PORTFOLIO POINT: These three gold juniors could be on the verge of success, provided certain factors play out in their favour.
Alkane Resources (ALK)
Most interest in Alkane Resources over the past two years has been in its proposed development of a big rare earths mine in New South Wales – a simple view that overlooks the well-structured business plan evolving in the stock, starting with early cash flow from gold.
Rare earth production from a world-class deposit of the exotic elements near Dubbo is still several years away. Long before then, Alkane should have landed two gold deals which will generate essential cash ahead of the more complex and expensive rare earth project.
Alkane’s first step back into the gold business – which was the company’s mainstay until it mothballed its Peak Hill mine (also in western NSW) several years ago – is expected to be the development of a series of small orebodies at nearby Tomingley, which will yield around 60,000 ounces of gold a year.
Costing $100 million to bring into production, Tomingley is poised to proceed once final approval is received from the NSW government. Funds for the project were raised last month through a series of share placements to existing shareholders, and a number of local and overseas investors.
With a proven resource of 811,000 ounces of gold, Tomingley is a small project, but it will have the effect of rebuilding a mining culture inside Alkane as senior management gets on with the next gold deal – the possible sale of a minority interest in a much bigger deposit.
The McPhillamys gold discovery near the NSW city of Orange contains at least 3 million ounces of gold, and is 49% owned by Alkane and 51% by one of the world’s biggest gold miners, the US giant Newmont Mining.
The problem with McPhillamys is that it is too small for Newmont, and too big for Alkane while it focuses on the Dubbo rare earths project, which will cost more than $1 billion to develop.
The too small/too big problem for the 51/49 partnership will probably lead to an outright sale of McPhillamys, potentially generating more than $100 million for Alkane.
Both gold deals – Tomingley and McPhillamys – will boost the balance sheet of Alkane as it gets ready for the challenging Dubbo project, though that too is showing signs of falling neatly into place, with growing interest from international companies that need rare earths, and from governments keen to secure supplies for their industries.
Chinese dominance of the rare earths business became a hot political issue last year, and led to a formal complaint of market manipulation by Japan, Europe and the US to the World Trade Organisation.
As well as fighting China in the WTO, agencies associated with those same countries are looking at ways to help fund alternative supplies of rare earths, with Dubbo and its 100-year resource at the top of their preferred investment list because of its location in Australia.
Over the next few months, the deal and news flow will accelerate at Alkane. Tomingley is a simple mine that will re-start production in the company. McPhillamys will generate cash in some way – either by Newmont buying the 49% of its minority partner, or by both parties selling – and development plans and government approvals will be finalised for Dubbo, which could be in production in 2014.
On the market, Alkane has recovered from a big price slide after the initial excitement over rare earths, which drove the stock as high as $2.70 before it fell back to 88c. Recent sales around $1.35 have valued Alkane at $453 million – roughly one-third of the $1.2 billion estimated net present value of the Dubbo rare earths project.
Troy Resources (TRY)
Since Troy was last mentioned in the Minefield column just before Christmas, it has been a reasonable performer, with an 11% share price rise aided by a strong showing last week, when operational and exploration success caught the eye of investors.
In a 48-hour burst of activity, Troy added 40c, rising from $4.40 at the close on Wednesday to $4.78 by Friday’s close. What makes the rise of Troy more interesting is that it has been swimming against an outgoing gold tide, with the 11% rise since its mention here on December 19 substantially better than the 3.8% fall over the same time in the ASX gold index.
Back in late December, the eye-catcher was the remarkably low production cost at the company’s new Casposo mine in Argentina. In October, the mine yielded a combination of gold and silver at $US103 an ounce, representing a profit margin of more than $US1500/oz.
One month is merely a snapshot of Casposo’s potential, but the low-cost, high-grade potential of the mine was confirmed in the December quarter report from Troy and will be re-confirmed when the March quarter result is released later this month, and possibly shown first-hand to visiting media and fund managers next week.
Since the start of 2012, Troy has been steadily cranking up its marketing program, with an emphasis on attracting the attention of North American investors who are much keener on South American gold stocks than Australians.
The push to develop a higher profile started with the opening of an office in Canada’s financial capital, Toronto, and continued last week with Troy’s chief executive, Paul Benson, talking to investors in New York as part of a roadshow. It will continue with the planned site visit to Casposo and the company’s second South American mine, Andorinhas in Brazil.
While Benson is focussing on Troy’s rising production profile – which should see output rise from last year’s 71,614oz of gold equivalent (gold plus silver) to around 130,000oz this year – and on falling costs, thanks to high gold grades and a switch from expensive diesel power to electricity supplied off the Argentine grid, investors will be focussing on two other issues.
Recent exploration at Casposo has confirmed that the orebody currently being mined is not an orphan. Lookalike structures have been pinpointed by drilling, and the geology of Casposo is showing signs of being similar to the Cerro Negro mine of Canada’s Goldcorp in southern Argentina.
Australian investors might remember that Cerro Negro was originally discovered by MIM (the old Mt Isa Mines). It was sold for a pittance when Xstrata acquired MIM, and became the flagship of ASX-listed Andean Resources, until Goldcorp bought Andean for a tasty $3.6 billion.
At a market value of $426 million, Troy has a long way to go before it matches the performance of Andean. But it will be interesting to see if history can repeat itself with a second small Australian explorer making a fortune for its shareholders in South America.
Carrick Gold (CRK)
Despite having all of its assets in the dusty flatlands that stretch to the east of WA’s gold capital, Kalgoorlie, the future of Carrick could be decided in China.
Never a stock to excite investor interest, or the attention of seasoned explorers in WA, Carrick has always been more of an exploration and financial play than a serious attempt to start a mine.
From its earliest days as a company created by the late Frank Carr – a man who made his name as a fringe player in big deals, including a cameo role on the board of Ken Judge’s Ariadne group in the late 1980s – Carrick has been beavering away at its Kurnalpi and Lindsay's projects for the best part of a decade, with limited success.
The company’s luck might have changed last week when its near neighbour, Norton Gold Fields, received a takeover offer from China’s Zijin group, which said it would pay 25c for all the Norton shares it does not currently own. Zijin already has a 16.9% stake in Norton.
The market, which has grown weary of Chinese companies announcing deals and not completing them, has treated Zijin’s proposal with caution. Norton’s on-market share price has only risen to 24c, a clue that a higher bid is not expected, and Zijin could take months to pay the 25c.
But the reason the bid for Norton is of interest to Carrick is that one of the companies (Norton) has an underutilised processing facility at Paddington, on Kalgoorlie’s northern outskirts, and the other (Carrick) has a resource of 986,400 ounces of gold, which needs a processing facility.
It would be a heavy financial lift for Carrick to go into production in its own right; far easier to strike a deal with whoever owns Paddington, which is within easy trucking distance from Kurnalpi and Lindsay’s.
Carrick is very much a speculative stock, but the logic of Zijin acquiring additional ore for Paddington from a neighbour is compelling, and it might make sense for the Chinese to buy the neighbour, rather than buy the ore.
On the market, Zijin’s April 3 bid has lifted Norton’s share price by 30%, from 18.5 to 24c. Carrick, over the same time, has risen by 4% to 39.5c.