Marengo's promise

A massive copper resource is tantalising investors, and has a compelling lookalike factor with a previous ‘overnight success’.

PORTFOLIO POINT: Further assaying is likely to add to its already huge copper resource; it has big backers and a lookalike factor.

Minefield is not about share tipping; rather it is about those stocks with a good story to tell but which are struggling for oxygen in a very crowded market. There will be no outright recommendations, but a simple measuring tool in traffic light colours: Green for “good”; amber for “proceed with cautious confidence”; red for '¦ well '¦ caveat emptor (let the buyer beware).

Here are three stocks that have slipped through the cracks.

Marengo Minerals (MGO)

Papua New Guinea has been in the news for all the wrong reasons lately, which is one reason investors have taken their eye off Marengo Mining, a copper-project developer with its foot on a world-class resource and a profile similar to the enormously successful Equinox Minerals.

Destabilising political squabbling in PNG, including a dispute over who is the country’s Prime Minister, will be sorted out, as it always has been in the past. As that happens over the next few months Marengo will be back in the news after a year on the sidelines.

The first event, scheduled for next month, will be a major resource upgrade at the company’s flagship Yandera project near the port of Madang on PNG’s north coast. A final feasibility study is expected mid-year, followed by financing, which will possibly be the easiest step because Yandera has the backing of the PNG and Chinese governments, and some of the world’s top private investors.

As it stands, Yandera contains a massive resource of 6.5 billion pounds of copper, plus large amounts of other minerals, including molybdenum, gold, silver and rhenium. However, the last resource upgrade was early last year.

Since then there has been 40,000 metres of fresh drilling into the huge blobs of ore that make up the deposit, but the results are yet to be included in resource calculations, largely because of slow progress assaying drill cores in over-crowded laboratories.

The delay almost certainly means that the resource of 6.5 billion pounds will rise substantially, and confidence will increase in transferring much of the resource into the higher quality reserve category, although that key calculation will not be revealed until the feasibility studies are complete.

Marengo and Yandera have attracted curious bedfellows. Among the major shareholders, with an 18.9% stake, is the Quantum Partners investment fund run by high-profile billionaire George Soros. He has been joined by the well-connected international investment fund manager Sentient Group, which has a 22.2% stake; and more recently by a Canadian pension fund, the Ontario Employees Retirement System, with a 7.4% stake.

The gathering of rich and famous investors on the Marengo share register is complemented by a close working agreement (and entitlement to a future 30% stake in Yandera) with the PNG government, and a strategic alliance with a big Chinese construction company, which will build the project, and has agreed to source 70% of the capital cost from Chinese banks.

Impressive as the political and corporate credentials look, there is one other point that is more important to investors: the Equinox look-alike factor and the history of that copper project developer, which disappeared last year after a 10-year struggle to open a world-class mine in the southern African country of Zambia.

For much of its early life, Equinox was little more than a penny dreadful, trading at less than 50¢. It started to move up as its Lumwana project was being built, fell in a hole after suffering construction problems, and then became an irresistible takeover target, being swallowed by Canada’s Barrick Mines at $8.15 a share in a $7.5 billion deal.

The similarities between Marengo today, and Equinox some five years before it was acquired are compelling, right down to the huge size of ore body, difficult political location, and uninspiring share price, which has fallen from 28.5¢ when Minefield last looked at the stock 11 months ago, to around 21¢ today.

There is a long way to go before Marengo starts production, with 2016 the likely starting date, at which time management will be able to borrow a line used by Equinox management: “It took 10 years to become an overnight success”.

Blackthorn Resources (BTR)

Five months ago Blackthorn was rated amber in Minefield, with a share price around 48¢ and a reputation for being somewhat accident-prone as well as being victim of an investor sell-off after the collapse of copper exploration joint venture with BHP Billiton in Africa.

Look again. Blackthorn today is up to 62.5¢ and putting runs on the board at a zinc-mining joint venture with the giant commodities trader Glencore, as well as turning a few faces red at BHP Billiton for perhaps walking away too soon from the Mumbwa copper project in Zambia.

Investment banks that follow the stock – and there aren’t many – rate Blackthorn’s chances of success highly. Investec, in a report published in November, tipped the stock as having a $1 target price, noting the dual share-price catalysts of the Perkoa zinc project in the African country of Burkina Faso, and Mumbwa copper.

At Perkoa, largely thanks to Glencore’s interest in zinc, development activity is almost complete with first ore reaching the surface, and approval granted to expand the operation before the first metal is produced.

Past technical and financial troubles have seen Blackthorn’s stake in Perkoa watered down to 39.9%, but even with reduced equity the difference between being a producer rather than just another explorer is significant.

It is Mumbwa that has ignited investor interest in the stock, with ongoing drilling without BHP Billiton’s participation yielding eye-catching assays such as last week’s 111 metres at 0.61% copper, and earlier assays of up to 1.05% copper over 282.7 metres.

Blackthorn has a lot more work to do at Mumbwa but it is rapidly moving on from the embarrassing loss of its exploration partner, a decision based on BHP Billiton’s assessment that Mumbwa would not be big enough to fit its demand for world-class, or tier-one, assets.

Today, Blackthorn owns 100% of a copper project that is not only expanding in scope, but delivering high-grade copper assays, and with the prospect of gold being added to the mineral inventory when the Zambian Government permits the release of assay results.

Rather than being a company with a stalled zinc project and a lost copper exploration partner, Blackthorn is about to enjoy its first cash flow from zinc as it plugs ahead with what could be a much bigger copper discovery than BHP Billiton imagined.

Gindalbie Metals (GBG)

Once the holder of a red card for uninspiring investment credentials Gindalbie looks set for a few months of good news as it moves into the final stages of building its ambitious $2.6 billion Karara iron ore project in WA.

What’s changed since last June, when Gindalbie, and other stocks developing magnetite (low-grade) iron ore projects were dismissed as too risky, is the shift in corporate profile from developer to imminent producer.

The red card, well-earned at the time as the stock fell from 82.5¢ to 45.5¢, has been replaced with an amber rating, but only on a short-term basis and only until Gindalbie proves that Karara can produce a premium-quality iron ore export product.

With recent trades around 68¢, Gindalbie has been attracting the sort of interest that builds ahead of project completion, with the immediate price target being the $1 level seen in April last year.

As Karara passes its construction milestones, Gindalbie will attract increasingly positive publicity. An estimated $1.82 billion has been spent on the project so far, and most major contracts awarded, including the main mining contract, a $570 million job lasting six years to Downer EDI Mining.

With close Chinese connections Gindalbie is assured of selling every tonne from Karara, though the key question once production starts will be the profit margin, a number which will not be known for some time but which will be critical given the completion delays at Karara and cost blowouts.

In the short-term, Gindalbie deserves to be re-rated. In the long-term it needs to demonstrate that it can generate the promised profits.