Silver Lake's golden glint

PORTFOLIO POINT: Its impressive outlook is likely to overcome negative investor sentiment and make Silver Lake a sector leader.

Minefield is not about share tipping; rather it is about those stocks with a good story to tell but which are struggling for oxygen in a very crowded market. There will be no outright recommendations, but a simple measuring tool in traffic light colours: Green for “good”; amber for “proceed with cautious confidence”; red for '¦ well '¦ caveat emptor (let the buyer beware).

Here are three stocks that have slipped through the cracks.

Silver Lake Resources (SLR)

The worldwide fall in asset values and a widespread feeling that 2012 will be a horrible year makes it hard to pass on investment ideas but, if there’s one commodity that should shine it is gold, and one stock set to lead the way is Silver Lake.

Long a favourite of mine because of the simplicity of its business plan and track record of successful discovery and development, Silver Lake shares became more interesting last week after a sharp decline.

The drop from a high last Monday of $3.81 to around $3.05 today is the sharpest fall in the stock’s four-year life as an ASX-listed miner and almost certainly reflects historic events rather than what lies ahead.

Dragging Silver Lake – and all other gold stocks – lower was heavy selling of gold, and gold miners, by cash-short European investment funds, which are being forced to liquidate whatever they can ahead of a bleak 2012.

Rising production costs at its flagship Mount Monger mines near Kalgoorlie in WA also weighed on investors, who have seen the company’s production costs increase from $574 an ounce in the March quarter to $691 in the September quarter.

There is a good reason for the higher costs, which are largely the result of investment in underground drilling and “development drives” to access recent high-grade gold discoveries, such as the Haoma lode, which lies adjacent to the rich Daisy Milano mine and is being accessed from existing workings.

Silver Lake currently has four underground mines in production at Mount Monger, plus one open pit, and is on target to lift annual production from about 80,000 ounces now to 200,000 in 2014, and maintain that level for at least 10 years.

The outlook from existing operations is the first stage in assessing Silver Lake’s investment appeal. The second aspect is a commitment to develop a second operational centre in the Murchison district to the north of Kalgoorlie, with $70 million in fresh capital already raised for that project, plus the potential for future copper production at a recent high-grade discovery close to the proposed Murchison processing centre.

Bringing the Hollandaire copper strike into production, if an ongoing $20 million exploration program finds more of the rich material than already discovered, would be simplicity itself given the complementary nature of gold and copper ores in the early stages of mineral processing.

Watching for the next set of drill results from Hollandaire will keep speculators interested because the original assays, reported six weeks ago, included some of the best combined copper and gold intersections encountered in Australia, with one hole containing a thin (one metre) core yielding 45% copper, 2.8 grams of gold and 51 grams of silver per tonne.

It was a result like that that sent Sandfire Resources shares sharply higher two years ago when it discovered its rich Doolgunna ore body, which is moving into production and is located about 200 kilometres northeast of Hollandaire, in a broadly similar geological setting.

Gold price sentiment, which is negative today as asset sales dominate thinking in investment funds, will affect the short-term future of Silver Lake.

But, as the company gets on with the business of mining gold at a fat profit margin from its existing mines, and develops a new mining centre and expands its copper exploration effort, it will emerge as a leader of the Australian gold sector – and almost certainly trigger a blip on the radar screens of bigger miners looking for acquisitions with growth potential.

Troy Resources (TRY)

No one has ever accused Troy Resources of “gilding” its message. If anything, complaints have been the opposite, with shareholders not understanding why management doesn’t do a harder sell, especially on the company’s high-grade, low-cost, Casposo gold mine in Argentina.

A glimpse of what Troy might be marketing was almost casually dropped into the chief executive’s report at the company’s annual meeting last month, when Paul Benson revealed a cash production cost at Casposo in October of $US103 an ounce.

That number, which implies a gross profit margin of $US1500 an ounce at the current gold price of about $US1603, is not the reason to add Troy to an investment shopping list, simply because one month’s production is not sufficient reason to ever buy a mining stock.

However, it is possible that super-low costs could become the norm at Casposo, which continues to reveal tantalisingly rich drilling results as the exploration footprint expands, and falling costs, including the benefit of switching from expensive diesel-powered electricity to grid power this month.

The key to Troy is not so much what you see today, a rare dividend-paying, ASX-listed gold miner with two mines in South America and production last financial year of 49,099 ounces of gold at $US519 an ounce, but what’s to come at Casposo.

In particular, there is the interest of North American gold bugs, who see anything in South America as being in their back yard, and their willingness to pay a premium price for gold close to home. That is what they did when snapping up another ASX stock with Argentinean interests, Andean Resources, once a penny-dreadful but acquired last year by Canada’s Goldcorp for $3.6 billion.

The common threads that link Troy and Andean include the location of their prime assets, and the geology, which in both cases is classic Andes mountain epithermal quartz veins, which invariably start with a sniff of what lies at depth and grow.

Early days as it is at Casposo, there are parallels being drawn between it and a well-known Queensland gold mine Pajingo, which started as a simple near-surface development and got richer as it got deeper and now represents a key plank in Evolution Mining.

Paul Benson, an ultra-cautious mine manager, is finding it increasingly difficult to remain conservative about Casposo as drill results reveal additional resources along strike from the existing mines (just like Pajingo), and he feels confident that there is now sufficient ore to fill a possible decline in gold output in the mine’s mid-years, as well as extending the life of the mine beyond its current plan of a short six years.

Another link to Andean is that Troy has just opened a marketing office in Canada, perhaps a precursor to acquiring additional assets or helping generate an offer too good to refuse, especially as the stock becomes more attractive in the current market-wide selloff, which has seen Troy drop from a high of $4.71 last week to about $4.21 today.

Iron Ore Holdings (IOH)

The last time Iron Ore Holdings registered on my radar screen was in July when it was trading at $1.36. Today it is trading at $1.30, which is hardly a good result even if better than the overall market, which is in steep decline.

However, what made the stock attractive back then remains attractive now, even if it is heavily exposed to its namesake mineral: iron ore.

Three factors make Iron Ore Holdings different to the many iron ore minnows exploring the remote interior of WA’s Pilbara region.

• It has discovered high-grade, direct-shipping ore of the type that can be developed quickly.
• It has devised, and is acting on, a strategy to monetise what it has in the ground by selling pods of ore for handsome profits rather than spending years trying to find a way to market via privately owned railways (which generally remain closed to third parties).
• It has a major shareholder (50.5%) in the form of media and industrial equipment billionaire, Kerry Stokes, a man who knows how to use share buybacks to boost his holding in a stock while also increasing its share price.

What Stokes has done in the past with the Seven television network he might now do with Iron Ore Holdings, which last week announced a $10 million buy-back to ease the “problem” of a $100 million cash balance expected to accrue over the next few months from asset sales.

Given that the stock is valued on the ASX at $215 million, that means its price is 46% covered by cash with close to a billion tonnes of iron ore in the ground valued at a super discount of $115 million.

If there are three factors that make Iron Ore Holdings interesting, there are two that explain the discount. Stokes is one, with many investors wary of his management style. Being in the iron ore business as commodity demand declines is another.

On balance, the positives outweigh the negatives, especially as management is not attached to its discoveries and is prepared to sell at the right price. The share buyback will also help, though it will be interesting to see if Stokes participates or plays his usual game of using share issues and buybacks to creep up the share register.