIG one and one SMALL one to BUY today…

Dear Battered and Bruised Stock Market Investor,

The 2007/08 tax year is almost at an end.

For stock market investors, it’s been a shocker, with the All Ordinaries Index slumping a wealth destructing 14% over the past 12 months.

But we have got two reasons to smile …

1. The resources sector continues to run red-hot, with iron ore prices up 85%, the oil price still hovering near record highs, and predictions Australia’s commodity exports will grow by another 40% next financial year. It all bodes well for our specially selected resource stocks.

2. Because of (justified) jitters about the state of the global economy, specifically the US and the spectre of rising inflation, the stock market has been falling, dragging the price of many resource stocks down with it. That gives us the opportunity to pick up some specially selected resource stocks at cheaper prices than they were just a few short weeks ago.

The Super Dream Gone Wrong

A year ago, with the stock market riding high, the Howard Liberal government’s superannuation reforms encouraged thousands of ordinary Australians to tip billions of additional dollars into super funds.

Investment properties were sold and the cash added to super funds. Financial advisors and planners were working over-time. Some people even borrowed money in order to maximise the amounts they could put into super.

It was almost entirely done in the name of tax. Superannuation is an excellent tax-efficient way of saving for your retirement.

But what many ordinary Australians failed to even consider was that the stock market can go down as well as up.

For years, we’ve been spoilt. We’ve been used to consistent double digit capital returns from the stock market, plus impressive dividend returns. You had to go all the way back to 2002 to find the last calendar in which the Australian stock market fell. Before that, it last fell in 1994.

Put another way, since 1994, the stock market as measured by the All Ordinaries Index, has fallen in only one calendar year.

Faster Than A Brett Lee Thunderbolt

That’s one down year in 13 years.

One of the mistakes many investors make is assuming the near-term past will be replicated in the long-term future.

So…up until November 2007, because the stock market had been rising strongly for many years, financial advisors, investment bankers, private investors, mums, dads, bar staff and taxi drivers simply assumed it would carry on doing so in 2008, 2009, 2010 and for every year ahead.

Welcome to reality.

In the short-term, the stock market is not a one-way bet. Many factors influence its short-term direction, and these can and do change almost on a daily basis.

Economic data is released faster than a Brett Lee thunderbolt. One piece of data is often in direct conflict with another piece of data. One person will interpret the data one way, another person will interpret it an entirely different and opposing way.

Often there are more questions than answers. For example, at the moment we have…

Question #1 : How High Can The Oil Go?

The oil price continues to dominate the news. We have OPEC saying the high price of oil is all due to hedge funds and financial speculators.

On the other hand, we have governments around the world, including our own here in Australia, telling OPEC the high oil price is because demand is exceeding supply, so please Saudi Arabia, pretty please Saudi Arabia with sugar on top, can you please please please pump some more oil?

Please Pump More Oil

It will bring down petrol prices for our gas guzzling western economy voters, help us ease inflation, and help get our greedy economies back on the straight and narrow. Please pump more oil.

There is a strong “global warming” argument that the oil price should remain around where it is now. Slowly but surely the high petrol prices are starting to change our behaviour – we are driving less miles and kilometres, we are dumping petrol guzzling V8s for fuel efficient smaller cars, airlines are cutting capacity, we are increasingly thinking about switching to hybrid cars and more bicycle lanes are being built.

And that’s not all that can be done to reduce our utter reliance on petrol – try things like car pooling, walking and cycling to work and school, working from home, and leaving the car at home and taking public transport, just to name a few.

Anyway…what does the high oil price all mean to us as stock market investors?

• On the one hand, we have some commentators predicting the oil price is in a bubble and is set to fall back from its current US$135 odd a barrel back to US$100 a barrel over the next few months.

• On the other hand, some people are predicting the oil price is only headed higher, both in the short-term and in the long-term.

• But a higher oil price will unleash even higher inflationary pressures. Inflation is the economy’s public enemy number 1, and will be fought with higher interest rates, which in turn, by definition, slow the economy. We’re staring at a classic catch-22 situation.

We told you there were more questions than answers.

We Got This One Wrong…But It’s Still A Winning Bet

We aim to answer the questions. We don’t get every answer exactly right.

For example, at the beginning of 2008, we said we remained bullish on oil. But we didn’t remain bullish enough, setting our 2008 oil price target at US$90 a barrel.

So…one point for a right answer and minus one point for a wrong answer.

But in this game – the game of long-term stock market investing – you can get unlimited points for a right answer but only lose one point for a wrong answer. That’s because shares prices can go up thousands of percentage points, but can ‘only’ go down 100%.

Whilst the oil price has risen substantially above our short-term target of US$90 a barrel, we haven’t been recommending our Members sell any oil company shares. On the contrary, we’ve been recommending they BUY shares in some of our specially selected favourite oil companies.

Oil Set To Hit US$200 A Barrel

At the same time, we’ve modified our thoughts on the oil price, saying…

• We believe triple-digit oil prices are here to stay.

• We believe oil could easily trade as high as US$200 per barrel.

When it comes to the high oil price, we firmly believe in the “demand exceeding supply” argument rather than it being driven by financial speculators.

Take these facts…

- Oil is a naturally depleting commodity.

- The last major oil discoveries occurred in the late 1970s and early 1980s.

- Almost all of the world’s cheap and accessible oil has already been discovered.

- The world currently has around 6.7 billion people, many of whom are utterly reliant on oil. The world population is expected to reach nearly 9 billion people by the year 2042.

- The current alternatives to oil are either unproven, very expensive or impractical.

So there you have it. Over the long-term, we believe the oil price will rise inexorably higher, not withstanding the odd hiccup.

Fight Them Not On The Bowsers, Beat Them On The Stock Market

As we’ve said many times before, the way to fight higher petrol prices is to buy some specially selected oil stocks.

Our preference has always been for smaller oil companies.

In fact, right now we think we’ve found a collection of smaller oil companies who generally have similar characteristics, being…

- The fly largely under the radar of the large institutional investors, meaning the shares are relatively cheap.

- They have outstanding leadership teams, many of whom we have personally met, and all of whom have extensive oil company experience, often in much bigger companies.

- They are already profitable oil producers, mostly with little or no debt.

- They have outstanding exploration prospects.

In a nutshell, at today’s prices, we believe many of these smaller oil companies are fairly valued based on their current production and profits, with the option of significant exploration success thrown in for free.

It’s our oil-stock version of investing with a large margin of safety.

Question #2: Is This A Resources Bubble?

We’ll let you work out the answer to this one yourself…

• Macarthur Coal went into a trading halt earlier this week as foreign suitors continued to circle the business. The shares were suspended at $20.73, at which price they trade on a price-to-earnings ratio of around 60 times – a quite astoundingly high valuation for a commodity business. There’s seemingly no shortage of steel producers willing to pay that high a price to secure Macarthur’s environmentally friendly PCI coal.

Do you think they see any end to the resources boom?

• After months of negotiation, Rio Tinto has just secured an iron ore price increase of 85% with Chinese steel-maker Baosteel.

Do you think Boasteel would be prepared to agree to such a massive increase if they could see any end in sight for the resources boom?

• The Australian Bureau of Agricultural and Resource Economics (ABARE) this week predicted the value of Australia’s total commodity exports is predicted to rise by 40% next financial year.

Does that sound like the end of the resources boom?

• There is a mini power crisis going on right now in Western Australia, following the explosion that took place recently at the Varanus Island gas hub, located in the North West Shelf region offshore Western Australia.

The facility is responsible for supplying some 30% of WA’s domestic gas needs. The government is encouraging people to turn lights off and to take four minute showers to save power.

It sounds to us like Western Australia needs to discover more gas, and preferably quite quickly, or else it won’t be just their two AFL teams who are left in the dark in 2008. What do you think?

As it happens, we are quite familiar with the North West Shelf area of Western Australia, principally because one of our favourite smaller oil and gas companies is currently drilling for gas in that exact area.

They are targeting a potentially lucrative discovery in the vicinity of 1 trillion cubic feet (TCF) of gas, which could more than double their existing petroleum reserve base.

Importantly any discovery could be brought into production quickly and cheaply.

Results from this potentially transformational well are due any day now. If they are positive, the share price of this smaller oil and gas company could literally take-off.

Question #3: Is It Time To Buy Aussie Banks?

We continue to be amazed at the fascination with banking stocks. We guess it comes down to a few points…

- Many people have become shareholders in banks courtesy of their privatisation over the past 20 odd years.

- Until very recently, bank shares have made for exceptional long-term investments.

- The Big Four Australian banks operate in a quasi cartel. Mortgage rates are remarkably similar, as are savings rates. This cosy togetherness has resulted in all four banks recording high and growing profits, much to the delight of the thousands of shareholders.

- Banks have been some of the highest dividend yielders on the market. Coupled with their collective dominant market position and therefore implied safety, they have become a firm favourite amongst self managed super funds and retirees in general.

- If you can’t beat them, join them. Rather than forlornly venting our frustration at the increasing number and increasing cost of the myriad of bank fees, people have instead bought shares in the banks.

- Private investors just love retailers and banks. They see them at their local shopping centre, and use them. They recognise the brand names. If their broker or financial advisor gave them a choice of buying shares in Commonwealth Bank or Terramin Resources, we suggest they’d plump for the bank. Why? They’ve heard of Commonwealth, but not Terramin. Strange but true.

We continue to avoid most banking shares. For us, it is not the time to be buying banks…

- The Australian economy is facing some strong headwinds.

- Inflation remains annoyingly high.


- Unemployment is edging higher.

On top of all that, we believe house prices are soon to come under increasing pressure, with a material risk of a fall.

The Scary Truth About House Prices & Bank Shares

We don’t wish to scare you, but US house prices are already down around 16% from their peak.

Then just last week, HBOS, owner of BankWest and the United Kingdom’s biggest housing lender, forecast UK house prices would fall by 9% in 2008.

If you thought Australian banking shares were becoming cheap, and some of them having fallen by around 33% from their recent peak, shares in the UK’s HBOS are down a whopping 75% from their peak and now trade on a trailing price-to-earnings ratio (P/E) of just 2.5 times.

To put that into perspective, if Commonwealth Bank were to trade on a trailing P/E of 2.5 times, its share price would be $6.80, down from the $40 it trades around today and the $60 it traded at as recently as November last year.

That sort of share price carnage is not about to befall Commonwealth Bank or any of the other major Australian banks. But it is a stark reminder that banks are extremely profitable in times of economic prosperity, yet in times of rising mortgage defaults and falling house prices, profits can virtually disappear, as can share prices!

The One & Only Bank We Are Buying Today

As we said above, we continue to avoid most banking shares.

But not all of them.

Very recently, we re-recommended one of the Australian mid-tier banks as a BUY. The company trades on a forward P/E of around 9-10 times and a forward dividend yield of around 7-7.5%, or more than 10% on a grossed up basis.

In line with the rest of the banking sector, the shares are substantially off their recent high.

Yet recent times have seen positive sentiment returning to the share price. Added to that, in the light of the Westpac takeover for St George, we are of the opinion that this company could also become a takeover target.

All in all, this is the only bank we are happy to recommend as a BUY, and although we anticipate that several months of consolidation and base building will be required before a sustainable revival of upward share price momentum emerges, we are very confident in the long-term prospects of this particular bank.

Question #4: Is It Time To Buy Shares Now?

Good question.

Our general view is that time to buy is now. It is always now.

But there are two important catches…

Catch No 1: It’s only time to buy THE RIGHT SHARES now.

Catch No. 2: It’s only time to buy shares now if you are prepared to hold them for the long-term.

As we’ve said plenty of times before, we think the resources boom is set to last for years and even decades ahead. The unprecedented great Chinese urbanisation is only just beginning. China has one of the lowest urban-to-rural ratios in the world, yet have the largest population in the world.

We could go on, but we think you get the message – we are firmly of the opinion that resources stocks still offer share market investors the best prospect of long-term capital gains.

We’re not all talk either – one look at our hypothetical portfolios show they are packed with our very favourite resources stocks.

We have big ones and small ones. Low risk ones and higher risk/higher reward ones. We have gold ones. We have oil ones. We have zinc ones. We have uranium ones. We have iron ore ones. Silver ones. Copper ones. Coal. Gas, and more.

For example…

BUY This Big One

Just last week we recommended this large diversified miner as a BUY.

The company has recently announced it is merging with another large Australian miner. We believe this ‘de-risks’ the company and sets the foundation for the combined entity to become a significant force in the diversified mining sector.

Indeed, the company will be Australia’s third largest diversified miner behind Rio Tinto and BHP Billiton, and the fifth largest miner on the Australian Stock Exchange.

The combined company offers broad based exposure to our view of continued commodity price strength. And the best part about this large diversified miner is that it is cheap, trading on a single digit price to earnings ratio.

We concluded our buy report with “…we believe the stock will be re-rated as future earnings growth comes into view in the months ahead.”

BUY This Little Copper One

Also just last week, we recommended this small copper explorer as a BUY.

We have followed the steady progress the company has made on its African exploration projects for the past few years; however only now do we believe the time is right to recommend the shares as a BUY.

The company has a major ground position in Botswana and is aggressively pursuing development of its primary project, a large copper deposit. The company looks cheap compared to its copper sector peers, which has prompted our initial Buy recommendation.

The charts back up our buy recommendation – we believe the company offers considerable upside potential over the longer term. Despite periodic bouts of volatility, a firm upward trend has emerged since 2005 and we anticipate further gains in due course.

We concluded our buy report by saying the company “…combines an attractive portfolio of mineral assets in Africa that are at advanced stage of development. The company’s market value is modest, but the upside in our view is enormous, driven by its large ground position and the potential for more discoveries.”

We think there’s a good chance the ONE BIG ONE above and this ONE SMALL ONE pass our test of being the right shares to buy now and to hold for the long-term.

We wish you happy and profitable long-term investing.

P.S. Remember the brand new Northern Territory iron ore producer we mentioned last week? At the time, the shares were around 77 cents. This week the shares closed Monday at just 64 cents. But that was before Rio Tinto agreed its massive 84% iron ore price hike. It seems that woke up the stock market to this company again, as the shares soared an astounding 12.5% on Tuesday alone. Yet they are still trading below the 77 cents of just one week ago. We just love these types of compelling and profitable stock market opportunities.

Three Tax and Six Share Tips

In this week’s bumper issue, we tell you exactly who to blame for the high petrol prices, and what you can do about it.

We also exclusively reveal a way that George W Bush can befriend the American people, AND leave a memorable lasting legacy…for the right reasons.

Finally, we give you details of 3 cheap small resources stocks we think could be set to fly higher in the days, weeks and months ahead.

Dear Fellow Tax Payer and Stock Market Investor,

The end of the 2007/8 tax year is just around the corner.

It’s been a tough 12 months for stock market investors, with the All Ordinaries index down around 13% since the end of June last year.

The last weeks in June are always a good time to review your tax situation. Everyone’s individual circumstances are different, and you should take tax advice where necessary and appropriate, but here are 3 things you could potentially do to reduce your 2007/8 tax bill…

1. Minimise your capital gains tax liability by either selling some winners to offset against capital losses, or selling some losers to offset against capital gains.

2. Prepay interest on margin loans.

3. You may be able to claim subscription costs against your tax.

Public Enemy Number 1 Raises Its Ugly Head

Meanwhile, back on the general economic front…

Can you feel the economic headwinds whistling down your computer screen?

We can.

Inflation is on the rise, not just here in Australia, but globally. The ever rising oil price is largely to blame.

Yet at the same time, economic growth is slowing.

The traditional cure for a slow economy is to lower interest rates.

But lower interest rates lead to higher inflation. And world central bankers have long made inflation public enemy number 1, so they are reluctant to lower interest rates.

In the US, to counter the growing threat of inflation, economists and central bankers alike are now making noises about raising interest rates – not long after they’ve just slashed them from 5% all the way down to just 2%.

But higher US interest rates will put even more pressure on US house prices. The whole sub-prime mortgage crisis, complete with home foreclosures, is still playing out in the US. You would think an interest rate rise would be the final nail for the US economy, plunging it into a deep recession.

Can This Be George W Bush’s Lasting Memorable Legacy?

But wait…there’s more. As part of George Bush’s “farewell and thanks for the memories” world tour, some people are suggesting the US government will eventually be forced to take on the debt of some of the more mortgage-stressed US citizens…

- to save them

- to save the US economy

- to save their houses

- to save banking stocks

- and to give George W Bush a legacy other than to be remembered for the Iraq invasion.

Our opinion since the whole sub-prime crisis first surfaced back in August last year has been the US government and economists will save the economy first, and deal with the consequences later.

Lowering interest rates and the sending cheques to many financially challenged US citizens has been the first step. As we’ve long been saying, lower interest rates and printing more US dollars will ultimately result in increased inflation.

Whatever happens, and especially if the US government ends up personally bailing out mortgage-stressed citizens, we think increased US inflation is as good a certainty as Tiger Woods was to win the US Open playoff.

And, as we’ve been telling you for some time now, increased inflation is good for oil and gold.

Gold spiked above US$1000 an ounce back in March. It’s off the radar a little right now, but gold is the natural hedge to rising inflation, so we think it will be back above US$1000 an ounce in the not too distant future.

As an aside, as this email goes to press, we are feverishly researching the entire gold sector, hunting for yet more hidden gems of gold mining shares. We expect to update our thousands of Members in the coming weeks.

Gold Price Up 20%, Gold Shares Up 100%

Why buy shares in gold miners rather than just buy a few gold bars?

It’s all about leverage. This occurs when production costs rise at a slower pace than the revenue received from gold sales. This effect is known as operating leverage and results in profits growing at a faster rate than revenue.

As an example, a company selling gold at $500 per ounce with costs of $400 will earn $100 for each ounce sold. If costs remain fixed and gold increases by 20% to $600 per ounce, then the company’s profits will rise to $200.

In this case, a 20% rise in the price of gold has translated into a 100% increase in profits.

In such a scenario, the share price performance of the gold miners should substantially exceed that of the gold price.

Voila.

The Small Gold Miner We’ve Just Re-recommended As A Buy

With that in mind, just last week we recommended our Members BUY more of one of our very favourite small gold explorer shares.

· We first began following the company’s progress more than two years ago. We’ve been greatly impressed by their ability to deliver on their exploration and development goals.

· The final piece in the jigsaw puzzle is now almost in place, as the company moves towards production of its first gold bar – the commissioning of their initial Brazilian gold mine, well below budget, a major feat considering the current environment of delays and cost blow-outs right across the resources sector.

· This is NOT a speculative resource play. We firmly see the company as a long-term generator of wealth for shareholders. The company is run by what we consider to be one of the resource sector’s most highly regarded boards and management teams, which have a goal of building a high quality and growing mid-cap gold producer.

· We believe the rewards for shareholders will be in the form of sustainable capital growth and dividends driven by long-term production and exploration success, rather than many of its peers with a short-term focus on chasing whatever commodity might currently be ‘hot’ to generate short-term share price appreciation.

· We have every confidence in the company’s eventual ability to reach its annualised production target of 35,000 ounces. With the gold price at around A$950 and their anticipated production costs of around $A450 an ounce, we’re very confident the company will generate robust cash flows, and we think that should ultimately be reflected in a sharply increased share price.

· We concluded our report of last week by saying we think the recent share price weakness provides an astute buying opportunity, even for existing holders. Accordingly, we recommend the company as a BUY to all Members around 60 cents.

The good news is the shares still trade at around the 60 cent mark they were at when we recommended them as a BUY just last week.

As The Oil Price Rises, The Gold Price Looks Set To Follow

The other piece of potentially good news is the fact that the gold-to-oil ratio has fallen to its lowest level in some time, pointing to an oversold position in gold relative to crude oil.

In recent years, the price of gold has been at a ratio of more than 9 times the price of oil. Following oil’s meteoric rise however, the ratio has slumped to around 7 to 1. We would expect the ratio to return to longer-term levels in the years ahead, as gold resumes its upward trend.

All in all, we are confident in the future prospects for this Brazilian emerging gold producer and the gold price itself. We think the company itself is worth significantly more than the $90 million it is currently valued at, even with gold prices where they are today.

But the real excitement for this company could come with an increasing gold price. If, as we expect, the gold price exceeds US$1000 an ounce again in the not too distant future, we could expect some serious share price excitement to closely follow.

Who You Can REALLY Blame For High Petrol Prices

Oil remains firmly in the headlines.

A Nielsen poll published in the Sydney Morning Herald this week said 78% of Australians want the government to cut fuel prices, and 56% were unhappy with Prime Minister Kevin Rudd's handling of fuel prices.

Yawn.

It’s like asking turkeys if they’d vote for Christmas.

Of course turkeys don’t like Christmas and of course the majority of Australians don’t like high petrol prices.

But don’t blame Kevin Rudd for high petrol prices. There are a host of other people and entities you can blame, for example…

· OPEC, for not pumping significantly more oil, presuming they could, which is a big assumption. Let’s blame them regardless.

· Various governments around the world, for not granting sufficient oil exploration licenses for years previous.

· The falling US dollar. OPEC has previously said that for every one percent decline in the dollar, the oil price rises by US$4.

· Oil speculators, for punting on a rising share price, hence sending it yet higher still.

· China and other Asian countries who are subsidising the oil price, hence cushioning their local companies from the full effect of the sharply increasing oil price. The end result is that the higher oil price is not affecting demand, as it should do.

If you want to get annoyed about high petrol prices, pick one of the above, print off a picture of Iran, John Howard, George Bush, George Soros and the Great Wall of China, stick it on your wall, and throw darts at it.

Hopefully it might make you feel a bit better.

But we suspect it won’t make you feel better for too long.

The Oil Price Was Supposed To Fall – But It Rose Instead

For example, this week, the oil price was supposed to fall.

On Monday, Reuters reported…

“The world's top oil exporter Saudi Arabia will boost output next month to the fastest rate in decades to help keep pace with demand and tame what it sees as unacceptably high fuel prices.”

Later on Monday, after the European markets had closed, the Financial Times of London reported…

“Oil surged to a record near to $140 a barrel on Monday as traders brushed aside reports that Saudi Arabia plans to increase production in order to cool the market.”

So much for that idea then.

We’re not surprised. In fact, we were one of the first mainstream organisations to predict oil would hit US$100 a barrel.

We like to keep it simple. To us, high oil prices are largely a result of the falling US dollar coupled with very tight supply versus demand dynamics.

We’re not the only ones who think that.

The Scary Truth About Oil – It’s Running Out Faster Than You Think

This week, as reported in the Australian Financial Review, the world’s 2^nd largest energy company, Royal Dutch Shell, said it sees it as a certainty that oil and gas supplies will not match demand by 2015.

2015 is not far away.

It takes years and decades to discover and bring into production new oil fields.

2015 suddenly feels very close.

If something is not done now about either curbing oil demand and/or increasing oil supply, you can forget about the petrol price falling back below $1.50 a litre.

Expect to pay $2.50 to $3 a litre for petrol in the not too distant future.

It’s a scary thought.

You’ll have to car-pool. You’ll have to catch public transport. You’ll have to do more walking. You’ll have to learn to ride a bike again.

Very scary.

But there is hope. Humanity has successfully evolved, changed and innovated over the centuries. It will do so again. Where there is a will, there is a way. We just need a few more people to be willing, like the US and China for example, and then we’ll find a way.

We’re no saints here in Australia either, with our insatiable demand for bigger houses, flat screen TVs, multiple cars per family and many other oil and energy guzzling luxuries.

Oil To Hit US$200 A Barrel

Through all this uncertainty, we think one thing is certain – the oil price will keep rising.

Oil’s current climb to around US$140 a barrel is just part of a strong upward trend in price that has been underway since 1997.

In fact, we have just made our boldest ever oil price prediction…

“Over the longer-term we believe oil can trade at much higher prices, although over the short-term it could be vulnerable to some profit-taking. Over the next few years however, we believe oil could easily trade as high as US$200 per barrel.”

So what’s a stock market investor to do, apart from driving less, walking more and generally reducing our energy needs?

Buy oil stocks of course.

But there is a catch.

The 6 Large Commodity Companies We Like Today

You must buy the right oil stocks.

As we’ve said here on many previous occasions, you could do a lot worse than just buying a large company energy company like BHP Billiton. In fact, last week we named BHP as one of our top 6 large-cap commodity companies today.

Whilst we think these 6 large cap commodity companies offer investors the prospect of solid long-term returns, it’s the smaller end of the market that we usually find our biggest winners.

Last week, we also said…

“At the smaller end, we anticipate the recent volatility will provide some additional buying opportunities.”

In the past few months, we’ve seen an almost unprecedented level of stock market volatility. The economic headwinds we mentioned earlier mean that one day the stock market is all gloomy because it can’t see an end to the credit related woes. The next day, the market is euphoric as suddenly it can see the light at the end of the tunnel.

Smaller companies often get hit the hardest on the down days, and then, perversely, don’t benefit as much on the up days. Even more bizarrely, we’re often seeing the share price of smaller oil companies fall on the same day the oil price hits yet another record high.

Two Even Cheaper Small Commodity Stocks

But that sort of stock market activity doesn’t faze us. On the contrary, we like it when some our very favourite smaller companies see their share price fall, because it gives us the unique opportunity to recommend them as a BUY to all our existing and our brand new Members.

For example…

A Cheap Small Oil Stock

The small Thai-based oil producer and explorer we recommended our Members BUY just last month at 76 cents is now trading at around 60 cents. New buyers today can pick up the shares at a 20% discount to the price a month ago.

An Even Cheaper Small Iron Ore Stock

A couple of month’s ago we met with this company’s Chairman and CEO, taking comfort from their vision of building upon and expanding the company’s existing Northern Territory based iron ore business.

They have just shipped their first boatload of high-grade iron ore to Chinese customers. As you probably know, iron ore is currently just about the hottest commodity on the planet at the moment, yet this junior iron ore producer is still only capitalised at less than $200 million.

Back in April, we recommended our Members hold the company when the shares were priced at 93 cents. Today they trade around 77 cents, a 17% discount to their price of just a couple of months ago.

Some Great Big Winners

These are just two small examples of the types of companies we prefer – small, cheap and largely undiscovered.

But simply finding a small, cheap and undiscovered commodity company does not guarantee stock market success. The Australian Stock Exchange is littered with ‘penny dreadful’ companies with dubious management, tenements in inaccessible places, little cash, and almost no hope of long-term share price appreciation.

That’s where we like to think we make a difference. We can get access to the management of many promising smaller resource companies.

We find there’s nothing better than kicking the wheels of a company to establish if it’s the real deal or just another fly-by-night pumped up ‘penny dreadful’.

For example, each of these companies was initially recommended to Members when they were worth less than $30 million. Just look at the stunning gains they’ve racked up since…

Terramin Australia – Up a breathtaking 695% since December 2005!

Platinum Australia – Up an astonishing 622% since November 2005!

(Share prices taken on Monday 16^th June 2008. Gains don’t include dividends.)

Don’t just take our word for it. Wilson Asset Management principal Geoff Wilson was recently quoted in the AFR as saying some “exceptional” opportunities have presented themselves, particularly in the mid-to-small company sector.

“I am more excited about the next 12 months than I have been in the last two or three years.”

We wish you happy and profitable long-term investing.

P.S. More than one respected source has recently suggested the oil price might be headed towards US$200 a barrel. If that happens, the stock prices of some of the small companies above could potentially soon be heading into the stratosphere.

The Scary Truth About Petrol Prices

Dear Fellow Market Investor,

We don’t know about you, but we are sick to death of the daily news bulletins leading with stories about high petrol prices.

We are even more sick to death of hearing about the FuelWatch scheme.

Enough.

Please.

Much of it comes down to politics and votes. We are politically agnostic and couldn’t care less whether our views on petrol prices gain or lose us votes. What we passionately do care about is fattening the purses and wallets of our thousands of Members.

In fact, contrary to popular politics, we could easily sit here and cheer for even higher petrol prices, because we are confident our Members will benefit.

That’s because we have long been telling our Members and readers of this email to buy oil companies, because we were (and still are) very confident the long-term price of oil will remain above US$100 a barrel.

We’ve been busy recommending small, medium and large oil companies as BUYS to our thousands of Members. If they’ve followed our advice, by now they could be sitting on some big profits, some possibly made in a very short space of time.

We’ll have more on that a little further down, including one small oil and gas company we think still has been overlooked by the market, despite its share price already having jumped 15% in the last month.

We also name the company whose share price soared an amazing 14% on Monday alone this week after announcing a $776 million deal with global oil and gas giant Shell. It’s a great case study in how our conviction about this company’s future prospects has seen our Members suitably rewarded.

The Scary Truth About Petrol Prices

Here are the real facts and some distinctly non-political home truths about oil and petrol prices.

· Despite what any politician from any party says, FuelWatch will not make petrol cheaper. Lower oil prices will make petrol cheaper. End of debate.

· Most of the world’s cheap oil has already been discovered.

· World demand for oil is high and only going to get higher still in the years and decades ahead. For example, the IEA (International Energy Agency) forecast that China and India will add more than 13 million barrels to daily oil demand by 2030. Longer-term, petrol prices are only going to go up.

· The days of cheap air travel are rapidly coming to an end. Higher oil prices means higher airfares. They also mean less competition. Who in their right mind would launch new a new airline in today’s environment? We predict a very tough time for recent domestic entrant Tiger Airways.

· Many working families are already struggling to cope with higher mortgage payments or higher rent costs. For a nation obsessed with petrol prices, paying $1.65 a litre is a killer blow. But they haven’t seen anything yet. Higher fuel prices are cascading down the food chain – literally. Expect to see the prices of groceries continue to rise, putting yet more pressure on family budgets.

· That in turn will continue to put pressure on domestic inflation. The Reserve Bank of Australia (RBA) kept interest rates on hold this week at 7.25%, but it is getting very worried about rising inflation. We do not envy the RBA Governor Glenn Stevens. If he raises interest rates, he could put large parts of the country’s population effectively in recession. If he doesn’t raise interest rates, he risks seeing higher inflation eat away the country’s prosperity. What’s a Governor to do? Sit on the fence, of course. But as we all know, sitting on a fence for long periods of time ultimately becomes very painful.

· We were talking to a real estate friend of ours on the weekend. He seemed to be spending more time at home recently. He said it was like someone had turned off the tap about 6-8 weeks ago. Sales have completely dried up. It’s no coincidence that the tap was turned off around the same time as interest rate rises and higher petrol prices started to really bite. Expect falling house prices soon – if people really want to sell their houses, the only thing they can do is reduce the price.

Yet whilst all this is going on regarding petrol prices, house prices, inflation and whether Shane Warne will make a comeback to take on the Poms next year, there is a huge part of the Australian economy that continues on its own merry prosperous way.

The Mining Boom Continues Unabated

For anyone connected with it, whether they work directly in it or like us, are investors in it, whichever way you look at it, the mining and resources boom is continuing unabated.

· As we said above, world demand for oil is only going to rise. Global oil consumption currently runs at around 88 million barrels per day. Higher oil prices has crimped some demand, but we’re only talking around the edges.

· Oil exploration companies increasingly have to drill for oil in more and more difficult places. This adds to the cost of exploration and in the event of a discovery, the cost of extraction. Either the price of oil stays high and goes even higher, so that it makes these new discoveries economical for the oil companies, or the oil stays in the ground. Given the increasing demand and the world’s complete reliance on the naturally depleting natural resource called oil, it has to come out of the ground.

· Then there’s gas. The sector is quite literally on fire. Last week we had Santos agreeing to sell part of its Gladstone liquefied natural gas (LNG) project to Malaysia’s Petronas for up to $2.6 billion.

· That in turn prompted Origin to reject BG Group’s $15.50 per share cash offer for the company. Significantly, Origin’s shares actually rose after the BG deal was rejected – normally shares in the target company fall when they reject a takeover. Maybe Origin has something (gas) that the rest of the world increasingly wants, and is increasingly willing to pay a hefty price to secure? Maybe indeed.

· Then we have this week news of Aussie junior gas player Arrow Energy’s $776 million deal with global oil and gas giant Shell. In a media release announcing the deal, Arrow said it “…has the largest coal seam gas (CSG) acreage position in eastern Australia and a growing presence in four Asian countries.” It went on to say “The global demand for LNG is forecast to more than double…by 2015 as developing countries like China and India compete for energy resources with developed states.”

500 Million More People Are Coming To China & India

A couple of week’s ago we printed a table of the population of the world’s three most populous countries. Repetition is the best form of learning, so we make no apologies for re-printing it this week.

1. People's Republic of China 1,323,902,000

2. India 1,133,037,000

3. United States of America 304,117,000

China and India together represent around 37% of the world’s population. No wonder Arrow Energy say they are increasingly going to compete for energy resources.

They are not the only ones saying that. In a presentation last week, Rio Tinto’s Chief Executive Tom Albanese said…

“The unprecedented increase in global urbanised population will be driven by emerging markets.”

“China and India, the largest single contributors, will experience a combined increase of over half a billion people…but growth is global, with a total increase in urbanised population from 2005–25 of 1.4 billion people.”

“Demand growth remains strong and, combined with supply side constraints, this means there has never been a time at which our options for expansion have been so valuable. With world demand for our products set to double by 2022, we have the reserves and resources in place to keep pace with the market.”

The Resources Megatrend Set To Last For Decades Ahead

Regular readers will know we’ve also been saying it too, probably for longer than most. For anyone who’s been listening, we’ve been saying the resources boom is likely to last for years and even decades ahead. We were saying it when few others were saying it. We were saying it when a few more ‘experts’ started catching on.

We’re still saying it now, at a time when the mainstream media have finally cottoned on that this is a resources megatrend, not a resources bubble.

Bubbles go pop.

Megatrends go on for years and decades ahead.

Sure we’ve just had prices of commodities like copper, oil, iron ore, platinum and coal – to name just a few – rising three and fourfold in just the last few years, but we believe that just gets them to roughly the levels simple supply versus demand economics dictate they should be trading at.

That’s now. Looking further ahead, the key drivers of future growth are…

· Increasing demand, as mentioned above.

· The increasing costs of mining and resources companies…

o Higher energy costs

o Higher exploration costs

o Higher extraction costs

o The continued weakening of the US dollar

o The cost of financing

To us, it all adds up to a continuation long into the future of the resources megatrend.

On Fire: The Small Queensland Company That Hit Gas

Arrow Energy is the name of the company we mentioned near the start of this email. As we said above, on Monday this week their shares soared 14% after the announcement of Shell’s huge $776 million investment.

Arrow’s share closed the day on Monday at $3.79. When we first recommended Arrow Energy as a BUY way back in November 2005, the share price was 75 cents and the whole company was worth around $500 million.

Fast forward to today and Arrow Energy is worth over $4 billion.

A $10,000 investment in Arrow at 75 cents would now be worth over $50,000.

Even Members who followed our BUY advice of just 3 weeks ago, when the shares were trading at $3.22, would already be sitting on a very handy gain of 18%.

But that may only be the start. In our BUY report of just 3 weeks ago, we said…

“Australia is ideally situated in proximity to China, and with abundant in-ground gas reserves to service China’s LNG needs.

Arrow Energy has been at the forefront of corporate and development activity in the Queensland energy market over the past couple of years. It remains our preferred CSG play.

With Arrow Energy at the forefront of a growing LNG industry in Queensland, we have never been more comfortable with the stock.”

Shock: World’s Oil & Gas Supplies Are Running Out

Obviously we’re pleased that some of our existing Members will have already benefited from the 18% jump in the share price since we published that report.

But in terms of the long-term picture for Arrow Energy and many other of our preferred mining and resources recommendations, an 18% gain could be just the beginning.

Like Rio Tinto and other major resources companies, Arrow Energy are planning way out into the future. They are looking past 2013, past 2015, and all the way out to 2020 and beyond.

Like us, Arrow Energy are planning on this resources megatrend running for decades ahead.

Remember – resources like oil and gas are naturally depleting. The world is absolutely reliant on them. Can you imagine a world without oil and gas? Maybe it could happen in 150 – 250 years time, after decades of mind boggling sums of investment, but what with the massive challenge of dealing with climate change at the same time, we’re struggling to imagine how the world might adapt and look.

Some BIG Winners

Naturally, we’ll continue tracking the performance of Arrow Energy in the months, years and decades ahead.

That’s one of the many nice things about being a Member. Once we recommend a stock as a buy, we keep following it and keep updating our Members on the latest news.

Like Warren Buffett, we are long-term investors. We like nothing more than to watch the share price of a company we first recommended as a buy a few years ago continue to rise as it increases its profits and/or makes a significant new discovery and/or launches a successful new product.

Arrow Energy is not the only long-term winner (so far) for Members. Just take a look at the performance of these specially selected companies …

Macarthur Coal – UP 1488% since September 2002.

Terramin Australia – UP 698% since December 2005.

QBE Insurance – UP 683% since September 2001.

(All prices taken from Yahoo Finance as at Monday 19^th May 2008 close)

We closely follow the progress of all the companies we recommend as a BUY right up until the day we recommend our Members sell them. Even then we will continue to monitor the performance of the company, always looking for fresh buying opportunities should they arise.

Another of the really nice things about being a Member is that because we follow our BUY recommendations so closely, we often find ourselves re-recommending them as BUYS months or years in the future. That’s exactly what we’ve done with Arrow Energy.

In fact, since that initial BUY recommendation in November 2005, we’ve made the following BUY re-recommendations about Arrow Energy…

Report Date BUY Recommendation Price

December 2005 67 cents

September 2006 65 cents

February 2007 $1.30

May 2008 $3.22

When Next? What Price?

As a reminder, on Monday this week, Arrow Energy shares closed at $3.79.

You could have done even better if you’d first bought Arrow Energy when we re-recommended them as a BUY a full 10 months after our initial BUY recommendation, in September 2006.

The shares traded even lower than 65 cents, their lowest point since our initial recommendation being 52 cents in June 2006.

As recently as January this year, Arrow Energy shares were a paltry $1.49.

The point is that for highly promising companies like Arrow Energy, with what we think are excellent long-term prospects, there are often numerous buying opportunities. And you don’t have to buy the shares just once – as you can see from the above, buying more shares at opportune moments can be an even more profitable investment strategy.

Run Your Profits For Maximum Gains

There is an old stock market saying…

“Run your profits and cut your losses”.

Unfortunately, many investors do the exact opposite.

People hate losing money. We’re no different. But people are often very reluctant to sell their losers because they can’t bear to actually book a loss. They say to themselves “I’ll sell the shares when they get back to the price I paid for them.”

Often that never happens. Shares that have already fallen say 30% can easily fall another 30% or more. In fact, most people conveniently forget shares that have fallen by say 80% or 90% can still fall another 90% from their current price.

For example, you could have bought Allco Finance Group at around $2.20 in January this year, which was 83% below their February 2007 peak of $13.24. Then, just 2 months later, the share price had slumped another 91% to trade at just 20 cents.

We’re pleased to say we never recommended Allco Finance as a BUY.

We like to run our profits. We think Arrow Energy is an excellent example of running your profits. Not only do we not sell out just because the share price has risen, we often re-recommend some of our favourite companies at higher prices, if and when the rewards outweigh the risks.

The Small Oil Company Overlooked By The Market…So Far

Which brings us nicely back to the oil price, and the small oil and gas company we think is still being overlooked by the market, despite its shares already jumping 15% in the last month.

As witnessed by our looooooooooong list of BUY recommendations, this is clearly one of our very favourite small oil companies…

Report Date BUY Recommendation Price

December 2005 98 cents

January 2006 $1.20

October 2006 $1.55

January 2007 $1.22

March 2007 $1.40

July 2007 $1.52

September 2007 $1.40

May 2008 $1.00

Here are some of the things we like about this oil company…

· Their strategy – enhancing production from aging oilfields – lowers the risk profile of the company.

· They have 100% ownership of the second-largest oilfield in Turkey in historical production terms. If they can increase the recovery rate to closer to typical averages, they would have potential access to an additional 45 million barrels of recoverable oil. For a company worth a total of around $90 million, that’s a lot of upside potential!

· The company recently began its first drilling programme on its second major asset, a Western Turkey gas field.

· To date, seven gas discoveries have been made out of seven wells drilled in 2007 and 2008. You can’t get a better strike record than that.

· Then, just last month, the company trebled its project portfolio by acquiring five projects totalling more than 19,000 acres in a prolific hydrocarbon region of central California.

· Unusually for a junior oil company, the company is profitable, has little or no debt, AND is dividend paying, trading on a trailing dividend yield of around 5%.

· Add all this together and it’s not surprising we’ve recommend the company as a BUY a full 8 times. We concluded one of our most recent reports about the company by saying it “…remains one of the most undervalued plays in the Australian oil sector.”

Today the company’s shares trade at around $1.16, meaning they trade below the price we were happy to recommend them as a BUY on 6 previous occasions. In our view, that still leaves plenty of upside for new investor’s a today’s price.

On top of that, we continue to remain very positive about the long-term oil price. It may not feel good at the petrol bowser, but we think it’s a good thing when you consider it from an investment in small, promising, undiscovered oil companies. Only the future will tell.

We wish you happy and profitable long-term investing.

P.S. More than one respected source has recently suggested the oil price might be headed towards US$200 a barrel. If that happens, the stock prices of the small company mentioned above plus all our other oil companies could potentially soon be heading into the stratosphere.

P.P.S. Remember the other small Thai oil company we highlighted just a few weeks ago, the company that is our best ever recommendation? We recently said we think the best days for this company could still be ahead of it. The share price has dropped back from a recent peak of 80 cents to around 69 cents, a fall of 14%. In our most recent report on the company, we recommended it as a BUY at 76 cents. Nothing has changed since then, except the share price!