The new mining rush

BHP Billiton’s recent share price rise to within a few cents of its 12-month high is one clue pointing to a reawakening of the resources sector, but the more interesting clue is the way in which exploration and discovery news has caused a number of small stocks to double in a day.

The BHP Billiton rise to $39.25 last Wednesday coincided with the release of the company’s fourth quarter production report and widespread upgrades of the stock thanks to encouraging economic news from China which, as Adam Carr points out today in Base metals turn the corner, should lead to increased demand for commodities.

Missed in the welcome revival of Australia’s biggest miner, and a similar upward move by its arch-rival, Rio Tinto, was the spectacular run by KGL Resources (code KGL), a low-profile explorer which has made what looks to be a significant base metal discovery at its Jervois project in the Northern Territory.

In a series of separate drilling reports KGL has revealed high-grade, near-surface, assays of copper, lead and silver, which have driven the stock from 9.8c earlier this month to a high yesterday of 36c.

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That 265% rise over 14 trading days looks particularly impressive because KGL has moved up from a low price, but the real eye-catching gains were made over July 17 and 18 when the stock really did double over two days with a rise from 13.5c to an intra-day high of 33c.

At its latest price of 33.5c KGL is a minnow, though its upward move during July from a starting price of 9.8c has elevated it from the ranks of penny dreadful, when it was valued at just $13.7 million, to a more respectable value today of $47 million.

For most cautious investors the small end of the mining world remains a place with the characteristics of a casino.

However, like any form of gambling (or speculation) there are ways of playing the system and one of the best in the early stages of a market recovery is to follow exploration and project development news.

What’s happening among the small stocks is a combination of factors, which include:

• Higher prices for base metals such as zinc and lead (along with exotic materials such as graphite and vanadium).
• A rotation of funds allocated to the resource sector away from iron ore, which is showing signs of a long-term cyclical price decline.
• Investor boredom with ultra-low interest rates, which has unleashed the “animal spirits” needed to drive a rally in speculative stocks.
• Discovery and project development news, arguably the most important factor.

On their own, none of those elements can be expected to drive share prices higher, but when they come together the result can be explosive – but will be almost certainly short-lived, unless a discovery is eventually converted into a development.

Sirius Resources is an example of a company which is turning its nickel discovery in WA into a mine, which is why it has continued to move higher after the initial euphoria of the first drill results two years ago. Is latest price of $3.98 means its market value has earned entry into the $1 billion market-cap club.

More recent sharp share price moves, include:

• Platina Resources (PGM), up from 5.2c as recently as July 18 to a high of 25c last Friday after reporting a deal with a Chinese company to supply 15 tonnes of scandium oxide from its Owendale project in NSW. Scandium is a rare metal used to strengthen aluminium. Latest trades in Platina have been around 19c, giving it a market value of $25 million.
• Lucapa Diamond Company (LOM), first mentioned in Eureka Report on April 30 (Diamonds deal adds sparkle) when it was trading at 18c, before rising to a 12-month high of 53c on July 10 after reporting the recovery of high-grade diamonds from the top of a kimberlite pipe at its exploration project in the west African country of Angola. Since hitting that peak price Lucapa has slipped back to 38c, valuing the stock at $69 million.
• Talga Resources (TLG), up from a low last year of 4.8c to recent trades around 41.5c thanks to exploration news from its Swedish graphite prospects, and an initial deal covering the sale of a sample of graphene. At its latest price Talga is valued at $51 million.

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• Syrah Resources (SYR), the local leader in a crowded field of graphite hopefuls which has attracted worldwide interest (and a rumoured takeover bid) for its Balama project in Mozambique. Over the past 12-months, thanks to a steady flow of exploration and development news, the stock has risen from $1.95 to a peak on July 11 of $5.99. It is currently trading at $5.60, a price which values the stock at $912 million.
• TNG (TNG), which has risen from a low last year of 3.6c to a 12-month high of 34c on July 14 thanks to a deal with Korea’s Hyundai Steel over the Mt Peake vanadium project in WA. TNG has slipped back to 19.5c, which is still double where it was in late May, and with that latest price valuing the stock at $108 million.

Further down the pecking order, among the true “penny dreadfuls”, there has been a flurry of activity as speculators trade rapidly in-and-out of ultra-small stocks on the first whiff of news from field work, most of it very early stage and of little real significance.

Two recent examples of minnows moving on exploration news include Meteoric Resources (MEI) and Blaze International (BLZ), which share an interest in the Barkly copper, gold, and bismuth project near Tennant Creek in the NT.

On July 24, after announcing its latest drilling results, Meteoric rose from 3c to 4.4c and Blaze doubled from 1c to 2c. Both have since retreated. Meteoric to 2.7c and Blaze back to 1c, with both capitalised at less than $5 million.

While ultra-small explorers are a country mile away from being regarded as investment-grade stocks, the flurries of activity among the penny dreadfuls when they report exploration news is a measure of the rising tide of interest in the very small end of the market.

Whether the reawakening continues will depend on a number of developments, including evidence of rising demand for raw materials from China, and whether the rotation of resource-allocated funds out of iron ore stocks continues.

For anyone interested in a game of high-stakes mining-stock speculation, there are also the considerable challenges of identifying genuine exploration success from promotional efforts of company directors and their public relations advisers – and that’s before considering that there are hundreds of small explorers which have run out of cash to fund their exploration programs.

Despite those negatives, and multiple warnings, it is getting harder to ignore the trend among authentic explorers which are showing signs of emerging from three years on the sidelines.