Mining juniors dig themselves out of a hole

Small mining stocks are doing what market leaders used to do ... mine development.

Summary: Some small resources companies’ discoveries are having a remarkable effect on share prices, and one case has even triggered takeover action. A trend is emerging: capital is coming out of larger companies and back into smaller ones, where growth is the only option.

Key take-out: It’s worth treating the positive news flow with caution as exploration projects may or may not become mines. But what’s interesting is a revitalised interest in the exploration process itself.

Key beneficiaries: General investors. Category: Mining stocks.

Cost cuts, capital returns and fat dividends are the three negative factors attracting investors to big resource companies, while at the bottom end of the sector something far more positive is having a remarkable effect on share prices: discovery.

Rather than shrinking to generate yield for cash-hungry shareholders, an increasing number of small mining companies are creating value by doing what resource stocks are supposed to do – explore, discover, develop and, in one interesting case, trigger takeover action.

Tanami Gold, an almost forgotten owner of two dormant projects in the Tanami desert of central Australia, burst back into prominence last week when a bidding duel broke out between suitors keen to get access to Tanami’s under-developed gold assets.

Metals X, a normally low-key tin miner with ambitions to grow its gold business, started the bidding for Tanami, only to be gazumped by the fast-growing Northern Star.

Both bids are a complex mix of cash, shares, and funding commitments to re-start Tanami’s goldmines, but they had the desired effect on the market with Tanami’s share price effectively doubling to 2.6c, a price which values the company at $30 million.

That low valuation for a business which has attracted rival bids is a pointer to the modest size of mining stocks which were heavily discounted over the past few years but which are starting to catch the eye of investors with a taste for speculative risk, or who have recognised that the big miners have swapped growth for annuity-like behaviour.

If what’s happening was restricted to a handful of small exploration and mine development stocks it would be easy to miss what appears to be an emerging trend as capital comes out of the top end of the resources sector and is re-routed back into the small end where growth is the only option for management.

None of the stocks to be mentioned in this story fits a financial model, because there is not much to model, nor are they researched by big broking houses or investment banks. They have either fallen through the cracks, or never made it to floor level in the first place.

TNG Ltd, another low-key explorer with a mix of assets ranging from vanadium (used to harden steel) and graphite, has enjoyed a 60% share price rise over the past two weeks for a much easier metal to commercialise, copper.

Trading around 10c in mid-February, TNG has risen to 16.5c since reporting the discovery of high-grade copper in rock chip samples collected near McArthur River in the Northern Territory.

Chip samples on the surface are not necessarily an accurate guide to what lies underground but they are a positive start and with copper grades as high as 48%, plus useful amounts of silver, they certainly qualify as discovery news and have helped TNG lift its market value back over the $100 million mark.

Sirius Resources, a popular stock thanks to the rapid progress being made at its Nova nickel mine in WA, is also an example which proves the point about discovery news re-emerging as a driver of share prices – albeit in a negative way.

Six weeks ago, Sirius shares rocketed up from around $2.30 to this year’s high of $3.25, not because of its nickel assets, but thanks to what looked to be a promising gold discovery at a prospect called Baloo where assays up to 4.87 grams of a gold a tonne over a 24 metre intersection were reported.

On Monday, Sirius disappointed speculators hunting discovery news with a far less impressive gold assay from its latest drilling (1.61g/t over 29.5m), with the shares immediately dropping from $3.14 to $2.83.

Lower prices for nickel and gold have not helped Sirius but the market reaction, going up and coming down, was all about discovery news, good and bad.

Sipa Resources is another stock benefiting from a recent discovery. One of the older survivors from past market cycles, Sipa has been in the exploration and small-mine production business for 25 years and this time around seems to have found something interesting in Africa.

Drilling at Sipa’s Kitgum-Pader prospect in Uganda appears to have encountered a mineralised system potentially rich in copper and nickel, and while assays are yet to be reported the discovery news of the past two weeks has sent the stock up by 36% to 5.3c, with trades as high as 7.8c, a price which represented a 100% gain in a matter of days.

Sipa has a long way to go before it knows whether it has made a discovery which will ever be developed, but the fact that discovery news triggered interest is a sign that some investors are keeping a close eye on news flow.

Other recent examples of stocks being driven by discovery and project development news include:

• Magnis Resources, which has risen by 40% from around 20c a month ago to recent trades at 28c after reporting an offtake (sales) agreement covering its Nachu graphite project in Tanzania.

• Havilah Resources, once best known as a uranium explorer, which has risen by 54% over the past 10 days from 14c to 21.5c after reporting the start of construction at its Portia goldmine in South Australia and plans for a second (copper and gold) mine at Kalkaroo in SA.

• Mt Ridley Mines, which has risen by 58% from 1.9c to 3c (with a high of 4.9c) over the past two weeks after reporting nickel and copper assays from its namesake exploration prospect in the Fraser Range area of southern WA.

• Aurelia Metals, already a producer of base metals (copper and zinc) at its Hera project in western NSW, caught the eye of discovery watchers with a report late last month of high-grade gold at its Hera North project. The best assay of 39.7g/t over 3.65m earned it a research note from the investment bank, UBS, for “drill hole of the day” and helped lift Aurelia’s share price by 2.5c to 27.5c – a small rise but one driven entirely by discovery news.

There are good reasons to treat the recent flow of positive news from small explorers with caution, not least being the fact that they are small companies and their exploration projects may, or may not, become mines.

But, what’s interesting about recent events is the widespread nature of the share-price rises, covering a variety of minerals, which points to a common driver – a revitalised interest in the exploration process itself and the news flow it generates.

A secondary influence on the market is that the big miners have effectively abandoned grass roots exploration, focussing attention on the assets they own and the ability to milk full value from those assets rather than trying to discover something for tomorrow.

The big miners undoubtedly generate handsome dividends but the returns are largely the result of shrinking the business whereas small companies are starting to generate value by trying to grow their business.

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