Busting a mining specs boom

PORTFOLIO POINT: Investors in some mining exploration companies have more than doubled their money over the past week. But don’t gamble what you can’t afford to lose.

If Sabre Resources was flying solo when its shares rose by 240% in a few days of speculative trading last week, it could be regarded as an isolated event.

But Sabre wasn’t alone, and share-price rises of 100% and more in a matter of days continue to be posted by exploration companies in near-boom conditions that are the exact opposite of what’s happening at the top end of the mining industry.

Other explorers setting the sector alight include:

• Peel Mining (ASX code: PEX), up by 300% from 9c to 36c between August 14 and 17, before slipping back to 27.5c.
• Horseshoe Metals (HOR), up by 100% from 16.5c to 33c in 24 hours from August 15 to August 16, and then back down to 21.5c.
• Matsa Resources (MAT), up by 49% from 23.5c to 35c between August 15 and August 17, and then back to 30c.
• Oroya Mining (ORO), up by 100% from 2c to 4c on Tuesday.
• Sirius Resources (SIR), the company which started the speculative stampede, up by 2500% from 5.7c on July 25 to $1.49 last Friday, and down yesterday to $1.03.
• Sabre (SBR), up by 247% from 10.5c on August 14 to 36.5c on August 16, and down to 32c yesterday.

What makes those boom-time rises particularly interesting is the minimal hard evidence to justify them, with all resulting from a handful of drilling results and, in some cases, without even assays, just a whiff of mineralisation in the drill core.

Exciting as it is, and highly profitable for the fleet-footed, what’s happening is a classic stampede of the greedy and gullible.

Small exploration stocks, no matter how well promoted, are not a place for cautious investors. In some aspects they are no different to casino chips, but they have the added drawbacks of small capitalisation, and can be very thinly-traded when not running hot. This means they are hard to spot, and can be hard to sell when it’s time to take a profit.

With those riders there is no doubt that the explorers are great fun, but a test of how out of step they are with the real mining market is to measure their skyrocket performance against two yardsticks: metal prices and the share prices of genuine miners.

Big miners, as has been well reported, are suffering from the effects of falling commodity prices and investor worries about delayed developments.

Nickel, the metal driving interest in Sirius, Matsa and Oroya, is far from booming. It is depressed, with no sign of an imminent recovery. Four years ago a pound of nickel sold for $US15, 12 months ago it sold for $US11/lb, and today nickel is selling at $US7.10/lb.

A glut of low-cost nickel from mines in Indonesia and the Philippines is killing the nickel price, with half of the world’s nickel miners believed to be losing money at the current level.

None of that is being taken into consideration by speculators, who are jumping aboard anything that smells like a discovery.

It is possible that what’s happening in nickel exploration stocks (and copper, which is behind Sabre, Horseshoe and Peel) is an early indication of a more widespread recovery in the commodity market next year.

But it is equally likely that speculators with spare cash they can afford to lose have become bored with a stockmarket that has been flat-lining for the past few years.

Whatever the cause, it is impossible to ignore what looks to be a trend in the high-risk, (possible) high-return business of exploration even if no one is seriously thinking about ruining good stories by actually planning any form of production.

Share traders hungry for any excuse to treat the stockmarket as a casino are not interested in the fundamentals of supply, demand and the underlying metal price. They are keen to get aboard the next hot tip, and while there is nothing wrong with that approach, and fortunes can be made, it is just as easy to lose money when the trading mob shifts focus, often without any warning.

The stock that started the current mini-boom among explorers is Sirius Resources, which ignited interest in the Fraser Range near WA’s south coast when it reported rich nickel and copper assays from its Nova prospect.

From a standing start at 5.7c on July 25, Sirius rushed to 47c the next day, then up to 63c the following day, before peaking (for now) at $1.49 last Friday, a three-week dash that translates into a 2500% gain for some lucky punters.

Much more work is required at the Nova discovery before it can even be considered a future mine. The signs are promising, but the location is remote, big nickel discoveries are rare, and the nickel price is depressed.

Similar reality checks can be applied to the other recent runners.

Peel appears to have made a discovery of copper, lead, zinc and silver at the Mallee Bull prospect near Cobar in NSW. No assays have been completed but hand-held X-ray analysis on site has revealed mineralisation in drill cores in thick intersections measuring more than 40 metres. The Cobar region has a rich history of major mineral discoveries, making Peel a stock to watch.

Horseshoe has reported excellent copper assays of up to 4.2% over a 23-metre intersection from drilling at its historic namesake mine in central WA. Good as the assays are, it would have been more of a surprise if nothing had been found because the exploration is taking place directly underneath a previously mined orebody.

Matsa is a beneficiary of the very inexact “science” known as “near-ology”. It has mineral claims close to the Nova discovery of Sirius but is yet to report any discoveries on its Fraser Range tenements.

Oroya is another “near-ology” stock, which doubled in price on Tuesday when 53 million shares were traded purely on a report that the company had a project called Talc Lake some 50km from Nova at which rich (6.15% nickel) but thin intersections (half a metre) had been encountered.

And Sabre is another example of an exploration project which would have been more surprising if nothing had been found, because it is drilling in a region of Namibia which has a long history of copper production. The Guchab prospect has returned an eye-catching 107 metre drill core assaying 1.15% copper (with richer zones inside that core). Sabre could be onto something good, but more assays across a wider area are essential.

For jaded speculators what’s happening in the exploration part of the mining industry is a refreshing reminder that fast money can be made if enough people decide that it’s time for a boom.

For more cautious investors, the spec end can be fun but it is a market where profits should be taken quickly, and losses cut just as quickly.