Minefield: Three stocks shining up

Summary: A look into companies exploring for or mining copper and gold, lithium and coal.

Key take-out: These stocks have risen due to new discoveries, rising demand, and takeover action.

As with every edition of Minefield, this article is not providing investment advice. For all of InvestSMART’s stock recommendations, click here.

Tumbling values in most asset classes over the past six months have served at least one useful purpose.

They have highlighted the importance of investing in quality which, in the resources-world, often means companies that are in production, or appear to have made a major discovery.

In this edition of Minefield there are three examples of quality shining through, with two of the companies mentioned in production and another with exposure to one of the world’s hottest exploration targets.

There are other factors which helped with the selection, including corporate activity, exposure to the new-energy sector, and what it means to be a relatively small explorer holding a tiger by the tail.

But there is also an important difference in the first company mentioned because, while it is Brisbane-based, it is very international in outlook with its best asset in South America and its stock-exchange listing in London.

SolGold (SOLG on the London stock exchange)

Despite a low profile at home, Brisbane-based SolGold is shaping as one of the Australia’s most successful explorers, with its foot on what already ranks as a world-class copper discovery in Ecuador.

Proof of that point lies in the latest resource statement covering the Alpala deposit, which lies within the bigger Cascabel project near the border with Colombia, and investment in SolGold by BHP and Newcrest.

What two of Australia’s biggest mining companies see in SolGold is a chance to get early exposure to a country showing similar indications of rich copper and gold deposits as its southern neighbours, Peru and Chile.

That Ecuador has not developed a big mining industry based on the Andes mountains, which connects every country on the western side of South America, is more about domestic politics than geology.

SolGold took its chance in Ecuador four years ago when it was seen as unfriendly to international business, pursuing a hopeless and repeatedly rejected legal claim for damages against the US oil major, Chevron, as well as providing shelter in its London embassy for wanted Wikileaks founder, Julian Assange.

With so much background noise swirling around Ecuador not many investors saw what SolGold was doing, which now looks like the next major copper province in South America.

Last week SolGold reported that the resource at Alpala had doubled to 6.1 million tonnes of copper and 16.2 million ounces of gold in an orebody measured at 950 million tonnes at a grade of 0.97 per cent copper equivalent (a mix of copper and gold) – with more to come.

The chief executive of SolGold, Nick Mather, said the latest resource calculation exceeded the generally held requirement of 750m/t at 0.9 per cent copper equivalent for a discovery to be classified as tier-one, the sort of asset big miners crave.

BHP certainly believes Alpala is a world-class discovery, spending an estimated $130 million to acquire an 11.18 per cent stake in SolGold through a series of transactions which sees it sit just below Newcrest which has a 14.5 per cent stake.

Investor interest in Alpala is growing, with SolGold’s London-listed chares moving up as BHP’s interest became more widely known. Since early September SolGold has risen by 86 per cent from 20.5 pence to 38.2p, a price which values the stock at £691 million ($A1.2 billion).

For local investors there might be a way into the Alpala discovery, and that’s through a third big shareholder in SolGold, ASX-listed but thinly-traded DGR Global. It is closely associated with Mather and has an 11 per cent stake in SolGold – an interesting proxy for a big discovery.

Pilbara Minerals (PLS)

An early mover in the lithium rush, Pilbara is a local star in an industry where Australia appears to be emerging as the global leader in a mineral at the heart of the new energy and electric car revolutions.

The event which earned the company headlines earlier this month was the official opening of its Pilgangoora mine located about 100 kilometres south-east of Port Hedland in WA.

But the event which could lead to a re-rating of Pilbara was a deal involving another lithium deposit not too far from Pilgangoora, the $1.58 billion acquisition of a half share in the Wodgina project by US specialty chemical producer, Albemarle.

The importance of Albemarle arriving in the Pilbara through a deal with Mineral Resources is yet to be fully appreciated, but it means that one of the world’s top producers of lithium recognises the underlying value in the geology of a region better-known for its iron ore.

Albemarle is already a major investor in the WA lithium industry through its half-share in the Greenbushes mine, and a recent commitment to build a processing plan to producer lithium hydroxide for the Asian battery-making industry.

The Wodgina investment could lead to an upgrade of all lithium assets in the Pilbara because it appears to put a very high value on a known resource which shares some characteristics with the Pilgangoora mine.

Over the past year as Pilbara has been building its mine the company’s share price has slipped lower, declining from a peak of $1.22 in January to recent trades at around 79c.

At some point investment banks and stockbrokers will take a close look at Albemarle’s deal with Mineral Resources and ask whether similar multiples can be applied to other lithium assets in the same region, or whether other international lithium players might follow Albemarle by making a direct investment in the north-west lithium industry.

Stanmore Coal (SMR)

It’s not that long ago that Stanmore Coal was struggling to survive with a lowly share price of 5c and exposure to an industry which investors were told would soon disappear.

Just how wrong that view was can be seen in the Queensland coal miner’s latest share price of $1.02, rising profits courtesy of strong Asian demand for coal, capped by a takeover bid from Asian interests.

Golden Investments, a Singapore-based business with close Indonesia ties, has made the move on Stanmore with a low-ball bid that has been rapidly overtaken by the market.

Pitched at 95c the offer was 15 per cent above the market price of 83c when launched earlier this month but is now 7c below the market, and 25c below what some stockbrokers see as the target price for Stanmore.

Bell Potter, one of the few firms to still follow small coal stocks, has maintained its buy tip on Stanmore in the face of the takeover bid largely because of the earnings potential of the miner’s Isaac Plains coal project.

“We view the takeover offer as opportunistic and not reflective of the underlying value of Stanmore’s Isaac Plains operations,” Bell Potter said.

The broker sees Stanmore heading towards a share price of $1.20, driven by the strong coal price and the potential “for other groups to recognise the value in Stanmore’s assets”.