Minefield: Rare earths, oil and zinc

Three small players - with focuses on rare earths, oil and zinc respectively - face game-changing moments.

*Small mining stocks are highly speculative. Those subscribers following this research do so at their own risk. The companies covered in the column below do not form part of the official share recommendations provided by Intelligent Investor and Eureka Report


Alkane Resources (ALK)

Patience is not normally an asset associated with small mining companies but it can be found in Alkane Resources. The company has survived 36 years of commodity cycles and could soon surprise by developing one of the world’s more interesting polymetallic orebodies in western NSW.

Hints that the $1 billion Dubbo Zirconia Project (DZP) is getting ready to move off the drawing board can be found in the recent improvement in Alkane’s share price and the news that the final pieces of an exceedingly complex proposal are falling into place.

Challenges remain because the DZP is unlike any other mining project in Australia, and unique in a global sense because of the cocktail of metals Alkane proposes to extract from an orebody rich in zirconia, rare earths, niobium and hafnium – names which mean nothing to most investors, with the possible exception of rare earths.

A few years ago, when rare earth prices rose sharply thanks to Chinese control of 90 per cent of the global market of elements essential in a number of modern technologies, the DZP was tagged a rare earth project – but when rare earth prices fell its name was changed.

The DZP today is a project which will have the effect of turning Alkane into a diversified miner from a single orebody thanks to multiple revenue streams from metals sold into different markets. Zirconia is used in chemicals and electronics. Rare earths have uses such as high-strength magnets. Niobium is used in steel, and hafnium is used in the nuclear power industry.

For a small company capitalised at $160 million the DZP is a huge undertaking but Alkane has been able to maintain 100 per cent control by generating revenue from another project, a small goldmine at Tomingley, also near Dubbo.

Over the past few years a steady stream of private and government organisations have beaten a path to Alkane’s door. Japanese buyers are keen to get access to the rare earths to avoid dealing with China. Steel mills want the niobium because 90 per cent of that element currently comes from Brazil, and a deal was signed last week to supply all zirconium to a British minerals trading company.

It was the signing of the zirconium offtake deal with Minchem Ltd which triggered a stock-market response and re-awakened interest in Alkane with its share price rising to a 12-month high of 34.5c last week, before easing back to around 32c.

How Alkane funds the DZP is the next test and while $1bn is an extremely heavy lift for a small company there is considerable international interest in the DZP and its range of strategically important minerals. It could attract the support of Asian and European governments keen to break the Chinese grip on rare earths and Brazil’s niobium dominance.

FAR Ltd (FAR)

If the oil price had not collapsed two years ago Melbourne-based FAR Ltd would be a much better-known business today with far greater investor support.

It’s not, and that’s the luck of the commodities game, but two events are starting to kindle interest in FAR, which is a minority shareholder in one of the world’s best oil discoveries of the past few years.

What’s changing for FAR are the early signs of an inevitable oil price recovery, which will follow the drought of investment in exploration and development of oil and gas projects. There's also an interesting corporate “game” developing around the SNE oilfield off the coast of the African country of Senegal, in which FAR has a 15 per cent stake.

The oil price will move at its own pace, but could get a boost in late September if a meeting of major oil-producing countries agree on some form of market support operation, such as trimming output.

Of far more interest are the corporate events swirling around the SNE field, which has Britain’s Cairn Energy and ConocoPhillips of the US as the major shareholders – but with Conoco proposing to sell its 35 per cent to Australia’s Woodside Petroleum.

The deal between Conoco and Woodside was, until a few days ago, seen as a simple transfer of ownership at a price of $US430 million, but that was before FAR objected with a claim that its right of first refusal had to be considered and it had an option to match Woodside’s price.

Given that FAR is capitalised at $330m and Woodside at $24 billion, not too many people took FAR’s stance seriously. But that could be a mistake because, while FAR might not have the spare cash to match Woodside’s deal with Conoco, it could easily find friends with deep pockets who could.

What FAR appears to be doing is dealing itself into the game by arguing that the clock has not even started on the bidding game, serving Conoco with notice that it has failed to comply with the terms of the SNE joint venture; an impressive position to adopt given that Conoco is valued on the New York Stock Exchange at $US52bn ($70bn).

Having dealt itself into a game being played by oilfield giants, the minnow FAR now appears to have three options. It can quietly accept the inevitable of Woodside replacing Conoco, or it can bring in a funding partner to beat Woodside to the SNE prize, or it can negotiate a high price for its 15 per cent of the SNE field and exit the game with a fistful of dollars.

On the market, FAR is trading at 7.4c, close to its 12-month low of 7c.

 Ironbark Zinc (IBG)

The key to Ironbark Zinc lies in its name, with zinc continuing its strong recovery on metal markets after a decade in the sin bin.

On the London Metal Exchange the price of zinc has risen by 60 per cent over the past six months and at $US1.04 a pound is within sight of a five-year high.

Ironbark has done a little better, rising by 140 per cent from 3c to 7.2c, an impressive move though also one that leaves Ironbark capitalised at a lowly $36.5 million.

The attraction of Ironbark is twofold. It is sitting on a world class zinc deposit, and it has two of the world’s leading players in the zinc market at the top of its share register, with Belgium’s Nyrstar holding a 22 per cent stake and Swiss-based Glencore on a 10 per cent interest.

Less appealing is the location of Ironbark’s flagship Citronen project, the far north of Greenland, an island covered in ice and with a government not that friendly to mining.

Progress is being made with Citronen and a more recent zinc discovery at Sortebjerg, but the real key to the company is what Nyrstar and Glencore want, and where Citronen fits into their zinc production plans.

If, for example, the zinc price continues to move higher – which it might given falling stockpiles and a lack of new mines – then Citronen could get a green light.

But then there are the risks that any project in Greenland faces, and the remote location and a lack of government encouragement, making Ironbark a company to watch rather than buy.


*Stocks worth a closer look are highlighted in green; ones requiring great care in amber; and those to avoid in red.