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    Wednesday, January 07, 2009


    Strike Resources Limited (SRK

    I've spent some time looking into Strike Resources Limited (SRK) after seeing that they were a major holding of Orion Equities Limited (OEQ) which is trading at about 1/3rd of book.

    At face value Strike (SRK is a resource company selling for 2/3 of cash of hand. They have an iron ore tenement that may have been worth as much as 400M to them at the peak along with a coal mine that will nearly pay for itself in one year of cash flow. This is what attracted me. On the downside here is some history of the founders:

    Strike is now locked in litigation in Peru and criminal charges have been discussed. Of course SRK's management insists that the claims are without merit. Peru is a good location for mining. The independent Fraser Institure has published an index of locales. Peru scores about 55 along with New South Wales and Victoria! Their Iron Ore tenement may really be a valuable asset.

    As for their coal mine; Indonesia scores a 15 out of 100 as a mining jurisdiction and is 7th from the bottom of the list. Another mining company executive is quoted as saying “Indonesia: No security of tenure, transparency, etc. Shame, as it is technically one of the best countries in the world to explore.”.

    It is critical to understand that $40M USD of capital expenditure or $57M AUD would leave $16M AUD if they don’t spend another cent on any other corporate activity. That expenditure will be in one of the worst mining jurisdictions in the world. That is assuming that the capital expenditure is really only $57M AUD. If it goes over by 25% then SRK is out of cash.

    To value Strike you have to look at their cash and what it’s going to be used for. If the Indonesian mine goes ahead next year then there will be little to no cash left in the bank. So it isn’t reasonable to value SRK based on today’s cash when they have already planed to spend it.

    All in all the origins of this company are very shaky. They’ve never really made money and the founders look like professional promoters switching from hot sector to hot sector while spending time every few years in court. Their new directional shift to Indonesia probably continues their money losing tradition and in 2 years time they’ll be explaining how the mine isn’t producing anywhere near forecast due to political issues. They’ll also have used up the cash they need for their one great iron ore asset in a secure jurisdiction. Finally they are paying themselves substantial amounts of shareholder money (cash and equity) while continuing to lose money.

    I’m tempted buy at 38c but I have to pass.
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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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