AUSTRALIAN MINERS CAPIT OR KAPUT?
Tony Locantro
After months of going sideways with a bias towards the Southside, Thursday morning for the Australian Mining Sector was either a case of capitulation or kaputulation. It all depends on how each investor viewed the activity that followed the Chinese warning and some nasty stop loss selling as support was wiped out effortlessly.
Many no doubt would have headed for the exit gates as they chased the larger sell orders lower in a plethora of companies, whilst a smaller but equally determined number took advantage of the across the board sale and voted with their wallets. For those fully invested but still loyal to the cause there were more "If Only's" than a love song production line.
Whilst my client base was on the whole well behaved I still managed to take calls where I was justifying the underlying fundamentals of every company they were invested in. Sure prices came off and with a bang, however regardless of the hype, noise and tension, companies are still going to graduate through the ranks - and commodity consumption will continue on its merry way.
When we have commodity prices returning to their long-term trading averages they are expected to immediately collapse, and when combined with the Chinese actually showing some "nous" when it comes to economic management nervous investors react as though the mining sector was about to provide sudden and catastrophic losses.
The follow through for gold and silver in particular was quite nasty, however it only served to illustrate the weak money that pushed it to such giddy heights in the short-term. Major bull markets are notorious at throwing "curveballs" designed to strike out the majority of speculators and here we have had numerous thrown by hedge funds, penguins and those who should have never turned up at the ball game in the first place.
Through my experience in dealing through the Australian speculative mania that was 1999-early 2000, I found the activity on Thursday in particular to be rather comical based on how the sellers all jumped over each other to get out any price. At this stage of the cycle I am dealing more specifically with "Company Risk" as I believe my core plays have the attributes to overcome the short-term volatility sweeping the commodities and PM markets.
The commodity and PM bull market thus far has largely been run on the "fear" factor, where there has been a tendency to take short-term profits where possible in order to protect capital. Once the wheel turns to "greed" we will then witness the stupidity that normally creates the top of the market. As we saw during the Nasdaq boom stocks trading at 10c are all on their way to 50c, anything over 20c is a certainty to hit an "Oxford" on the next set of drilling results and not forgetting that every RAB or RC hole will create more "Mine"s than an under 10 football match.
FIELD VISIT OUTBACK AUSTRALIA
Two weeks ago I had the pleasure of a field visit to Arafura's Nolans Bore REE/Phosphate tenement in the Northern Territory. For those with a keen interest in the mining sector I would encourage site visits where possible in order to develop visual images that are likely to assist you when combing through company reports. After expecting a bunk bed in the middle of whoop-whoop I was confronted with a five star resort, fine food and surprisingly good nightlife and local talent.
The journey from Alice Springs was via a well-maintained bitumen highway (with an open speed limit for the petrol heads) and the main entrance to the property was via gate next door to the main roadhouse at Aileron. Unfortunately on that day a 20c part on a $300,000+ drill rig had to break and instead of overseeing the drilling operation we walked the project using a simple radiometric device that provided an indication of where the good ore was hiding. The completed drill holes were capped in order to protect the local wildlife despite the fact many of them would have enjoyed the 70m+ slippery dip ride to the bottom. There has been considerable research conducted on the animals that die at the bottom of drill holes, and with the environmental issues we are now faced with in the mining industry it is taken quite seriously.
Prior to attending the site I had visualised a far more remote setting, considerably less vegetation and cattle, without the close proximity to a gas pipeline, major highway and train line.
Walking the ground and meeting the people is far more beneficial than attempting to read a chart over the longer-term, however when your significantly outnumbered some days it is best not to switch on the multi-coloured poker machine.
CLIENT DINNER IN SYDNEY
Last weekend I decided to hold a function that was open to all my Sydney based clients that would involve not only the usual formalities of meeting and greeting, but also to allow those present to meet two Managing Directors from mining companies we have supported. (Tri-Origin and Malachite). The night was a considerable success, however markets can have a nasty habit of bringing everyone back to the field as we saw so violently last week. The journey from Sydney Airport to the North Shore was quite an education in itself with new suburbs being created in the corridor designed to suck in the Yuppies like an industrial strength vacuum cleaner. Give them some earthy tones, endless pictures of attractive couples living the opulent lifestyle and Bobs well and truly your uncle. Combine these with features in the weekend press with headlines such as "Predicting Sydney's next boom suburbs" and you have a recipe for ultimate disaster. I view these new developments as IPO's where the outlook on the secondary market is anything but rosy, yet the uneducated continue to throw themselves at the "Great Australian Dream". First homebuyers being forced to fork out close to half a million for a suburban shoebox in order to simply enter the market is not a healthy site either.
THE EIGHT ELEPHANTS
After working my way through the junior resource sector I ended up with the "Fab Five" that soon became the "Sensational Six" that has just evolved into my portfolio, which I have called "The Eight Elephants". In mining terms an "Elephant" is a major resource that eludes many, whilst others through a combination of factors manage to discover one or a number of these that transforms a struggling junior into a fully-fledged miner. The companies are at different levels of development (some already have world-class deposits on their hands), whilst in some cases there have been a procession of ASX announcements that are suggesting one of those on the list may indeed come up with "That discovery" that could well lead the charge on the next leg.
Whilst I would love our sector to eventually do the "Canadian" the recent shellacking over the past two months as resulted in not only the heat being taken out of our market but on Thursday morning the oven was pulled out from the plug. Those that are addicted to the mining sector will soldier on regardless as major mineral discoveries will continue to be appreciated despite the underlying market sentiment.
In an environment such as we are in now, those companies that mine the market will continue to drift lower prior to the players reloading for the next leg up (you can make bucket loads off any base), whilst those that intend to develop mines will simply shrug their shoulders at the lack of market appreciation and continue on with their business.
HERALD RESOURCES (HER) 82C
HER's share price briefly touched $1.00 after the company announced a spectacular gold intersection of 18.63m @ 46.71 g/t at their Coolgardie Joint Venture with MPI Mines (ASX: MPM).
In their quarterly report released on Friday, Herald indicated that the BFS on their Dairi zinc-lead-silver deposit (6.3mt @ 23% Zn equiv) was proceeding well and a new phase of exploration is to commence shortly on zones outside the major resource area. Gold exploration at Coolgardie is ongoing (ten diamond holes underway) and with Troy Resources (ASX: TRY) now spending $1m per month at Sandstone (HER have a JV with TRY on ground adjacent to the Lord Nelson discovery) the outlook for Herald in terms of exploration excitement is quite favourable. HER has been listed on the ASX since 1948, have never reconstructed and only have 62m shares on issue. Completion of the BFS on the Dairi Project is eagerly awaited and is expected to be completed over the next 3-4 months.
MEDUSA MINING (MML) 38C
MML are searching for high-grade epithermal gold veins in the Philippines and during the week announced not only some positive gold drilling results but also some indications that Saugon also is highly prospective for silver. (Gold-silver ratios reported in the recent drilling are quite consistent).
After a stellar performance with their IPO in December 2003, the momentum in the stock has slowed up somewhat, however the ASX announcements on their exploration progress would indicate that MML has the potential to develop into a gold producer within the next 12 months.
MALACHITE RESOURCES (MAR) 23C
After listing as a silver focused company in late 2002, MAR through title issues and some positive exploration are now basing their immediate future on the Tooloom Goldfield in Nth NSW. In a recent corporate overview of the company's projects the Tooloom Project was compared to Cadia (Newcrest ASX: NCM) in it's early stages, with the emphasis on following the fortunes of MAR's sixth hole.
MAR's Managing Director Garry Lowder must be given ample credit for placing his proverbial on the line here, and with the "Rotary lie detectors" now in full swing it brings new meaning to the term "Hero or Zero". MAR also have tenements prospective for silver (Conrad and Rivertree), whilst Elsmore continues to be scrutinised in terms of its hard rock tin potential.
UNIVERSAL RESOURCES (URL) 14.5c
In terms of finding "elephants" URL must easily rate as one the most successful on the boards with the latest round of drilling at Roseby throwing up a 107m copper intersection at 1.39% (gold analysis to follow). Although not a discovery hole at Roseby those that closely follow the mining scorecards would have noted that the first major hit at Minotaurs Project (ASX: MNR) was 107m at 1.94% with 0.8 g/t gold. MNR's shares during the rush in late 2001 rallied from 17c to in excess of $3.00 after the results were released. In a market driven by fear URL was lucky to even get a 3c intra-day lift, however it is results of this nature that should be stored well inside the memory bank for when sentiment finally decides to turn around.
ARAFURA RESOURCES (ARU) 16C
ARU is a company many would find difficult to grasp. Whilst they have a number of gold projects (one with a modest resource at Mt Porter) the company has already negotiated a sale/royalty over their Iron Ore Project, whilst the flagship project at Nolans Bore in terms of visual analysis of the core samples is hinting towards some success in the recent drilling campaign. ARU are a company that looks towards projects that have the potential to make money as opposed to chasing the commodity/PM that is rating highly in terms of "sex appeal".
TRI-ORIGIN MINERALS (TRO) 19.5C
After listing and trading well above the 20c issue price, TRO like many silver/resource-focused juniors found the going tough late last week and is now trading at 19.5c (half a cent below the issue price). The company has just announced the commencement of a drilling program at Lewis Ponds (350,0000z gold and 18m ounces silver), whilst exploration is planned at the Woodlawn Project (high-grade base metals and silver). Based on the company's resource base and potential to expand it through continued exploration, I rate Tri-Origin highly in terms of their silver exposure and experienced board.
SANDFIRE RESOURCES (SFR) 25C
SFR listed on the 4th March 2004, and have performed well based on the track record of the management team and the medium/longer-term potential of the company's projects. Graeme Hutton (Director of Herald Resources and Technical Director at Kimberley Diamonds) was the major draw card from a managerial perspective whilst from the company's prospectus the following in bold sums up what the company is about, "by backing this team, you will be backing unconventional thinkers looking for a really big discovery". SFR's tenements cover zinc-lead-silver and gold-copper projects each possessing an analogy with another project and clearly defined targets in terms of what size and grade they are chasing. One to watch once the initial surveys/studies have been completed and drilling can commence.
JAGUAR MINERALS (LISTING TBA)
Nanette Allen (Daughter of Herald's Managing Director Terry) has taken the reins of Jaguar Minerals (the spin-off of Herald Resources non-core Australian assets). With Herald's focus now clearly on developing the rich Dairi Project in Indonesia, and Coolgardie again showing some signs of life, the Tasmanian, NSW and WA projects in the Herald stable were not getting the exploration spend required to take them to the next level. Jaguar's suite of projects is prospective for gold, tin, nickel and copper with the Balfour Project in Tasmania (copper/tin) regarded as the company's flagship project. The Herald shareholder priority issue closes on the 4th May 2004, and with Herald maintaining >40% interest in Jaguar those taking up the issue of shares at 20c with ½ an attaching 2008 20c option are in a more comfortable position than many other IPO participants where there are no seed or promoters shares to hit the boards on day one.
For many participants in the speculative mining sector, the week that just passed would have resulted in considerable damage to the spreadsheet and for some it was the straw that well and truly smashed the camels back. For me the biggest slap came during shopping on my Saturday morning adventure when I found out much to my dismay that Coke had removed the Diet version with lemon from their product list. Maybe I can grow that lemon tree next to the sandpit and find a new beverage to consume as I ponder how bitchy this resource game can be at times. I am sure Coke will derive great pleasure from my letter to have the product re-instated as I will from eventually seeing value realised in our neglected mining sector.
3 May 2004
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 and 2004 (Independence Group) and Arafura's Nolans Bore Project in April 2004). 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 free to prospective clients via email 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
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