THE AUSTRALIAN EXPLORERS
Tony Locantro
Despite the improvements in the USD gold price and the occasional move towards $5.00oz for silver the Australian exploration sector remains subdued. Whilst a number of juniors have graduated through the ranks on positive results, improving liquidity and market profile, market capitalisations on an historical basis remain low with ongoing opportunities to accumulate positions.
Contributing Factors
The Australian speculative sector has come to life after a considerable period in the doldrums, however the funds have moved from childcare centres to retractable syringes, whilst having a brief flirt with the adult entertainment sector. The bulk of the recent activity has been confined to a small group of biotech stocks involved in developing drugs for animals. Normally the dog stocks rise to prominence once a bubble as well and truly burst and not during periods of economic weakness in the US and signs of a precious metals bull market that could continue for a number of years to come. The real estate bubble has been talked down also where some experts are expecting housing prices to "plateau".
The introduction of the Virgin credit card in Australia has resulted in approximately 50,000 applications and many no doubt will use the low interest rate to increase their credit limits, which may fuel further discretionary spending and extend a population already owing on average 126% of their yearly income on credit cards and personal loans.
Whilst the drilling results released thus far have provided a number of clues the fact remains we are still lacking that "killer intersection" that appears to be the catalyst needed to re-rate the sector on a broader basis. Despite significant moves in a number of major resource companies, there has been a shortage of stock rotation/liquidity necessary to allow for a sector based re-rating.
Why Invest In Junior Explorers?
Apart from the obvious leverage to exploration success and being within the vicinity of a major find I feel many investors fail to appreciate the risk factor of the sector in comparison to the more popular mainstream investment classes. I guess if you invest in companies without profits or hope of them for that matter the chances are the market is unlikely to become disappointed. A number of juniors are able to run on low overheads and those with loyal shareholders are able to continually raise money through small placements until the cycle turns in their favour.
The risk profile only increases once prices become overheated and/or the company moves from explorer to producer. Those that purchased on the ground floor should now have a three-digit percentage paper profit, and more importantly the opportunity to seek other investments with a lower risk profile. The advantage for those able to research the sector is that the stocks they are buying are likely to be well off the radar screens of technical analysts and the financial press, and on numerous occasions the speculator is only defeated by their own lack of patience and self-belief.
The resource sector has never failed to produce significant profits for those able to buy against the trend and being prepared to break nearly every rule in the book that is brainwashed into the masses. Whilst "Averaging Down" is often viewed as a strict taboo, I find it too is one of the most powerful tools available and if the story is still right the leverage potential increases significantly.
Why Do The Majority Fail?
Regardless of the multitude of investment lessons throughout history the fact remains that we tend to learn very little from past mistakes. Some may a buy a stock at 10c and sit on it for three months, then due to boredom they simply bail out once it again reaches their break-even level and move onto another stock and do exactly the same thing. The only beneficiary of this activity is the broker and the ASX and the chances are this is set to undergo a dramatic increase, although I doubt we will see the frenzy that was January to March 2000 just yet.
Others look at market depths and due to a lack of buyers are scared away from the stock until it starts to run. The question, "If this story is so good how come there are no buyers?" is often asked, however to put it simply there are no buyers because everyone is waiting for someone else to show some leadership. It could be similar to not having the guts to approach a good looking sort in the pub simply because there are twenty other guys standing around waiting for someone else to have a crack, before they then develop the courage after a few more drinks to compete for her attention. From reading numerous magazines it is apparent the good-looking ones are often bemused as to the apparent lack of attention, and deep down are yearning for one night stands just like those of us who are aesthetically challenged.
I guess it boils down to, stupidity which is endless, lack of money, lack of courage and our in built desire to follow others. Contrarians these days are fighting tooth and nail not to run out and leverage their houses on a portfolio of overpriced blue chips, however with our lack of social acceptance we could well be the ones that always grab the positions near a pole and the dance floor and stand there throughout the night vowing to say hello to at least one person.
Whether it is the stock or meat markets the rules are generally the same, however I was shocked to discover on a science program that the smell of a persons shirt virtually gauges whom we end up with in terms of having children and our ability to do so. Chemicals are playing tricks on us, and it is the same ones that ultimately lead around 97% down the gurgler when it comes to stock market speculation.
A Portfolio Of Junior Explorers
I have discussed the fundamentals of the resource sector along with my selection criteria to the point where it is clearly time to avoid being terribly repetitious and move on. The aim of my articles is to come up with new discussion points, reviews of performance and to provide current and relevant updates where possible. In my opinion the writing progresses from being somewhat restrained and professional to bordering on the offensive in some cases through the strategic use of colourful language. I have no doubt the contrarian breed derive considerable comical pleasure from watching psychics in action, and many would fantasise over the possibilities of having their conscience surgically removed.
After considerable ongoing research I have come up with a portfolio of Australian junior explorers, and in no way view this list as "selling out". Stock suggestions are rampant regardless of the underlying dangers that exist, and it would appear that it is considered to be ok to see your portfolio evaporate due to the fact the companies were widely held and highly regarded.
The stocks listed each have varying degrees of risk (high to extreme), however with some solid underlying fundamentals and encouraging results to date they could well easily see their market profile change dramatically. Apart from Herald Resources (HER) that has proven to be an excellent cyclical gold/resource play over the years the others are yet to attract the attention of the broader market and many are barely off their 12 mth lows despite achieving varying degrees of exploration success.
Austminex (ATX) 7c
Results released thus far to the market have pretty much been allowed to go through to the keeper. One of the most aggressive gold explorers in Australia, with the aim of defining further resources/reserves and ultimately moving into production. Recent results from drilling at Dreadnought included 30m @ 3.24 g/t, 24m @ 2.43 g/t, and 7m @ 5.4 g/t. With the recent share issue to absorb the unlisted Focus Minerals, a private placement and share purchase plan underway the liquidity issue has been addressed.
www.austminex.com.au
Herald Resources (HER) 42c
HER are currently producing gold at Coolgardie, have a world-class zinc-lead-silver project in Nth Sumatra (10mt @ 15% zinc equiv + a further 8mt of lower grade ore), and have recently acquired the Meluak gold project (also in Indonesia), that has shown some initial similarities to Martabe and Yanacocha. (Both major Newmont Projects). Amazingly HER has been listed since 1948 and has not had a placement in 10 years. (52m shares on issue).
www.herald.net.au
Malachite Resources (MAR) 15.5c
Silver focussed junior explorer that has recently completed drilling at Conrad (historical producer). The company has a host of high-grade targets and combined with an extremely tight structure and register offers significant leverage potential.
www.malachite.com.au
PlatSearch NL (PTS) 8c
PTS listed during the 1987 platinum boom and the chart since then represents a goal post missing the right hand side. Have projects in the majority of our exploration hotspots and some major landholdings around Broken Hill. Were very close to MNR's discovery in 2001 but the market generally failed to pick up on this. Inco funds the majority of PTS's exploration efforts with the company running on low overheads. Very tightly held with a top 20 list that has hardly changed over the past 18 mths.
www.platsearch.com.au
Golden Cross Resources (GCR) 5.5c
GCR have a host of exploration projects with some handy gold and silver-barite resources to provide a floor under their share price. GCR are in the vicinity and have a royalty agreement with Alkane (ALK) who have recently moved from the low 20's to the mid 50's on some exciting gold hits at Wyoming. The other junior in the near vicinity Compass Resources (CMR) has done diddlysquat also.
www.goldencross.com.au
Mount Conqueror (MCO) 4c
Has a habit of running every 3-4 years, whilst the periods in between there is little need to check the company's share price at all. MCO have some prospective silver ground in the New England Fold Belt (NSW), and during recent drilling at Boorook came up with 3m at 103 g/t gold, and have indicated that this result requires some following up.
Universal Resources (URL) 9c
Recent results released from the Roseby Copper-Gold Project (JV with Bolnisi Gold BSG), have been most encouraging with the aim of proving up a 100mt copper and low-grade gold resource re-iterated. After floating at 20c in September 2002 the company has managed to double the Little Eva resource yet the market recently marked them down to 6.4c. Peter Ingram who is at the helm of URL was heavily involved in the 1985-1987 mining boom with one of the old time favourites Metana. Interesting to note after speaking with Peter, the run from 50c to in excess of $10.00 was on the back of small gold operations (some only 20,000oz pa). These days if you announced 20,000oz pa of gold production you could well find your share price a few cents lower than prior to making the announcement.
www.universalresources.com.au
Ramelius (RMS) 13c
Named after a horse that according to legend discovered the Rommelsberg silver-lead-copper mine in Germany RMS are currently into their second phase of drilling at Black Cat and Bonnievale near Coolgardie WA. Whilst initial gold results were solid, there were no major intersections reported and as a result interest in the stock waned considerably.
www.rameliusresources.com.au
Independence Gold (IGO) 35c
IGO listed in January 2002 on the back of a suite of gold leases and the Southstar database but have since acquired the Long Victor Nickel Mine from Western Mining and are currently producing nickel to assist in funding further exploration. Interesting to note that the amount of $4m raised in the IPO now constitutes their annual exploration spend. Gold exploration is currently underway at Tropicana (JV with Anglo), with ongoing drilling taking place at Long Victor.
www.independencegold.com.au
COMMENTS
- The stock selection criteria included, management, market capitalisation relative to their peers, structure, projects and proven resources and tracking the trading behaviour of each stock on the ASX.
- The exploration targets are not limited to gold and silver based on the current market environment, which may well be conducive to success in base metals exploration.
- Due to generally low levels of liquidity the stocks listed above are prone to significant percentage gains and falls on low volume. (Hence the applicable risk profile of the portfolio).
- Market capitalisations of Australian explorers remain low on an historical basis with many companies at or near their 12-mth lows.
- There has been insufficient stock rotation to generate interest beyond the mid-cap sector, although a number of juniors are starting to respond to company specific news.
- Once momentum builds the minimum market capitalisation of a junior explorer could well be in the vicinity of $10-15m. (Many Australian juniors are attracting market caps of between $2m-5m)
Disclaimer: I have direct/indirect holdings in the stocks listed/mentioned above. Clients have considerable holdings in each of the stocks and may change these holdings without notice. The information on each stock has been derived from ASX reports, company discussions and a site visit to Long Victor in 2002. The company websites have been provided where applicable for further research. Each of the stocks listed is to be considered as speculative, and may not be appropriate for individual investors. No buy recommendations have been provided on the listed stocks, and the opinions on each are those of the author only.
About the Author
Tony Locantro is a Perth based Senior Private Client Advisor specialising in the junior resource market. He is the author of "The Green Room, A Guide To Speculating On The Australian Stock Market" and presents on resource stock investment. He is a contributor to a number of precious metals related forums.
Contact Details:
locantro@iinet.net.au for further information and/or contact details.
16 June 2003
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