After getting it right on oil last week, Prospector’s Diary tips silver to bolt next

Congratulations to readers who took seriously last week’s departure from the norm with mention in this column of the long-neglected small oils sector because some of them could have doubled their money on Strike Energy.
30th August 2019
Tim Treadgold

Congratulations to readers who took seriously last week’s departure from the norm with mention in this column of the long-neglected small oils sector because some of them could have doubled their money on Strike Energy.

Interest in Strike, and a number of other small oil stocks, such as Cooper Energy, Carnarvon Petroleum and Warrego Energy, has been building as a recovery in exploration accelerates after the painful oil-price crash of five years ago.

Strike caught the eye of investors (and a handful of commentators) this week because it looked like it had made a significant gas discovery in the onshore part of the Perth Basin, home to a number of other big gasfields such as the original giant, Dongara, and the Waitsia field of Beach Energy and Japan’s Mitsui.

A decision by John Poynton, a canny investment banker and chairman of Strike, was another clue that something good was happening when he topped up his stake in the stock with a $100,000 investment at 15c (after getting shareholder approval at the company’s annual meeting).

Today, Poynton’s latest investment is valued at around $170,000 thanks to the stock rising by 13c (83%) to 28c, which is down 1.5c on the 12-month high of 29c reached on Wednesday. An $80,000 win even for someone as rich as Poynton is not to be sneezed at.

What sent Strike through the roof, along with Warrego, its partner in the West Erregulla No.2 discovery well, is that it contains an awful lot of gas (and might turn out to be a one trillion cubic foot reservoir) – with the prospect of more to come.

There is also another factor at work in the re-discovery of the Perth Basin as a high-quality source of gas and that’s the potential for gas exports, by-passing the already glutted southern WA market, by sending the gas north to the North West Shelf, which is in danger of running short sometime in the next few years.

The idea of sending gas north (when most of it flows south) is novel but Beach and Mitsui are considering the same process because gas-is-gas and so long as Perth Basin gas meets the specifications demanded by Woodside Petroleum, a new business could theoretically be created simply by boosting the amount of gas in the pipeline with some taken out in the south for domestic customers and some taken out, liquefied, and exported.

Warrego, the other owner of the West Erregulla discovery, did a little better than Strike this week with a rise of 19c to 37c.

Elsewhere in the oil sector, Cooper Energy started to develop traction with a 2c rise to 57c as it gets closer to delivering gas from its Sole platform in Bass Strait to energy-hungry east coast gas customers and Carnarvon Petroleum also added 2c to 38c as interest grows in its upcoming Dorado No.3 well off the north-west coast of WA.

Already rated a significant discovery, Dorado can get a lot bigger as drilling stretches the known reservoir, with Macquarie Bank tipping Carnarvon as a buy with a share-price target of 51c.

Oil is not the only asset for investors with an eye on overlooked commodities, with gold’s neglected sister metal, silver, staging an overdue recovery, cracking the $US18 an ounce mark on Wednesday for the first time in more than two years.

Since June 30, silver has comfortably outperformed gold, up by 20.5% to its latest price of $US18.36/oz, whereas gold as risen by 7.5% to $1537/oz.

There’s a lot to explain in those numbers, including silver being late to the precious metals story and gold having run hard now for two years and starting to look stretched even though the economic and political forces continue to deliver it a stiff tailwind.

Unfortunately for Australian investors, there aren’t a lot of pure-play silver stocks, with production of the metal mainly as a by-product of gold, or of zinc and lead. Exceptions include Silver Mines, which owns the Bowdens silver project in NSW, and Azure Minerals, which has re-acquired control of the Alacran silver and gold project from Teck resources in Mexico.

Since July 1, Silver Mines has more than doubled from 5c to 14c while Azure has done almost as well with a rise from 9c to 17c.

An overall look at the resources sector this week reinforced the case for gold, even if it was outshone by silver – perhaps because of silver’s reputation as the poor man’s gold, a precious metal to buy when you can’t afford gold.

The appetite for gold stocks could be seen in a number of newsworthy and market-moving developments, including:

  • Northern Star continued its growth-by-acquisition strategy with an agreed merger of Echo Resources, a stock in which it already holds a 21.7% stake. The $193 million deal provides Northern Star with growth options through the use of Echo’s Bronzewing gold plant. On the market, Northern Star (mainly through the higher gold price) added 75c to $12.19.
  • Westgold Resources added 36c to $2.32 after reporting a strong profit and confirming that it was on track to become a producer of 300,000 ounces of gold a year at an attractive profit margin approaching $A1000/oz thanks to the strong Australian gold price.
  • Tietto Minerals reported fresh assays from its Abujar gold project in Ivory Coast with a best hit of 73 metres at 2.8 grams a tonne from a depth of 218m. On the market, the stock added 3c to 22c.
  • Silver Lake Resources continues its recovery after dramatic slump five years ago when its corporate ambition saw it over-stretch, leading to a 96% price crash from $3.90 to 14c. A fresh reserve report filed this week confirmed a handy 835,000oz of gold in reserve category and 5.3 million ounces classified as resource, news which lifted the stock by 5c to $1.13.
  • Saturn Metals added 6c to 44c after rising $3.3 million in fresh capital to accelerate work on its Apollo Hill gold project near Leonora in WA where encouraging assays have been reported, including 17m at 2.96g/t.
  • Independence Group reported a strong pre-tax profit of $341 million for the year to June 30 thanks to strong gold and nickel prices. On the market, the stock added 26c to $5.32.
  • Adriatic Metals reported additional drilling results from its Rupice base metals project in Bosnia including 38m at 6.2% zinc, plus 3.8% lead and 1.9g/t of silver. A falling zinc price ate into the good news with Adriatic shedding 6c to $1.04, and
  • Sandfire Resources added 34c to $6.03 after reporting a strong profit of $106.5 million which analysts at JP Morgan said set the company up for a potential long-term re-rating after completion of the deal to buy MOD resources. The investment bank reckons Sandfire is a buy with a 12-month price target of $7.70.

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