Red Hill Energy Inc. – A possible Pinetree, Mega Uranium, Dines Play?

by JDH on February 19, 2008

Today, a special report on a potential play in coal and uranium:

RH.V – Red Hill Energy, Inc.

Red Hill has been a component of the JDH portfolio for a while now, but I significantly reduced my holdings earlier this year during the correction. I think the time has come to re-visit it.

According to the Red Hill website:

“Red Hill Energy is a publicly traded (TSX-V: RH) mineral exploration company head quartered in Ulaan Baatar Mongolia that engages in the exploration, development and (currently) pre-production of advanced coal projects and a portfolio of uranium exporation projects.  Red Hill is currently advancing three coal resources, in two significant basins towards production with a combined total exceeding the 1 Billion tonne mark of high quality reportable bituminous coal.”

(As an aside, Red Hill has a really crappy web site; I think they should hire a high school kid to re-design it for them, and perhaps even include some up to date information. It’s somewhat embarassing to read on a site what they plan to do in 2007. However, I’m buying an exploration company, not a web design firm, so I’ll ignore that for now).

(As a further aside, the 1 billion tonnes of coal is for all projects, not just the 43-101 compliant ones, as we shall see below).

Coal is obviously an abundant and cheap fuel source, and will be essential for the growth of countries like China and India, until they all have hundreds of nuclear reactors on line.

Red Hill gives exposure to both coal and uranium, which is great.

Here’s the chart:

red hill energy

Obviously the stock has been in a downtrend since April, 2006, but the long term very slight uptrend that started in July 2006 has survived. The RSI downtrend seems to have been halted with the RSI now around 42, a favourable buy point. Also, the 60 cent level looks like a fairly stable floor, so I don’t see a huge amount of downside risk from here.

So, to summarize, exposure to uranium and coal, but high risk because it’s all in Mongolia.

Now, for the kicker.

On December 7, 2007 the following press release was issued:

“Canadian-based Mega Uranium Ltd. (TSX:MGA) has announced the purchase of new mining sites in Mongolia.  On Wednesday the company said it had acquired a 50 percent stake in those sites being operated by Red Hill Energy Inc. (TSX VENTURE:RH). Red Hill currently has ten sites in Mongolia with a total area of 1850 km2. Mega Uranium Ltd is a mineral resources company with a focus on uranium properties in Mongolia as well as Australia, Canada, Cameroon, Argentina, Bolivia, and Colombia.”

In other words, the Red Hill uranium properties in Mongolia are all now joint ventures with Mega Uranium.

As we all know, our old friend PNP.TO – Pinetree Capital Corp. owns, according to their web site, just over 8 million shares of MGA.TO – Mega Uranium Ltd., which isn’t a big percentage of the 180 million shares outstanding , but of course the CEO of Mega is also the CEO of Pinetree, so we know they are joined at the hip.

So let’s put two and two together:

Mega already has an interest in Red Hill. They know what’s going on. Further engineering studies are underway, as noted in a December 21, 2007 press release. That probably means more good news in the future. The press relsease noted that Red Hill has “a combined 208.8 million tonnes of high quality thermal coal.” (They are referring only to their Ulaan Ovoo Coal Project located in north central Mongolia, not all of their properties). At 65 cents per share, assuming around 48 million shares outstanding, Red Hill has a market cap of $31 million, so if you assume that only the Ulaan Ovoo Coal Project has any value, each tonne of coal is worth 15 cents.

Now I realize that coal in the ground is worth less than coal that’s been mined, and I realize that to get the coal from Mongolia to the customers in China requires a few hours on a train, so there are transportation costs to consider, but 15 cents a tonne? Seems cheap to me.

And, that means the other coal projects are worth nothing, and the uranium is worth nothing, which is ridiculous.

If I was Pinetree, why would I not invest directly in Red Hill? Pinetree has an indirect interest in Red Hill through Mega, but this looks like the perfect value play for Pinetree.

Over on the Buy High Sell Higher Forum we have often talked about buying a company before Pinetree invests in it, and then selling it on the inevitable pop. We have also talked about buying companies before The Dines Letter recommends them, again because in the past Mr. Dines has recommended companies after his friends at Pinetree have already taken a position. Well, Red Hill may fit the bill on both counts.

I have had a small amount of Red Hill in my portfolio off and on over the last few months, but I now plan to start buying more in the 65 to 70 cent range. I’m not going to chase it. Red Hill will not be a big component of my portfolio; 2% to 5% will probably be about the right level, given that this is a highly speculative play. However, I think the downside is low, and the upside is large, so it’s a good one for a flyer.

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