Bearing in mind the nature of this issue's cover story, where we discussed recommendations that haven't worked out, this is a clear example that requires us to hold our collective hand up.

Times just keep getting tougher for Sons of Gwalia and therefore, unfortunately, for subscribers who took the plunge into this gold and tantalum miner.

Following a poor set of results, the share price has fallen 20% since issue 121/Feb 02 (Long Term Buy - $1.83), and over 70% since issue 112/Sep 02 (Buy - $4.95).

Concerns

Normally, when the market starts singing a tune of loathing and discontent, we take it as an opportunity to sit back, reconsider the situation and, hopefully, pick up a good stock at a cheap price.

That's what we've done lately, with reasonable success, with Macquarie Bank and Sydney Aquarium . Occasionally, though, the market turns out to be right. And this looks like one such case.

The latest profit result for the six months to 31 December 2002 was a dismal $7.2m, down 80% on the same period last year.

But what really concerns us is the outlook for the company – mainly the difficulties being experienced by the Western Australian gold operations, which represented nearly half of earnings before the latest profit crunch.

Profitable gold mining is, to a large extent, about achieving a good grade (gold content per ton of ore). This is something that seems to be eluding Sons and we suspect it may continue to do so for a while yet.

Management is saying that the grade problem is on the mend but we aren't so sure. The cancellation of the interim dividend was hardly a vote of confidence in the outlook and we have a suspicion that some writedowns may be on the horizon.

On an initial inspection, there appears some striking similarities with the last few gasps of zinc miner Pasminco.

That, though, isn't a fair interpretation of Sons' position. Cash flow in the last six months was dismal but we'd hope that this serves as a wake up call to management. Although the balance sheet isn't a picture of health, we don't think it's terminally ill.

Hedging

The company's hedging position has also received a lot of attention. But this doesn't seem to be the most serious problem. Please refer to our comments in issue 115/Nov 02  (Long Term Buy - $2.66) for a fuller description. We believe the company's gold division to be a greater cause for concern.

So, whilst there are certainly some similarities between Sons and Pasminco, there are a larger number of differences.

Indeed, aside from the gloom, we think there is some upside. With the departure of MD Mark Cutifani in February the company is now seeking a new leader, leaving the Lalor brothers, who built the company originally, temporarily holding the reins.

This is a good thing. Nobody will work as hard for the company as the men who made it and the Lalor brothers know gold better than Cleopatra.

When a new MD is found we're hopeful he or she will work harmoniously with the founders and get the company back on track.

The sticking point is this – with the share price as sick as it is, some institutional shareholders are, in all likelihood, baying for blood. And we fear that blood may be Peter Lalor's. In our view, losing him would be a a poor outcome for shareholders.

To our second reason for a hint of confidence: tantalum, Sons' other mined material, is used mainly in electronics and communications equipment like mobile phones. And the tantalum price, like the equipment in which it is used – has suffered from falling demand but the longer term fundamentals look much brighter.

Indeed, it's hard to contemplate tantalum prices being much lower than they are currently, although anything's possible. And Sons' tantalum division still manages to make money, with plenty of potential to expand production should demand increase.

-Reversing the share price slide hinges on turning around the company's gold operations-

Were Sons just a straight tantalum miner without the gold exposure we'd be far more favourably disposed to it. But then again, if that were the case, without the gold the company probably wouldn't be in the state it is now.

So the situation is far from certain to say the least. The ability to reverse the share price trend over the past few years really hinges on turning around the gold operations, which won't be an easy task. Nor will it be achieved, in all probability, without more financial pain.

That said, and not to deny the magnitude of the task, it is achievable. The argument swings slightly in favour of us reiterating the view in our recent email update. We suggest current shareholders continue to HOLD WHILE UNSTABLE .

Those contemplating buying in now, though, can find better opportunities with less risk elsewhere. For the risk averse that want resources exposure, the diversified miners BHP Billiton and Rio Tinto are safer bets.