AUSTRALIAN MINING & MKT REVIEW 2003
Tony Locantro
Thus far 2003 has proven to be an exciting year for both precious and base metals enthusiasts. Whilst the major focus over the last two-three months has been on nickel and copper, more recently there have been a number of positive signs emerging for silver and gold in particular. Apart from the action surrounding the Rugby World Cup, Melbourne Cup the RBA lifted interest rates 0.25% to the surprise of many. Whilst the hike will result in minor increases in the range of $25-$50 pm the first psychological blow has been struck with warnings of another one prior to Christmas. The impact of this may take sometime to filter through, however in a market that is as overheated as this one it would only take buyers to step back a little to cause some real pain to those that overextended. As prices fall buyers normally hold off and wait for cheaper entries therefore exacerbating the deflationary impact.
Some may argue that giving up smoking or a few drinks after work will compensate for the rises, however if anything the potential for even greater blows in 2004 will drive many to the bottle and/or the Mr Juicy containers and ultimately bankruptcy and the breakdown of the family unit. History has shown that bubbles usually end in tears, however with the housing/credit bubble fuelled by soaring household debt (126% at last count) anyone that can engineer a soft landing from here deserves greater social status than a "Hilton Sister" or a night out with one of them at least.
I would not be surprised if we see a Royal Commission into the housing industry/bubble down the track (similar to those already undertaken on Australian Police Services), a significant increase in domestic violence and the need for adequate support/counseling along with boom times for those companies well positioned in insolvency management/bankruptcy support. I have already started to direct profits from the mining sector into companies I feel will benefit once both the real estate and credit bubbles have literally imploded as a clayton's short. (Short you have when you haven't really gone short).
NEW GOLD RUSH SIMILAR TO NICKEL
In February this year I attended an explorers conference in Fremantle WA, which could well have had its name changed to, "Movers and shakers in sulphide nickel". Juniors were scurrying frantically for producing assets to acquire from the majors, and if these could not be seized they directed their efforts towards advanced exploration properties. With the benefit of hindsight these juniors were successful in capturing not only the markets attention but for many the reward was no more evident than in the 200%+ increase that many enjoyed once the mainstream press latched onto the potential for another, "Nickel Boom". Whilst the activity in the nickel sector has calmed somewhat we are now seeing explorers acquiring producing gold assets from the majors. Three recent acquisitions included, Range River Gold (RNG) (Indee), Legend Mining (LEG) (Gidgee) and Greater Pacific Gold (GPN) (Union Reefs).
Time will tell if they can make a fist of graduating successfully into a gold producer, however based on gold's recent performance it is a trend that can certainly gather significant momentum. As assets become scarce in Australia and the asking prices increase, many companies will seek out opportunities abroad in the fear of simply missing out. Those countries perceived as being "high-risk" such as Indonesia, and the Philippines could well become attractive in similar fashion to the 1985-1987 mining boom.
POLITICAL RISK ………PERCEPTION vs REALITY
From following the mining sector going on eleven years it has become apparent that a number of medium-term ten baggers are coming from those companies with overseas projects in countries with a high degree of perceived political risk as opposed to those in our own backyard. Examples include,
Aquarius Platinum (AQP) (South Africa) 38c in 1998 to a high of $10.90
Oxiana (Copper-Gold) OXR) (Laos) Sub 10c in 1997-1998 to $1.15
Zimbabwe Platinum (ZIM) 40c in 2000 to in excess of $4.00
Anvil (Copper-Silver) (AVL) (DRC) 3c in 1999/2000 to 46c
Kingsgate (Gold) (KCN) (Thailand) 40-60c range to in excess of $4.00
Whilst there are always a number of high profile failures (Russia often springs to mind), the fact remains that we are often provided with numerous reasons not to buy companies in the class of those listed above. I have heard on numerous occasions, "Who would want zinc in Indonesia?" or in the case of Oxiana "Isn't that where those Australian's were arrested on suspicion of stealing gems?"
With these attitudes taken into consideration it is no wonder that you tend to feel lonely on the register and buy side, however with every graduate that ploughs their way into production the steep discount applied previously turns into an attractive premium and percentage return.
With many of these companies we tend to look to others for reassurance, however once they eventually find their way into the mainstream press the bulk of the upside potential has been eroded.
SPECULATIVE STOCK U-TURN
Over the last two weeks a number of the more speculative mining companies have been under severe selling pressure as many retreated from their highs and technical selling was triggered. There is still considerable interest in the sector, however stock rotation is now clearly in play as traders chase liquidity. The recent increase in the gold, silver and nickel prices has done little to arrest a number of share price corrections, as no doubt many traders would have been caught by surprise at the extent of the move and its timing. Whilst a number of companies will embark on new share price rallies, many are now in consolidation mode waiting further ASX announcements to re-ignite interest.
The sell-off to an extent has been similar to that experienced in the speculative sector in late 1999, as weak hands salvaged what profits they could and moved on with the view that falling share prices were pointing to an abrupt end to the festivities.
PLACEMENTS AND IPO'S BUT STILL FAR FROM BOOM PREMIUMS
With the welcome change in sentiment towards the market and mining sector in general the number of retail and institutional placements along with IPO's has undergone a staggering increase. In terms of mining floats and thinking back to 1999 I can only come up with Kagara Zinc (KZL) whereas we now have companies lining up like peak hour at Sydney Airport looking to get away before the music slows down. After following a number of new issues it is apparent that the 20c IPO's with reasonable projects and/or management are listing at a 25%-40% premium, whilst the lesser likes with the sweetener of an attaching option are holding their issue price before drifting lower on the second and third day. This is a far cry from the Nasdaq inspired boom where 100%+ premiums were standard with some moving considerably higher shortly after listing. Not until the 20c stocks start coming on at 35c+ will I even remotely consider it a "boom". In terms of 1985-1987 and comparing the level of activity, 2003 has been little more than a solid move off a very low base.
INSTITUTIONAL BUYERS FINALLY TARGET THE MID-CAPS
I have noted a significant increase in institutional buying across the mid-cap mining sector over the last two-three weeks in particular. Buyers continue to target both gold and base metals stocks, whilst placements are providing ideal entry points for both overseas and institutional investors. Whilst the buyers are still fighting their way through the stale bull brigade it would appear that they are starting to get the upper hand with the help of the short-term traders.
PM/COMMODITY AND ASX PRODUCERS 2003
- Gold and silver in comparison to platinum and the major base metals have lagged considerably. Silver has made up ground on gold but is still one of the worst performing commodities/PM's this year.
- The real surprise packet has been lead with a 49% increase in 2003, and some suggestions that a critical shortage is nearing and it may indeed become more expensive than zinc over the medium-term.
- MPI Mines (MPM) is the best performer thus far with a 305% increase from the 40c issue price, however the bulk of their success has come from the nickel operations/exploration efforts.
- The stars of 2002, Alkane (ALK), Croesus (CRS), Kingsgate (KCN), Sipa (SRI), Triako (TKR), and Troy (TRY) have all performed well below the 46% sector average.
- Currency issues have affected the performance of Newmont (NEM) and Durban (DRD) in particular.
- Abelle (ABX) has performed exceptionally well despite having a PNG focus that has been recently re-iterated following the sale of Gidgee.
- The mid-caps have clearly outperformed the majority of the larger producers (Newcrest being an exception to the rule driven by operational/currency improvements and takeover rumours).
EXPLORATION UPDATE
Whilst the explorers portfolio in terms of the share prices has consolidated/moved lower from their highs the remainder of 2003 will not entirely be spent planning drilling programs for the New Year.
AUSTMINEX (ATX) 19.5C 15/06/03 (7C) +179%
Austminex recently issued 25m shares at 16c through their new association with Hartleys Corporate.
Exploration is continuing at The Mount gold project, whilst initial results from the Coolgardie and Nepean nickel projects were encouraging and further work has been undertaken. The shares reached an all time high of 26c in early October.
HERALD RESOURCES (HER) 76C 15/06/03 (42C) +81%
Herald recently announced further discoveries at the Dairi zinc-lead-silver project in Indonesia with up to 35% zinc in some samples. Whilst the company acknowledges the scope for the further delineation of resources at the project they are electing to concentrate on the completion of the bankable study where 6.3mt have been identified at 22% zinc equivalent. With the improvement in gold production at Coolgardie the market has ascribed very little value to the potential of the Dairi project, which has been enhanced significantly due to firming zinc and lead prices. The Meluak project, which was spun-off into a new entity Corona Gold (1c issue to Herald shareholders), provides the exploration sizzle with the backing of Macquarie Bank.
Whilst the stock is now being featured in financial publications/magazines it would still appear that the Dairi project is far from being embraced in terms of promoting the company's prospects. Despite the strong share price move to date, Herald Resources remains my top selection in the Australian resource sector.
MALACHITE RESOURCES (MAR) 21.5C 15/06/03 15.5C + 39%
Malachite last week announced an option over the Elsmore Tin Mine (Nth NSW), where the company is aiming to develop a producing tin operation in 2004, before embarking on work associated with the kaolin resource. The company has just commenced drilling at the Boonoo Boonoo silver-gold project, and plans to undertake further exploration at Rivertree (silver) and the Tooloom gold field. The current program is expected to continue till mid-December 2003. The rationale behind acquiring an option over the tin assets is to provide a valuable cash flow to fund the company's silver ambitions whilst protecting shareholders from excessive dilution.
UNIVERSAL RESOURCES (URL) 15C 15/06/03 9C +67%
Exploration at the company's Roseby copper-gold project near Mt Isa in Queensland continues to throw up very encouraging results with the company now focused on proving up sufficient resources to support a 2mtpa copper-gold operation with the support of the Yunnan Copper Industry (Group) (Largest copper smelting company in China) who took at a placement in URL at 16.88c per share ($1m) and have an option for an offtake agreement for the copper sourced from Roseby.
PLATSEARCH (PTS) 14C 15/06/03 8C +75%
After high-grade samples from Broken Hill provided the impetus for a rally to 17c liquidity has tapered off somewhat with the share price settling around 14c. With significant drilling taking place in the Broken Hill region at present, results are eagerly awaited and could re-ignite interest in the company.
MOUNT CONQUEROR (MCO) 9.5C 15/06/03 4C +137%
Whilst the second round of drilling at the Boorook silver-gold project was a disappointment the share price has only recently fallen from a high of 12c, after other parties have moved onto the register with the aim of ousting the current board and seizing control of the assets with the major focus on the Victorian gold potential. Will be an interesting one to watch nevertheless for further developments on the corporate front, whilst those that purchased the stock for the Boorook drilling program probably cannot believe their good fortune.
GOLDEN CROSS (GCR) 7.9C 15/06/03 5.5C +44%
After again failing to break through 10c on the last rally, shares in Golden Cross have again retreated to the 8c level despite further encouraging results from Sunny Corner. With assays still pending from the latest round of drilling, the focus now will be on the Broken Hill exploration being undertaken by Gravity Capital (GRN) on four of GCR's JV projects in the area.
RAMELIUS RESOURCES (RMS) 15C 15/06/03 13C +15%
After announcing a resource upgrade at the Black Cat gold project, Ramelius has been concentrating on picking up exploration turf in the Widgeemooltha-Coolgardie region with the major focus on the gold rights, although the sulphide nickel potential cannot be underestimated. Liquidity has all but dried up in the stock, however this could change with the listing of their neighbour Pioneer Nickel in the near-term.
APEX MINERALS (AXM) 17C 15/06/03 10.5C +62%
One of the most volatile stocks in the portfolio that has recovered somewhat after exploration results at Narndee failed to meet the lofty expectations that were temporarily built into the share price.
INDEPENDENCE GOLD (IGO) $1.14 15/06/03 35C +226%
IGO continues to perform well after announcing record profits/nickel production whilst continuing with the exploration efforts for nickel and gold. From the recent share price movements in the broader nickel sector it would appear that IGO has been well supported and far less susceptible to the extreme volatility that has engulfed a number of other stocks through the short-term traders.
MY EXPECTATIONS GOING FORWARD
- Further corporate activity in the gold sector with the frantic rush for assets/advanced exploration plays intensifying with the focus on overseas projects in 2004.
- As we witnessed with the nickel sector, junior gold companies may well experience share price re-ratings through the signing of JV agreements before any meaningful exploration results are released.
- I am expecting that overseas companies would again be targeting our limited supply of gold producers as prices in the US, Canada, and Africa become somewhat unattractive in comparison.
- The mainstream press to eventually release a detailed review on the Australian silver sector as the price approaches/breaches $6.00. With a limited number of opportunities out there having funds spread across each one would not be an onerous task.
- Base metals prices to remain volatile with large percentage rises/falls, with negativity on the China issue increasing with the commodity prices. Whilst a number of companies are talking up the demand coming out of China, some analysts are predicting hefty falls across the base metals complex in 2004. Shortages at this stage have been predicted for copper, nickel and lead.
- Gold to trade in a similar fashion to how it reacted on the last breach of $300oz where any falls well below the $400 level will be treated by many as the end of the gold bull market.
- In terms of price predictions for 2003 I was looking for gold to test the 1996 high of $418, whilst a target range of $5.55-$5.75 seemed appropriate for silver. Whilst these targets have not been met and time is running out the sharp increase in volatility could well seem them under threat sooner rather than later.
EXPLORATION HOTSPOTS
- With the level of activity increasing based on renewed interest in base metals, Broken Hill could again be the centre of attention with a number of programs planned and results expected to flow in the near-term from the Gravity Capital (GRN) drilling. The success of both Perilya (PEM) and Central Broken Hill (CBH) in the region has also assisted in lifting Broken Hill's profile as an exciting exploration destination.
- The New England Fold Belt is about to witness a significant increase in activity, which will follow through into 2004. The major players include, Malachite Resources (MAR) and Macmin Silver (MMN).
- Widgeemooltha to gain attention not only for its nickel potential but also for gold with major drilling programs currently underway in the region. The major focus in Coolgardie is centred on gold, however there has been recent interest on the nickel front.
- The Lachlan Fold Belt in NSW for gold and base metals as new IPO's undertake their initial drilling programs.
- Tasmania is now finally starting to attract renewed interest after the Tasgold IPO (Macmin spin-off) and interest shown in the PM and base metal potential.
- Regardless of the political risk profile, Australian mining companies are now having success in the Philippines (Red 5, Indophil, Climax Mining, Lafayette), and the market's willingness to take on the perceived risk will be tested with a new gold IPO planned to list later this year with a major focus on the country and its vast resource potential.
At this stage of the resources/PM cycle it would appear that the greatest risk could be underestimating the longetivity and power of the bull market and therefore maintaining adequate exposure throughout the volatility. The emphasis with major advances in market trading technology has been on the short-term gain and not identifying major market movers once gold and silver fever finally takes hold.
17 November 2003
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 (Independence Gold). 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. It should also be noted that some of the stocks may have very low levels of liquidity and may result in significant percentage rises and falls. Please conduct further research and consult your financial advisor before making an investment/trading decision.
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" (available on request) and presents on resource stock investment. He has been a contributor to a number of precious metals and market related forums.
If you would like further information or are interested in becoming a client I can be contacted at locantro@iinet.net.au Due to increasing workloads I am only able to take on a limited number of new clients and/or enquiries.
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