Market sell-off could prove a blessing for mining stocks as investors switch from tech to hard assets
11th October 2018
This week’s tech wreck is not a bad thing for the mining sector on the basis that the sell-off is contained and that it will convince investors that it is time to replace over-hyped growth stories with some hard assets.
That was reflected in the local gold sector being a beacon of light when just about everything else was swimming in a sea of red in Thursday’s tech-led dive.
The rest of the miners took comfort from the performance of the gold stocks for reasons not readily apparent.
While safe haven buying played a role in the gold price edging higher, the good news for the other miners was the fact that the gold price rose at all.
Gold’s ability to rise meant investor capitulation was not absolute.
Techs and healthcare copped it between the eyes for sure, but damage elsewhere was contained. That gets us back to the argument that hard assets like commodities are going to be the winners.
Good news for the major and mid-tier miners perhaps, but not so great for the juniors where the hard asset is still in the ground and is yet to have a clear pathway to being monetised through a fully-funded development.
But it can also be argued that the greatest leverage to the emerging hard assets thematic rests with those juniors which have projects knocking on the door of becoming a development.
WA copper-zinc developer Venturex Resources (VXR) is a prime example. During the week it delivered a definitive feasibility study in to the development of its Sulphur Springs project, 140km south-east of Port Hedland in the Pilbara.
Early expectations that Venturex’s relatively new managing director AJ Saverimutto would deliver big improvements on last year’s value engineering study (VES) were on the mark. The group’s 20% shareholder, Northern Star, would have been pleased.
A bigger 1.25mtpa processing plant has been priced at $146m, down from the $167m in the VES for a 1mtpa plant.
The project’s net present value increased to $472m ($310m post tax) on consensus pricing, up from $338m in the VES. Initial mine life has been put at 10.3 years and the average annual production of 15,000t of payable copper and 35,000t of payable zinc is good for $80m of annual free cash-flow.
The robust DFS will make it all that much easier to secure a financing package, most likely including strategic offtake arrangements with Asian end-users/traders who have a long-term view on commodity markets, not one framed by Thursday’s tech wreck.
It all makes for an interesting comparison with Venturex’s current modest market cap of $42m at 17c a share.
Euroz – which reckons EBITDA of $200m in years four and five during the mining of higher grade ore is possible – has a 60c price target on the stock.
Back over in the gold space, Nusantara (NUS) is another junior to have recently put its hand up as a leveraged hard asset proposition based on advances in its key project towards development status.
It released its DFS into the development of its Awak Mas gold project in Indonesia as a 100,000 ounce-a-year producer from a 1.1Moz reserve (within a 2Moz resource), with a 20.3% IRR using a gold price of $US1,250/oz.
The post-tax NPV was put at $US152m for the $US146m project which comes with an initial mine life of 11 years.
The DFS was not able to capture the upside at the project, both from infill drilling (it has been indicating higher grades), and extensional drilling at the two main deposits and nearby/regional opportunities.
There is good reason at this early stage to think that another $US100m could be added to the NPV by adding three or so years to the initial 11-year mine life.
Nusantara last traded at 20c for a market cap of for a market cap of $20m. If Awak Mas had a WA address, the stock would likely trade at more than twice its current level.
But it is not. Indonesia is not exactly flavour of the month with mining investors because of its resources nationalism. So a 50% or more discount is applied to a stock like Nusantara.
Having said that, the company is happy with its lot in the country after it came away from tough negotiations to secure a new Contract of Work in March that removed the uncertainty which has held investors back.
Among other things, the new CoW gives secure title to 2050 and a 10-year holiday on a mandatory divestment of a 51% interest to Indonesian partners in the CoW.
As it is, Nusantara currently has a data room open in Jakarta with a view to bringing a strategic partner in to Awak Mas. About 10 groups are in the room, including Indonesian interests.
A short list of potential partners – Chinese interests and three groups from other parts of the world are also having a look – will be drawn up by the end of the year, with a deal targeted for the New Year.
Assuming that comes to pass, Awak Mas could well be on the way to first production in 2021.
Given the robust economics and exploration upside of the project, Nusantara will be hard to ignore as 2021 approaches, if not for its takeover appeal, then for its future free cash flows.
Genesis (GMD) is another gold junior to put its hand up as a value story, announcing during the week the resource at its Ulysses project near Leonora in WA had more than doubled to 760,000oz.
It’s got a high-grade portion of 628,000oz at 4.7 g/t which kind of says Genesis has either got a standalone development opportunity on its hands, or it is going to get taken over so Ulysses can feed any one of the hungry mills in the region.
Run the multiples implied in recent merger and acquisition activity in the junior space across Ulysses and it is clear that with a share price of 4c for a market cap of $38m, Genesis has yet to come to the attention of the market.
But that will happen if M&A activity breaks out, or as expected, further exploration lifts Ulysses into the 1Moz resource category before long. In the absence of M&A by that point, Genesis’s stand-alone development ambitions will have some real meat on the bones.
Argonaut has a 10c price target on the stock.
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