|Summary: What do uranium, nickel, diamonds and oil and gas have in common? They are all investment targets for several of Australia’s richest people, who are punting on specific Australian small resources stocks.|
|Key take-out: The message to investors is that these entrepreneurs are willing to put their money into the resources sector in the belief it is waking up after three years in the doldrums. But also be aware their investments are small change for them, and they can easily wear a loss if things go pear-shaped.|
|Key beneficiaries: General investors. Category: Shares.|
When four of Australia’s richest people plunge into the small end of the mining and oil sector it’s time for other investors to take note of what looks like the early stages of a significant revival in resources.
The recent deals involve:
- Andrew Forrest, an iron ore billionaire, placing a $12 million bet on a high-risk WA-focussed uranium exploration stock, Energy & Minerals Australia (EMA).
- Mark Creasy, a millionaire who made his fortune in gold, boosting his exposure in a cash and shares deal with Sirius Resources (SIR), the company behind Australia’s best nickel discovery of the past 10 years and has taken a small interest in the graphite explorer Talga Resources (TLG).
- John Kahlbetzer, a reclusive agricultural millionaire, punting $1.5 million on Lucapa Diamond Company (LOM), an Australian diamond explorer with its best assets in the African country of Angola.
- Kerry Stokes, a billionaire best known for his interests in the Seven television network, and the Westrac industrial equipment dealership, bidding for control of the oil and gas explorer, Nexus Energy (NXS), while also sitting on a controlling stake in an emerging iron ore producer, Iron Ore Holdings (IOH).
Several factors are influencing the interest of Australia’s very rich in resources, including boredom with the sluggish performance of their primary business assets, the lure of a quick kill from a spot of speculation, and an appreciation of the advice being served up by some of the world’s top investment banks.
In January, Citigroup surprised its clients with a recommendation that they rotate some of their funds out of safe havens into mining and oil stocks, adding that after three years of holding a negative view on resources its research analysts had turned positive.
The Citigroup report of January 16 was headed “Mining fightback, turning bullish for the first time in three years” and included a proviso that while not everyone could see the turn it would “rather be too early than too late in making the call”.
Last week, another big investment bank, J.P. Morgan Cazenove, joined the resources revival (see Mining tide lifts BHP and Rio) with a report that included this comment: “Having been structurally bearish on mining for more than two years (our) European equity strategy team has totally upgraded the sector to overweight”.
For most investors the change in sentiment towards resources by some of the world’s leading investment banks means that it’s time to consider the merits of the sector leaders, such as BHP Billiton and Rio Tinto.
For investors with spare cash to play with, and with the luxury of not being hurt should a punt flop, there is more bang to be found for their bucks at the bottom end of the resources sector where some stellar returns are already being generated from exposure to selected commodities being heavily influenced by supply-side surprises.
Nickel, often a “first mover metal” in a wider resources recovery, has been the leading performer so far this year, rising by 50% from around $US6 a pound in January to overnight sales at $US8.95/lb, a price which is down slightly on the two-year high of $US9.47/lb reached last week.
The primary cause of that sharp upward price move is an Indonesian Government ban on the export of unprocessed nickel-rich ore, a decision that has effectively removed more than 20% of the world’s nickel supply from the market.
While it is possible that the export ban could be lifted after mid-year Presidential elections in Indonesia there are some nickel-market observers, including analysts at Macquarie Bank who believe that higher prices are here to stay.
The nickel revival is significant for two reasons. Firstly, because it has lifted the price of nickel producers such as Mincor (up 40% over the past two months) and Western Areas (up 29%), and secondly because nickel has been the trigger for past, wider, resource recoveries which started with a supply-side surprise.
In 1966 Western Mining Corporation was able to develop the Kambalda nickel mines in little more than a year to cash in on a nickel-price boom that resulted from a strike by Canadian mine workers, which severely constricted supply of the metal – an essential ingredient in high-quality stainless steel.
Backed by investment bank advice that the resources worm is turning, despite the occasional setback in the early stages of the recovery, some of Australia’s richest people are testing the resources waters.
Forrest’s plunge into uranium has already yielded a spectacular 116% return in just two weeks, with his $12 million investment in EMA being made at 3c a share on May 5 and the stock now trading at 6.5c.
Whether EMA can do much better is an interesting question because its best asset, a uranium resource at Mulga Rocks east of Kalgoorlie, needs a much higher uranium price than the current $US29 a pound to justify development.
What Forrest has done in adding uranium to his long-term interests in iron ore and nickel is to back two friends, Mike Young and Julian Tapp, who recently took control of EMA, and put a handful of his petty cash into a currently unpopular metal which has been heavily sold down, but might stage a revival next year.
Creasy’s deal with Sirius cements a long-term relationship with that company, as he was the first prospector to unravel the deeply-buried geological secrets of the Fraser Range region of WA.
Tenements he pegged are the most important assets controlled by Sirius, which has since made a series of exciting discoveries including the Nova Bollinger orebody, which will soon be developed as a mine thanks to its thick and rich deposits of nickel.
What Creasy did was vendor into Sirius his outstanding 30% stake in the exploration licence covering the discovery for a cash payment of $28 million, plus 70.6 million Sirius shares, which lifted his stake in the stock to 35% (currently valued at $282 million).
Kahlbetzer’s dabble in diamonds is a much smaller step into mining by a man best known for his agricultural interests in Australia and Argentina.
He has invested $1.5 million for a 5.23% interest in Lucapa, which has found a number of big, high-quality, diamonds on its tenements in Angola. Much more exploration and bulk-testing of river gravels is required to prove that Lucapa has a viable project, but if it has the reward could be substantial given a looming global shortfall in diamond production.
Stokes’ interest in oil and gas is being driven largely by one of his trusted executives, the former head of Woodside Petroleum, Don Voelte.
It was Voelte who identified the opportunity to take control of the financially-challenged Nexus, which has an interest in a relatively small Bass Strait gas project, and a potentially much bigger gasfield off WA’s north-west coast that has the potential to become a producer of liquefied natural gas, or be sold to a bigger player in that industry.
Seven Group (SVW), in which Stokes holds a commanding 67.8% stake, is bidding 2c a share for Nexus, an offer which values the oil and gas company at $25 million, a modest punt for Seven which is valued on the market at $2.44 billion.
What makes the Nexus play interesting is that it will be the second move by Stokes into a small resource stock. His first was taking a 50% interest in Iron Ore Holdings which, even after the recent fall in the iron ore price, is still worth $70 million.
The message being sent to all investors by four of Australia’s richest people, and some of the world’s biggest investment banks, is that the resources sector is waking up after three years in the doldrums.
But there is also a secondary message: all four investors are people who can easily wear a total loss on their resource-sector plunge should it go pear-shaped.