Best undeveloped projects list: history suggest investors stand to do very nicely

Argonaut’s latest annual compilation features diverse mix of commodities and locations. In the mix is Bardoc Gold, which a fellow broker says is yet to get the love it deserves from investors.
18th December 2020
Barry FitzGerald

If only there was a tried-and-true method of determining when a project gives its junior resources company owner the right stuff to outperform in the next 12 months.

Well, a neat bit of annual research by Argonaut gets as close to a tried-and-true method as could be hoped for by investors.

It’s called “Argonaut’s Best Undeveloped Projects (BUPs),” with the resources corporate adviser/stockbroking firm having just completed its 2020 review.

After assessing more than 450 companies and their projects, eight projects and their owners made it on to the 2020 BUPs list. There is a further 11 projects/companies that got a special mention as they have not quite reached the project study phase or do not meet all of Argonaut’s BUPs criteria.

To get on the BUPs list, a company’s project needs to have demonstrated potential to be low-cost and high-margin, with the capability to maintain strong financial returns through the commodity cycle.

Such attributes give BUPs a broader range of financing options which underpin a likely development, as well as increasing M & A appeal.

It is interesting stuff because companies on Argonaut’s 2019 BUPs list performed strongly in the last 12 months, posting average share price increases (12 months to October 31) of 51%.

“This was strong outperformance against most relevant indexes, namely the ASX Small Resources, which was up 1%, and the ASX 200, down 11%,” Argonaut said.

As companies with development projects commonly raise capital, measuring the change in market capitalisation to take into account share dilution is also important. On that basis, the 2019 BUPs list soared 74%.

Over the six years that Argonaut has been compiling the list, the average share price increase has been 24%, and the average market cap increase has weighed in at 56%.

The only setback year was 2017, which Argonaut put down to investors rotating funds out of risk sectors, in particularly those exposed to Chinese resources demand funnily enough, given the current China-Australia trade war theatrics.

The BUPs list for 2020:

While not as deep as most might have expected given the dollars thrown at exploration in the past 12 months (the best of the new discoveries pop up on the special mention lists), the 2020 BUPs list  (alphabetically listed below) is notable for its commodity and country diversity.

Some but not all of the companies mentioned appear in Argonaut’s disclosures in the report, and it notes that inclusion in the list does not necessarily imply a corporate level opinion, recommendation, valuation, or target price.

1: Adriatic Metals (ADT, trading at $2.14): Owns the Vares silver-lead-zinc-barium project in Bosnia & Herzegovina. A PFS demonstrated “excellent economics,” driven the high silver grade. Argonaut assess a post-tax NPV of $538m. Has corporate appeal as Sandfire (SFR) holds a 16.2% take.

2: Atrum Coal (ATU, 30.5c): Its Elan project in the Canadian province of Alberta is a “rare unexploited low-strip premium coking coal project”.  It’s next to where Gina Rinehart is expected to get approval for the Grassy Mountain project in the first half of 2021. Should that come through, the corporate appeal of Elan to operators in the region, and large diversified miners, will be enhanced.

3: Bardoc Gold (BDC, 7.1c): Its namesake project to the north of Kalgoorlie “shows healthy margins, decent size and fewer technical challenges than the market would have us believe”. Bardoc has recently secured a gold concentrate sales agreement for the refractory component of the project’s ore sources, a de-risking event the market has been waiting on.

4: Galena Mining (G1A, 25c): Is now fully funded for its high-grade Abra lead underground mine in WA. It comes with silver credits and evidence of copper and gold mineralisation, with the potential of the latter two revenue boosters yet to be full tested.

5: Myanmar Metals (MYL, 7.3c): Its Bawdwin silver-lead-zinc project in its namesake country is a “behemoth and still largely underexplored”. Waiting on investment clearance to majority own and operate a mining joint venture. “Once attained, we expect as high level of corporate interest, particularly from Chinese parties.”

6: OreCorp (ORR, 65c): Now owns 100% of the Nyanzaga project in Tanzania which has a current resource of 3.1 million ounces at a handy grade of 4.03gpt. Could be the first major gold mine project in the country to be permitted under new mining legislation.

7: Pantoro (PNR,  23c): Leading the revival of the historic Norseman gold field in WA (5.5m ounces from grades of better than 10g/t). A low-cost restart plan was based on 602,000oz, with drilling continuing with the aim of doubling the mining inventory by early 2022.

8: VRX Silica (VRX, 29c): Has three silica sands projects north of Perth. Simple processing and access to infrastructure lead to low capital intensity of less than one years’ annual EBITDA for a 2Mtpa plant.

Some of the special mentions in Argonaut’s 2020 review will no doubt bob up in its 2021 BUPs list. And there is a chance some won’t.

The list is Bellevue (BGL), Chalice (CHN), Centaurus (CTM), De Grey (DEG), Mincor (MCR), Musgrave (MGV), NexGen (NXE:TSE), Oklo (OKU), Sovereign Metals (SVM), Stavely (SVY) and Tietto (TIE).

Bardoc Take Two:

Bardoc gets another mention here on its recent “derisking” event mentioned above – its offtake agreement for gold concentrates from the Aphrodite deposit at its Bardoc gold project.

It shouldn’t really be seen as a derisking event as selling concentrates rather that gold dore is an increasingly common practice. Evolution at Mt Carlton and Silver Lake at Deflector know all about it.

Still, the market wanted to see a concentrate offtake arrangement put in place and just as important, one that contained recovery/payability factors at or better than contained in the project’s March PFS.

Bardoc’s off-take deal with Zug-based MRI, the world’s biggest trader of non-ferrous concentrates on a non-producer basis, has done all that, notably with better recovery/payability.

Rawson Lewis has taken all that (it has acted as adviser for Bardoc and has a research mandate with the company) to arrive at a new valuation for the company of 22c a share, and a target price of 18c a share, the latter up from 15c previously.

That’s kind of interesting when compared with Bardoc’s 7.1c market price and its inclusion in Argonaut’s BUPs list for 2020-.

“Bardoc continues to de-risk the Bardoc gold project, and at some stage we expect the market will recognise it for what it is - one of the few remaining WA development opportunities with scale, transitioning to production in just over 18 months,” Rawson Lewis’ analyst said.

 

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