Small miners reflect uranium's glow

Any doubts about whether seeds are being sown for a revival in the small to mid-tier section of the resources industry were dispelled last week when there was a minor boom in the most downtrodden group of mining stocks, those exposed to uranium.

Largely forgotten, and still very high risk, the uranium revival saw the biggest local producer, Energy Resources of Australia, rise by 33 per cent (16.5c) over five trading days thanks to an unexpected increase in the price of the nuclear fuel.

ERA, which is an arm of the diversified mining giant Rio Tinto, was last in the news 18 months ago when it stopped mining at its Ranger project in the Northern Territory and switched to processing stockpiles, which it can do until 2020 without producing any fresh ore.

Back in mid-2015 ERA saw its share price devastated by the end-of-mining decision with the price plunging 75 per cent – from $1.34 to 33c – in a matter of days. Current trades at around 70c mean the stock is halfway back to its pre-crash level.

Other uranium-exposed stocks have done almost as well. Bannerman, which is exploring in Africa, rose by 31 per cent last week. Deep Yellow, another African explorer, gained 16 per cent, while Toro, a local uranium hopeful, was up 12 per cent in the week (to 6.2c – a price which means it is close to doubling since hitting a 10-year low of 3.5c last month).

What's driving uranium is the same force which is at work in zinc, oil and other commodities, and that's production limitation events – such as mine closures – designed to remove price-damaging surpluses from the market and, hopefully, spark a long-term price recovery.

Glencore, one of the world's biggest miners, has been largely responsible for the zinc price almost doubling from US65c to $US1.25 since this time last year, closing some of its mines in the hope of encouraging a metal-price recovery. In addition, Kazatomprom, the uranium business of the Kazakhstan Government, has help lift the uranium price from $US18 a pound to $US24 by announcing a 10 per cent production cut which will trim global uranium supply by 3 per cent a year.

The supply limitation strategy is working in zinc and uranium, and might also work in oil because cutting supply (even for six to 12 months) acts as a circuit-breaker that should see surplus material absorbed. This would permit a return to a conventional commodity cycle which could restart in time for what is expected to be a period of stronger global growth – barring a trade war between China and the US.

Uranium, which is definitely not a commodity to interest most investors, is a case study for what's happening more broadly across the small to mid-tier resource market, which is following the lead set by the top-end revival that has lifted the bigger producers (Can mining repeat its resplendent 2016? January 12).

Across the resources sector there are green shoots to be seen, and while conditions are far more subdued than the boom years there is evidence of a sustainable recovery aided as much by higher commodity prices as sharply lower construction and operating costs.

New projects are not in the mega category of the boom, but there is a surprisingly long list of resource projects under construction or soon to start, including:

• Gold Road and its $500 million Gruyere gold mine in Western Australia being developed in partnership with South African mining giant, Gold Fields.

• Albemarle of the US and China's Tianqi and their $US300m expansion of the Greenbushes lithium project in WA.

• Locally-listed Syrah Resources making brisk progress on its $US185m Balama graphite mine in Mozambique.

• Heron Resources redeveloping the Woodlawn zinc and copper mine in NSW at a cost of $144m.

• Locally-listed Paringa Resources developing the $US40m Buck Creek coal mine in the US.

• Pilbara Minerals heading towards a mid-year start-up of its $214m Pilgangoora lithium mine in WA.

• OZ Minerals starting construction on its $975m Carrapateena copper mine in South Australia.

• Mount Gibson Iron developing its small but life-extending Iron Hill iron ore mine in WA at a capital cost of up to $3m.

• Rio Tinto developing the $US1 billion Silvergrass iron ore mine in WA to maintain overall production at current levels.

• Dacian Gold starting work on its $220m Mount Morgan goldmine in WA.

Those 10 examples are not the full list of projects under construction or about to start, but their value lies in demonstrating that the resources sector, after five difficult years, is regaining its strength.

Other signs of the resources recovery can be seen in measures such as a 2 per cent rise in Perth residential property prices in December; a small increase but one which could be signaling the end of the dramatic collapse in the one-time boom town.

Rising job advertisements for mining professional is another indication of the change in market conditions, with the best example being a search by Australia's richest person, Gina Rinehart, for 500 additional workers for her part-owned Roy Hill iron ore mine in WA.

Other clues pointing to a sea-change in resources include:

• Deal flow with EMR Capital, a fund led by long-term mining executive, Owen Hegarty, paying $US210m for the historic Golden Grove copper and zinc mine in WA.

• Birimian, a low-key ASX-listed explorer, announcing that it has signed a deal to sell its Bougouni lithium project in Africa to a Chinese company for $107.5m in cash – an interesting price, as Birimian is currently valued on the market at $62.5m.

• Takeover interest with higher commodity prices generating an urge to merge, with the latest being a proposed $US5bn deal between London-listed goldminer Acacia Mining and Canada's Endeavour Mining.

• Indications of an increase in initial public offerings (new floats) by small mining companies, with 13 resource-linked stocks listed by the ASX trying to raise capital (though most of those – nine – appear to be struggling, with listing dates postponed).

• Strong cash flows from higher prices and lower costs enabling small (and large) miners to retire heavy debt loads taken aboard during the lean years.

That final point is best demonstrated by the upgraded credit rating awarded last week by S&P Global Ratings to Atlas Iron, an iron ore miner once struggling to survive a deadly mix of high debt levels and a low iron ore price.

With iron ore at $US80 a tonne, Atlas is making solid profits and retiring debt (including a $54m payback last week), which has been good enough for S&P to upgrade it from its low CCC rating to B-minus (still considered by ratings agencies to be below investment grade status).

For investors the latest events in the resources sector are pointers to 2017 being a continuation of the recovery which started at this time last year.

The next clues to whether the revival can continue will come from the commodity markets, especially China's appetite for resources, and from the political climate which is becoming more interesting as Donald Trump moves closer to starting his four-year term as US president.