Mining predators’ favourite fiveBy T Tim T TreadgoldPORTFOLIO...

Mining predators’ favourite five
By T Tim T Treadgold
PORTFOLIO POINT: Discounted share prices mean junior miners that are about to start generating cash are at their most attractive for investors and predators alike.
Minefield, as every reader now understands, was a name chosen quite deliberately by Eureka Report when starting a regular column last year on investment (and disinvestment) opportunities in the resources sector.
The November 28 report, Rio could trample iron minors < http://www.eurekareport.com.au/iis/iis.nsf/pages/4BF4F815F23424E7CA2573A0007E98A5?OpenDocument>, detailed the dangers ahead for small iron ore miners, especially those planning high-cost magnetite mines. It went against conventional wisdom at the time but can’t be refuted today as junior iron ore players struggle on the ASX.
Just as tricky times for some sectors of the resources market could be clearly seen last year, so can opportunities be seen in the changed circumstances resulting from the bout of financial jitters gripping world markets since the start of 2008.
It’s the credit crisis itself and the flight of equity capital into cash and bonds that are adding to the appeal of small-to-medium mining stocks, which have moved beyond the cash-consuming exploration phase but haven’t yet reached their cash-generating phase.
These are companies at their most vulnerable because of project-completion risk. That’s why their share prices remain attractively discounted for investors and predators alike, and that’s why they’re shaping as potential winners because of the projects they are building – or as takeover targets.
Stand-out companies in this category are:
n Platinum Australia, which is busy building the first of two platinum mines in South Africa. It is a takeover plum waiting to be picked.
n Windimurra Vanadium, which, despite a disappointing history when trading as Precious Metals Australia, is in a similar position of being halfway through a re-building project.
n Centamin Egypt, a favourite of Minefield because of its large gold resource, and also because it is busy assembling plant and equipment at its Sukari minesite in Egypt.
n St Barbara Mines, another gold favourite. It is also at a delicate point in its re-emergence as a major gold producer as its digs down to the Gwalia Deeps ore body, and plans to re-start production at the nearby Tower Hill mine.
n Western Areas, which has started nickel production at its Flying Fox mine in Western Australia but will not achieve full output, or strong cash flow, for several months.
Picking companies with projects half-built is the easy part of this exercise.
Picking predators is harder – and does it really matter who buys? For retail investors it is always better to buy the prey and sell the predator.
However, for amusement, likely bidders for Platinum Australia are home-grown South African platinum producers, such as Impala, which are keen to cement their stranglehold on a metal that is outperforming gold. Or there is the Australian success story in platinum, Aquarius, which would enjoy adding more mines to its inventory.
Potential buyers for Windimurra include the expansionist Territory Resources, led by former Consolidated Minerals boss Michael Kiernan, who has a “money bags” backer in the Hong Kong commodity trader, Richard Elman – See China merchant’s ASX favourites < http://www.eurekareport.com.au/iis/iis.nsf/pages/C155752A3A5A7E34CA257354001C5925?OpenDocument>, and his Noble Group.
Given that Windimurra might also emerge as a world-scale producer of steel-hardening vanadium, a bid from a world-scale miner keen to expand in Australia cannot be ruled out with Brazil’s acquisitive Vale (currently negotiating with Xstrata) emerging as a prime candidate.
Western Areas is a possible target for Russia’s Norilsk Nickel, which bought ASX-listed LionOre last year; or Switzerland’s Xstrata, which is trying to wrap-up its acquisition of the Western Areas lookalike, Jubilee Mines.
The two gold stocks on the project construction list will prove tempting targets for one of the emerging gold-sector consolidators, or one of the gold majors keen to add ounces to its resource base. A major gold producer such as AngloGold Ashanti is already comfortable working in Africa, while Barrick Gold or Newmont need to add ounces to their Australian operations.
Published in Eureka Report on January 30
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nvestors’ psychology is also a key component in what determines a company’s share price and psychology can change quickly
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On the market, it’s worth looking at how the five prospective takeover targets are performing, and where they are with the projects that make them appealing.
Platinum Australia started trading on the ASX in 2008 at $2.77 a share. It has since fallen to $2.29, somewhat perversely as the platinum price has risen from $US1530 an ounce to $US1664. PLA’s 48¢ (17.4%) fall is substantially more than the 9.3% decline in the metals and minerals index (AMM) on the Australian Securities Exchange over the same time. But, it is far less than most speculative mining stocks, or miners still in the cash-burning exploration phase and without a project that yet represents future cash flow.
Windimurra Vanadium shares opened the year at $2.05 and have also fallen 48¢ (23.4%) to $1.57. However, on January 14 the company did what other small miners dream about: it secured $US127.5 million in debt finance to finalise the cash requirement for re-building the mothballed (and partly demolished) Windimurra project, which achieved some notoriety five years ago when Xstrata was running the business. The new owners have Noble Group behind them, which ensures future sales of vanadium, mainly to China, with first production scheduled for the second half of 2008. A fully underwritten one-for-three rights issue priced at $1.60 closes on February 15 and will bring in $54.8 million in fresh equity.
Centamin Egypt started trading this year at $1.40, got as high as $1.63 on January 11, but has retreated to $1.44 in the market shakeout. Interest in the stock is high because of its big Sukari gold project, and will grow as project construction advances and if the gold price continues to rise.
St Barbara Mines opened the year at 77¢, peaked on January 15 at 92.5¢ and has slipped back to 84.5¢. It is in the same category as Centamin with the Gwalia Deeps project in its construction phase and with the gold price driving interest in the stock.
Western Areas started trading this year at $5.42 and has slipped to $4.87 as production news from Flying Fox gets better. Last week, the company said it was on target to produce 8000 tonnes of nickel in the 2008 calendar year from the first orebody in the mine. As it digs deeper production will rise to about 14,000 tonnes of nickel a year at a time when nickel demand for stainless steel in China remains strong and the price remains close to $US24,000 a tonne.
Pursuing an investment strategy based on the expectation of future bid is never wise, for the simple reason that you’re relying on an event that might never occur.
But, in each of these cases we are talking about very good stand-alone assets and there is an expectation that the resources sector is ripe for a consolidation phase driven by these forces:
n Companies in production are posting big profits and they want to continue growing without necessarily taking on too much exploration risk.
n Prices for minerals have retreated, but not back to pre-boom levels. Profit margins remain extremely attractive – or BHP Billiton would not be trying to acquire Rio Tinto and Vale would not be chasing Xstrata.
n We have entered a period where there is a natural coalescence of companies with cash (those in production) and companies with assets that need cash for exploration and/or development.
n We have also entered a phase where the forces of mineral supply and demand are being sorely tested. Chinese demand is not reported to have weakened, while news that South Africa is cutting electricity supplies to big gold, coal and platinum mines can only have a positive effect on the price of those commodities.
n The potential for more “supply-side” shocks, such as a further deterioration in political conditions in South America and Africa remains high, with a corresponding positive effect on the price of key commodities such as copper, nickel and gold.
The five stocks selected for this exercise are not “takeover dependent”. They are all moving through the project construction phase or have just started production. They all have their debt and equity requirements in place, and all have quality management teams.
In each case there is an opportunity to take a position ahead of the switch from negative cash flow to positive cash flow, a change that the market (no matter how gloomy) always appreciates.
Long Winded, i know but interesting.
RAB