|Summary: Two recent small base metals floats have delivered strong returns for investors, and could spark a new IPO rush at the small end of the mining market.|
|Key take-out: For investors, the challenge is judging whether the current interest in zinc, nickel and aluminium is the start of a long-term and sustainable revival, or whether more high-cost metal needs to be removed from the system.|
|Key beneficiaries: General investors. Category: Mining Shares.|
Rio Tinto’s stronger-than-expected first-half profit last week was a reminder that the mining sector is regaining some strength, but what was even less expected was the return of quick profits for supporters of small mining floats.
Two recent initial public offerings have significantly outperformed the overall market, and while they undoubtedly constitute speculation in its rawest form they are a sign of life returning to what was once the most exciting sector of the Australian stockmarket.
Stavely Minerals (SVY), which is exploring for copper and gold in western Victoria, listed on May 7 with its 20 cent shares opening at 22c. A month later they reached 31c and two months after listing the stock hit 60c, on its way to a high of 70c on July 28 – a 250% gain for an original investor who cashed out at the peak.
Latest trades in Stavely, which has a highly-qualified management team led by Chris Cairns, a former BHP Billiton geologist and a former managing director of Integra Mining, have been around 60c thanks to increasing optimism for the entire base metals complex, which includes copper, zinc and aluminium.
Duketon Mining (DKM) also achieved float success, with first trades of its 20c shares earlier this month at 24c, before a rapid rise to 31.5c. Latest trades are at 24.5c, a price which still represents a gain for initial subscribers of more than 23%.
Interest in Duketon has been fanned by the rising price of its primary target, nickel, with the company owning the small Rosie nickel prospect near Laverton in central WA, plus an extensive land holding for future exploration.
A change in sentiment?
It is impossible to prove, but until recently market sentiment towards small mining companies, especially those not in production, was so negative that floats such as Stavely and Duketon would not have succeeded in raising fresh funds, let alone attract support after listing.
It’s also true that two successful floats do not signal a complete reversal of sentiment in a sector of the market overcrowded with failed small mining stocks, some of which are being rebadged as technology stocks, triggering a warning to investors from corporate regulators concerned about the need for full disclosure of the switch.
However, the recent rise in the nickel price and a steady copper price, has attracted investor support to the small end of the market, with Stavely raising $6 million in its float and Duketon $7 million.
Both companies, even at their higher share prices, are mining minnows. Stavely is valued on the market at $29 million, Duketon at $22 million.
As well as returning handy profits for stags (investors who sell soon after a new float is listed) the success of Stavely and Duketon has stirred interest in the investment banking world, with other floats likely to will follow their successes, though there are no more mining stocks currently named on the new floats list of the ASX.
Re-engineering for growth
As well as new floats adding spice to the small end of the mining world there is increasing interest in companies being “re-engineered”, with the common thread being base and exotic minerals (such as graphite and vanadium). These have taken over from declining interest in yesterday’s stars, iron ore and gold.
Two examples of the speculative revival of base metals are the (misnamed) Mungana Goldfields, which is developing a zinc strategy based on old assets in North Queensland, and Cassini Resources, which has acquired a discarded BHP Billiton nickel asset in WA.
Mungana is effectively the rebirthed Kagara Zinc. It has enjoyed strong support in the market since acquiring assets from the liquidator of Kagara, a company which collapsed after the zinc price fell from around $US1.10 a pound to US78c/lb in mid-2011.
After revealing a switch away from gold into zinc in late June, Mungana’s share price has risen by 200%, from 5c to 15c.
Widespread zinc mine closures are having a positive effect on the price of the metal, which has risen by around 30% this year to $US1.05/lb, and traded as high as $US1.08/lb in late July.
Nickel is enjoying similar benefits from declining supply thanks to an Indonesian ban on the export of unprocessed ore, and from speculation that BHP Billiton might opt to close its troubled Nickel West business in WA rather than accept a low-ball offer in a sales process that is drawing to a close, with no sign of an interested bidder.
The loss of zinc and nickel production from the global system, with both metals shifting from a surplus to a deficit, is the first sign of the cyclical effect in the metals market, with low prices driving high-cost miners out of business, thereby taking the first step in a future revival.
Has the metal wheel turned for investors?
For investors, the challenge is judging whether the current interest in zinc, nickel and, most surprising of all, aluminium, is the start of a long-term and sustainable revival, or whether more high-cost metal needs to be removed from the system to be confident that the wheel has turned.
Another complicating factor is judging the level of demand for base metals, which are fundamental building blocks in many industries. Zinc is critical in construction and motor vehicle manufacturing, and nickel is an essential ingredient in high-quality stainless steel.
Clues pointing to the start of a revival can be found at the top and bottom of the mining market.
In Rio Tinto’s half-year report the dominant profit generating division was iron ore, but the highest percentage rises were recorded by the company’s two major base metal divisions, copper and aluminium. These increased their underlying profits by 74% and 71% respectively, compared with the 10% rise by iron ore.
This is misleading in a way, because copper and aluminium are coming up off a low base, and both remain relatively small profit generators alongside iron ore. The trend is what should interest investors, with base metals recovering and iron ore flattening. This means Rio Tinto must produce more to earn the same profit, with a future iron ore profit decline highly likely.
The same sense of revival can be seen in the way investors have reacted to the floats of Stavely and Duketon, and how stocks such as Mungana and a recent copper favourite, KGL, have been pushed higher on the promise of future production.
It’s certainly not a return to the buoyant conditions in the mining market of a few years ago, but the upward trend is hard to ignore, even if it is speculative at this stage.