Heron and Ardea - relative merits

There has been a lot of conjecture on the ARL and HRR forums about the relative merits of the two companies and in particular Ian Buchhorn’s contribution vs others who form part of the current Heron Board and management.

The debate is obviously tied to Heron’s share price vs Ardea’s, yet the two companies are at such different stages of their lives that comparisons are not straightforward..

Please bear with me as I try to put their differences in context.

Ian Buchhorn, frequently referred to on Hot Copper as the driving force behind Ardea, has been the one consistent factor in Heron from the time of listing in September 1996. He has been a Top 20 shareholder since inception and has never sold a share. At the time of listing, Heron had 68 tenements across 1,200 sq km. In the 21 years since, Ian has been a hands-on Director and Manager at Heron in various capacities and has shown a love of accumulating tenements and gathering rocks. He is full of energy and enthusiasm and his actions display a true interest in outcomes for shareholders. He is a role model for all Company Directors, especially those speculative companies that rely on shareholder funds for their fees and salaries.

Over the 21 years, Heron has seen several commodity cycles, the bane of junior explorers, but the company has only ever gone to shareholders once for a capital raise. Along the way, management has gained significant financial and professional input from BHP and Vale.

In the 2000s, Heron focused its efforts on nickel. Then the nickel price started heading south, from US$45,000 a tonne in early 2007 to US$10,000 in early 2009. These were the very 2 years when Jump Up Dam was being drilled out and a pre-feasibility study for the KNP was released to market. Heron’s efforts to become a nickel producer were thwarted by the commodity cycle.

With this headwind, Heron moved to spinning out several of their large number of tenements into new companies, notably Polaris, which provided a good dividend for Heron shareholders and Heron itself. The Polaris takeover added around $40 mill to Heron’s coffers in January 2010, taking their cash to over $60 mill. Some might argue management sold the company's MIN shares (from Polaris) too early, with the MIN price doubling in the next 12 months! So be it!

That aside, with the KNP financially unviable at the low nickel price, cashed-up Heron set off on a hunt for a replacement project, a process that lasted many years and ruined several CEOs. The end result was the merger with TriAusMin in mid-2014, the aim being to develop Woodlawn, finally transitioning Heron to a producer. This time, luck has been on their side, with a rising zinc price supporting the project viability.

Heron is now on the verge of mine development, with Ian seemingly still heavily involved and committed. Today, under the new, merged management team, the only remaining step to construction is a financing package. It is less than 3 years since the merger and, while this may seem a lifetime to shareholders, it isn’t in the context of the typical life-cycle of a junior miner – refer to the chart below.



The chart indicates that the time from Discovery through Feasibility to Development can be anything from 5-7 years. Further, the share price doesn’t start rising again until Development is well underway and it doesn’t return to the peak of the speculative Discovery stage until after Start-Up. If these are typical timeframes, Heron has done well, with Development likely to be underway within 3 years, about half the usual time. Meanwhile, Heron’s share price is following the typical pattern of a junior explorer at pre-development stage, languishing around its lows.

A plus for Heron shareholders recently is the 2c dividend at Ardea’s IPO price, now a 6+c dividend if you still hold, so your Heron shares now have a value of 15-16c. At the same time, Heron has 10 mill 25c options in Ardea, which, at the current 62c share price, represents a $3.7 mill asset.

So, congratulations to the Heron Board on their decision to spin out Ardea. The Hot Copper discussion about who drove the move is irrelevant; the fact is that the Heron Board approved it and the shareholders and Heron were winners.

Now, let’s have a look at Ardea.

Ardea has made a fabulous start to its life on the ASX – one of the few recent IPOs to be well ahead of its issue price.

Ardea's business is basically Heron minus Woodlawn, with $4.2 mill in the bank as at 31 March. It has 78 tenements either live or pending (more than Heron's 68 at its IPO) and which need to be maintained in good standing. This represents a significant and ongoing funding commitment, unless some can be divested into a new entity.

Ardea has the benefit of several promising projects, but they need proving up, so it is at the Pre-Discovery to Discovery stage on the chart. The rising share price is based purely on speculation, mostly related to cobalt at the KNP, which was not on Heron's radar in the early 2000s. Another example of the fickleness of the commodities market!

The Board of Ardea has a strong focus and deserves success, but, as Heron knows only too well, the hard work lies ahead.

In summary, both companies have done well in what has been a tough environment for junior explorers.

Heron has survived the GFC without going back to shareholders for a cash top up. It is on the verge of production at a time when its major commodity, zinc, is close to a 10-year high and is only 16 months into its rise (commodity cycles typically last 5-8 years). The remaining obstacle to mine development is funding. It will probably be painful for shareholders, as it is no easy task for a company with a market cap of $40 mill (and an enterprise value of about ½ this) to raise 4 times its market cap. No doubt the magnitude of the funding, which itself has been dependent on negotiating with Veolia and the NSW government over environmental permits, explains why the exercise has taken so long to complete. However, it's a must win situation - without funding there is no Woodlawn. Heron has announced that the funding package is imminent. If it takes the usual course, shareholders will have an opportunity to participate in the raising. Once funding is settled and development is underway, and all else being equal, the life cycle chart indicates a share price recovery should follow.

At the other end of the scale, Ardea remains in exploration stage and, as the chart indicates, there is a high probability of a retrace as it moves down the path of feasibility and development. It now, like Heron in years gone by, has to choose wisely how to spend its limited funds developing its projects.

Both companies have done very well for their shareholders and their respective Boards and management teams deserve congratulations.

Ardea's protagonists might consider taking some (very good) profits, leaving some money on the table.

Nay-saying Heron shareholders – if you’ve held in there - might just be rewarded for giving the hard-working Board and management another few months to prove their efforts.

The life of commodity companies, be they junior explorers or seasoned producers, is driven by so many variables that forecasting is nigh on impossible and none of their futures is assured. If you are into speculating, both Heron and Ardea seem worthy of consideration – their projects, albeit at different stages of development, have great potential and their management teams have credibility, two ingredients essential for success.
It's a tough gig out there in commodity land. This post is an attempt to articulate some of the challenges - from my reading of the HRR and ARL histories, both teams work hard for their shareholders and deserve support.