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High-risk GCM a spicy choice

Written by: 
Edmond Jackson

This article was published on Interactive Investor website.

When should you take notice of a sudden chart movement, as signalling underlying change? One possibility is when the overall context for a company looks more promising than it has in a good while.

Thus, it is interesting to keep an eye on the AIM-listed shares in Bangladesh-oriented coal miner GCM Resources (GCM).

Since last autumn, the price has traded in a 100p to 65p range, the company's annual meeting in December the price has signalled a swift climb - to breach the 100p level on Thursday 14 January amid hopes that finally the company can secure genuine progress to develop a substantial coal resource at Phulbari in north-west Bangladesh.

You can learn more via gcmplc.com. The unpublished message from the AGM was that management was working with the government to get an outcome, and the rise in the share price shows speculators reckoning (once again) that GCM's time has come.

There have been various false dawns. Since listing as Asia Energy at 75p a share nearly six years ago, the price has swung dramatically in a range of about 10p near 1,000p. This reflected greed that the company could achieve massive long-term revenues from its sovereign contract with the Bangladesh government; then fear, both after riots at Phulbari in 2006 and in the dark days of the late 2008 bear market, that the shares could effectively be written off.

While the government has prevaricated on approving project go-ahead, GCM applied funds originally raised to develop Phulbari to invest in other situations such as Aura Energy, a uranium exploration company listed on the Australian Stock Exchange, Coal of Africa (CZA) also listed on AIM, likewise Polo Resources (PRL) in uranium and coal and which also owns 29.8% of GCM equity.

GCM also owns 37% of PeoplesTel, an unlisted telecoms network in Bangladesh said to benefit the Phulbari project. Such an 'investment holding company' approach can work well in a bull market yet in more sceptical times the shares tend to linger at a discount to their sum of parts.

Even after quantifying it you are left guessing where a support level really lies. The 2008 bear market swept all such impressions of security aside, and GCM shares down to 13p.

While it is necessary to be aware of the history, one also has to strive to be objective - as cynicism only guarantees missing out.

If Phulbari remains on the backburner then in the current financial climate possibly the shares' downside is to about 50p according to sentiment. What remains intriguing is the upside potential, which would help the shares to multiply again if this coal project progresses and according to what terms. In 2005, brokers published targets over 2,000p a share, even assuming lower coal prices than today.

Bear in mind that although a contract has existed, what terms may actually get finalised could differ in order to make project go-ahead politically acceptable - both with the government and wider population. Yet with the market barely reflecting Phulbari's upside, GCM's risk/reward profile remains attractive to gamblers.

A consistent factor is Bangladesh's chronic energy crisis leading to power cuts, which the Awami League government promised to address with power plants when elected last July. Furthermore, it was a previous such government that progressed initial foreign investment in the Phulbari coal project, so the odds are fair they will look on it favourably again.

Against this, the project has a bloody history with organised riots in 2006 against open-pit mining, and shootings by the then government's police. This stymied the atmosphere and doubtless the Bangladesh elite still fears the potential reaction on the streets.

There was talk in late 2006, this had been whipped up partly by vested commercial interests in coal importing who did not want to see Phulbari developed; meanwhile genuine locals are said to be in favour, with relocation packages offered. The only proof is what gets announced in Bangladesh and how it goes down publicly.

Hence speculators have looked for clues in the varied Bangladesh online media, where a pinch of salt is wise. A few sections are pro-business arguing the case for foreign investment, occasionally written by Bangladeshi's abroad or possibly influenced by companies.

Breakthrough has appeared within grasp, on and off in recent years, then for whatever reasons the necessary approval has not come through from government. Yet the regular features on power generation do keep the project in serious contention: for example government officials have examined open pit coal mines overseas.

The situation is also hard to judge because of the ongoing challenge to finalise a national coal policy although it is repeatedly said by GCM directors that Phulbari does not require this to get approval.

Despite these drawbacks, they are part of the challenge for investing in developing countries, why the shares currently trade at a big discount to Phulbari's potential. You have to decide if GCM is the kind of high risk/reward share that fits with your AIMs and portfolio.

It is quite tightly held, with a market capitalisation of about £50 million, prone to rise sharply just on the expectation of news - as shown by various spikes in the chart over recent years.

So, although it is not a producer with a proven track record, such as AIM-listed Western Coal (WTN) I have covered, GCM is among the spiciest of mining shares to follow. Eyes down for perhaps an interesting few months ahead.

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