Investors return to mining stocks

Punters are piling into the speculative end of the mining sector...and being very well rewarded for brave moves.

Summary: There have been a number of oversubscribed share issues coming from the small end of Australia’s mining sector in the past few weeks, with many of the funds used for future exploration projects. Potash, gold and lithium have been popular choices, and while not all capital raisings have been successful, many have seen capital gains almost immediately.

Key take out: The renewed interest in these miners suggests that while the drought may not have broken, the speculative investor believes they can find value in our smaller mining operations.

Key beneficiaries: General investors. Category: Commodities.

Cash is flowing into the small end of the mining sector for the first time in five years, with a series of recent capital raisings heavily over-subscribed, some by more than 100 per cent.

And while mining juniors are dependably reactive to the first glimmers of good news for a ravaged sector there is even signs of life among the biggest players: Remarkably BHP has surged 27 per cent over the past nine trading sessions (to April 20) with the stock finally breaching $20 for the first time in five months.

The awakening is another sign that investors believe the worst of the commodity-price crash is over and while a sharp recovery is unlikely, the trend for most minerals is up.

Companies with gold, lithium and potash interests have attracted the most support, displacing the previous leaders, iron ore, oil and coal, which have been temporarily sidelined by their problems of over-supply and poor price outlook.

Perhaps most encouragingly from a future discovery perspective, at least five of the latest share issues by ASX-listed companies have raised funds for grass roots (early-stage) exploration, the highest-risk category in mining.

The outstanding recent raising is the $100m raised by Pilbara Minerals, a $640m lithium-project developer, which was rushed by investors in a significant change of market sentiment

Separately, Core Exploration (CXO), a minnow with a market value of just $12 million, raised $2.2m yesterday in a heavily oversubscribed share issue with the funds earmarked for its Finniss lithium project in the Northern Territory.

Four days earlier West African Resources (WAF), a $55m market-cap gold explorer with a promising project in the West African country of Burkina Faso, raised $12.5m for drilling work with the placement also said to have been heavily oversubscribed.

In most case investors who have taken up new shares have enjoyed a capital gain immediately after the issue.

Core placed its new shares with professional investors at 4.2c and is now trading at 5.5c. West African raised its fresh funds at 12.5c and is now 18c. Pilbara’s new capital cost investors 38c and the stock is now 64c.

Risks associated with new mining ventures are always high which is one reason why few investment advisers follow the small end of resources or recommend stocks still at the mineral exploration stage of their development.

Another problem is that exploration stocks are impossible to model, one of the pre-requisites for investment bank and stockbroking analysts.

A common view of the small end of the mining market is that it is far too speculative and has more in common with a casino than a place where serious investments can be made.

In some ways that view is correct, but don't ignore that first flush of recovery at the top end of town either: Along with BHP's bounce in recent days we have seen Rio Tinto (RIO) up 11 per cent this month, Newcrest (NCM) up 3.4 per cent and Fortescue (FMG) up 21 per cent.

Core Explorations was trading at 1.1c in mid-January and while it is stretching the point, the stock, at its latest price of 5.5c, has delivered a 400 per cent capital for some lucky speculators.

West African was trading at 5c as recently as late February, which means that at its latest price of 18c it is up by 260 per cent.

Pilbara Minerals has doubled in price since the start of the year and at this time last year was a 3c penny dreadful.

Other examples of the awakening among small mining and exploration stocks include:

– St George Mining (SGQ) raising $2.3m late last month for work on its Mt Alexander nickel and copper project with the bulk of the funds coming in via a private placement last week at 8.5c, comfortably below the latest share price of 13c, and with the $255,000 share purchase plan component of the issue over-subscribed by 500 per cent.

– Salt Lake Potash (SO4) setting itself a capital-raising target of $5.2m for work at its Lake Wells project but increasing the offer last month to $8.4 million to accommodate demand for the issue priced at 32c. The stock is now trading at 36c.

– Gascoyne Resources (GCY), raised $15 million last week at 33c a share to accelerate exploration at its Dalgaranga gold project, describing the placement as being “many times oversubscribed”. The stock is now trading at 50c.

– Western Areas (WSA), a well-established nickel producer hit last year by a low nickel price, raised $60m three weeks ago in a fully-underwritten placement priced at $1.95, describing the share issue as substantially over-subscribed. The stock is now trading at $2.59.

– Panoramic Resources, another nickel miner battered by the low nickel price, raised $10.7m at 10c a share and is now trading at 13c thanks largely to nickel price rising from $US3.80 a pound at the time of the placement to $US4.18/lb today.

– Danakali, a potash project developer, raised $5.5m late last month at 22c a share and is now trading at 25c.

Not all recent capital raisings can be called successful. Hastings Technology Metals (HAS), a rare earths explorer, had a raising of $9.6m on Monday through an issue of shares priced at 10c but is today trading at 9.5c.

Talisman Mining (TLM), which is part-owner of the Monty copper and gold development, raised $16.7m early last month at 45c a share is now trading at 40.5c.

Important as it is to acknowledge the less successful capital raisings, at least in terms of immediate capital gain, it is the revitalisation of the capital raising process at the small end of mining, and the wide spread of commodities which have caught the eye of speculative investors.

If the trend continues it will not be long before capital raising for mining spreads to the area of initial public offerings.

The current ASX new floats list features a handful of mining-linked companies, but most have been unsuccessful with stocks such as Golden Eagle Mining withdrawing its prospectus or changing the completion date to a category headed TBA (“to be advised”).

One new float which has set a listing date (May 18) is Graphex (GPX), a graphite-focused spin-off by IMX Resources which is seeking $7m to accelerate exploration on the Chilalo project in the East African country of Tanzania.

You might say it’s too early to pronounce drought has broken for small mining stocks but there are signs of cash raining lightly on the sector.

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