Minefield: A mixed metals bag

PORTFOLIO POINT: Gold miner Northern Star has had good results, but iron ore company Strike Resources warrants some caution, and nickel-platinum group Panoramic gets a red light.

Northern Star Resources (NST)

Tempting as it is to call Northern Star Resources a one-trick pony because it is dominated by a single gold mine it is also possible to dredge up one of Winston Churchill’s famous sayings, and twist it slightly, to say: “some pony '¦ some trick!”

Paulsens is the “pony” which has driven Northern Star from the status of penny dreadful just two years ago to a stock trading around 80c, a move which has lifted its market capitalisation from $5 million to $320 million, making it one of the ASX’s top performers, and one of the stars on a list of stocks mentioned last month in a story about gold companies with high profit margins.

Back on May 23 (Gold’s low-cost glow), Northern Star was mentioned, but fell just short of the $US1000/ounce cut-off used to make the final list at a time when the gold price had retreated to $US1537/oz. Today, with gold trading higher, the stock would just make the $US1000/oz club, which could be a factor in its share price rising over recent months.

The share price rise is a reason why some investors see the company as having done its best work, a view that should be discounted against ongoing exploration success and expansion plans at Paulsens, plus a two-pronged plan to grow the business and shrug off the one-trick-pony tag.

The latest news from the mine, including thick and rich gold assays, indicate that Paulsens will be in production much longer than the market expects, generating higher profits than appear to be factored into its share price.

The company’s drilling results news, announced on June 15, included assays of up to 63.5 grams of gold a tonne (two ounces in the old imperial measuring system) from a location well ahead of the current workings. While over a narrow distance of less than half-a-metre, that assay was part of a suite of drill results indicating that Paulsens should be in production for at least the next seven to 10 years.

What Northern Star does with the cash from its gold is the most interesting question for investors, because management is likely to have around $100 million a year to play with as production rises to a target of 100,000 ounces of gold a year at a long-run cash cost of around $600/oz (for a margin of just over $US1000/oz at the current gold price).

Developing a second goldmine will be the company’s next trick, with work under way at the nearby Ashburton project, a mine which should double annual gold output to around 200,000oz a year.

Corporate activity has also been stimulated by the Paulsens cash flow, with Northern Star taking a 15% stake in the emerging copper producer, Venturex Resources.

Until the Ashburton mine starts production, initially by trucking ore to the Paulsens plant, the label of one-trick pony will probably stay with Northern Star, and investors should always be wary of mining companies with only one major asset.

Paulsens, however, is proving to be an excellent asset at a time of high gold prices. It has what all goldminers seek, high grades, and it has a relatively simple geology that is being opened up by a busy drilling schedule.

Strike Resources (SRK)

If the geology was all that counted, Strike Resources would be trading at a much higher share price than its current 11.5c. Unfortunately the ASX-listed stock has two non-mining issues to manage: the location of its best asset, and the location of its biggest shareholder.

Alisher Usimov, a Russian oligarch, is the major owner of Strike shares with an 18.2% stake held through a Cypriot-registered company, Gallagher Holdings.

If an oligarch at the top of the share register is not sufficient reason to treat Strike warily, then Peru might be because that’s where the company is sitting on the Apurimac iron ore deposit – but what a deposit it is.

Technically an orebody made up of magnetite, a material widely-regarded as inferior to the hematite mined in WA’s Pilbara region, the Apurimac ore is unlike anything seen in Australia.

Whereas Australian magnetites require expensive processing because they generally grade less than 40% iron, the Apurimac magnetite ore assays more than 60% iron, a quality which ranks it as one of the world’s richest magnetite structures, with some of the ore suitable for direct shipping without processing.

Making the jump from an explorer with its foot on something special in the Andes mountains of South America to a miner shipping ore to customers in Asia will be a heavy lift.

Strike’s first step along the path to developing Apurimac will be resolving a complex ownership structure with a local partner, a company called D&C. A deal, designed by the investment bank, Rothschild, could see Strike acquire clear title to the orebody by October.

Then comes the question of what Mr Usimov wants to do with a tiny part of his worldwide portfolio of mineral investments, and finally will come the question of how best to mine the orebody; undoubtedly the easiest part of the equation.

Because of its unusual qualities and high iron content, Apurimac could cost as little as $US150 million to develop, and produce ore at a fabulously low $US20 a tonne – about half the cash cost of the best Australian producers in the Pilbara.

Profit margins on a mine producing up to 20 million tonnes of ore a year, the current target, would be enormous, even with the iron ore price slipping back to around $US130 a tonne.

It is the geology, and the potential to generate profits measured in the billions of dollars a year, which keeps Usimov interested in Strike, though for investors with a more cautious approach the stock is one to watch, before rushing in, to see that it does clear the hurdles ahead.

Panoramic Resources (PAN)

Four years ago Panoramic Resources was trading at close to $6 a share. Today, it is trading at 58c, with that 90% fall caused largely by an equally big fall in the price of nickel, the company’s primary product.

But, if any investors are inclined to think that Panoramic has become a bargain-basement buy they might want to think again because after the scorching from the nickel market the company is now jumping into platinum, another metal suffering from over-supply and low prices.

A few weeks after Panoramic wrapped up control of an ASX-listed, but Canadian-focussed platinum explorer, Magma Metals, and acquired the mothballed Panton platinum project in WA’s Kimberley region, the most successful Australian-listed platinum stock, Aquarius, closed one of its part-owned South African platinum mines.

What Aquarius saw in platinum was a metal suffering from “an enduring low platinum group metals (PGM) basket-price environment” – mining industry mumbo-jumbo for lousy prices that are likely to stay lousy for some time.

For Panoramic shareholders, that means they own a business suffering from a low nickel price, buying into a low-priced platinum environment.

Why Panoramic management believes it can do better than those getting out is an interesting question, with the answer perhaps lying in the fact that the Panton project, which has been too difficult to develop for about 30 years, and Magma, which has struggled to make a business case for its Thunder Bay project in Canada, were cheap.

Buying assets it believes are under-priced can also be seen in Panoramic’s acquisition of the Wilson’s gold project from troubled Apex Minerals.

As a policy, buying low works well, if prices rise in the future. In Panoramic’s case it is now waiting for the price of nickel and platinum to rise, and for a second-hand gold deposit to be developed.

All of the above might happen. But, it could be frustrating waiting for the turnaround.