Minefield: base metals in play

Iron ore is the big profit maker in the current commodity-price cycle thanks to Brazil’s production shortfall, but it is base metals such as copper and zinc, and the small miners favourite, gold, which are attracting the most exploration interest.

Even lithium and other battery metals have faded as supply overpowers demand, a situation which should reverse when sales of electric cars take off.

Three miners with base metal interests feature in this month’s small-company focussed Minefield column, two with cash-generating exposure and one a pure exploration play.

As with every edition of Minefield, this article is not providing investment advice. For all of InvestSMART’s stock recommendations, click here.

Adriatic Metals

If the Vares project of Adriatic, with its rich grades of zinc, lead and copper, was located in almost any other country, the stock would be attracting more attention than it is, but any mention of Bosnia & Herzegovina and the 1990s war there brings back unpleasant memories.

Shaking off images of a war-torn Bosnian capital of Sarajevo, which is just 50 kilometres south of Vares, has not been easy for Adriatic though the return of other miners to the region, including Rio Tinto with its Jadar lithium project across the border in Serbia, has helped.

Adriatic was first mentioned in this column 10 months ago, shortly after listing on the ASX. Back then (June 29, 2018) it was trading around 56c, having enjoyed strong speculative support after reporting its first drill results from the Rupice prospect located within the wider Vares project area.

It was the early results which attracted a number of well-connected supporters, including Karl Simich, chief executive of the successful mid-tier copper producer, Sandfire Resources, who signed his company up for a 7.7 per cent cornerstone stake in Adriatic.

Since the middle of last year, Adriatic’s share price has marched higher to trade recently at around 82c, down from an all-time high of $1.12 reached last month after it cleared a government permitting milestone with the Bosnian Government.

Four drilling rigs are currently active on Adriatic’s tenements as the company expands its geological understanding of a location which hosted a base-metals mine until 1987 when the region started its descent into war.

The latest drilling results from Rupice, reported yesterday (Tuesday) confirmed that high-grade mineralisation extends north and south with a best assay of 30 metres at 9.7 per cent zinc, plus 5.2 per cent lead, and useful readings of silver, gold and barium, a true “polymetallic” structure.

Two weeks ago, Adriatic revealed in its March quarter report a 72-metre section assaying 18.3 per cent zinc, plus 10.7 per cent lead and 2.5 per cent copper starting at a depth of 206 metres.

Adriatic’s chief executive, Paul Cronin, said in yesterday’s report that the latest drilling demonstrated that high-grade mineralisation continued north into a new concession area.

A key event in the second half of the year is the expected release of a maiden mineral resource at Rupice, the most advanced of Adriatic’s projects in Bosnia.

Nickel Mines

Unlike most small Australian nickel stocks beavering away in the outback looking for pods of high-grade ore, Nickel Mines has entered the industry via a unique processing deal with a Chinese stainless-steel maker in Indonesia.

Operating far from its Sydney home with a foreign partner in a foreign country has not helped Nickel Mines develop a following among Australian investors, which is their loss because the company is performing strongly.

The key to the business is exposure to an industry which was once derided, the mining of low-grade, near-surface (laterite) ore for use in the production of a material called Nickel Pig Iron (NPI) which is popular with Chinese stainless-steel makers who find it to be cheaper than the sort of nickel produced in Australia and Canada.

The Indonesia Government, however, dislikes NPI, demanding that miners invest in value-added processing rather than export a low-value mud-like material containing less than 2 per cent nickel.

Enter China’s stainless-steel champion, Tsingshan, which has gone far beyond what the Indonesian Government wanted, constructing a world-class steel-making business on the island of Sulawesi.

The Tsingshan plant is producing premium stainless steel so cheaply for export back to its customers in China that the Chinese Government is investigating dumping allegation (an illegal trade maneuver which sees a product sold for less than it cost to make).

Nickel Mines, originally just a supplier of low-grade ore to Tsingshan, is now a partner in a series of furnaces producing NPI, with an option to expand as demand rises.

From opening sales at 23c in early January, the Nickel Mines has risen to 42c as it grows its Indonesian business.

The stockbroking firm of Bell Potter is leading the Nickel Mines cheer squad with a share-price forecast of 95c thanks to the potential for the company to earn a pre-tax profit of $254 million next years from NPI sales totalling $516 million.

Red River

The name tells investors something about the ambitions of Red River, a Queensland-based producer of zinc and copper, with another company having a similar name, Rio Tinto, which takes its name from a river in Spain.

While Red River, with a stock-market value of close to $100 million, is a fraction the size of the $100 billion Rio Tinto, it is performing strongly at its Thalanga mine, located about 200km from Townsville in a region with a deep history of base metal production.

Operations in the March quarter hit a number of records, including the amount of ore mined, metal produced and costs, which fell to an all-time low of 58c per pound of zinc.

The net result is that Red River is doing something which has eluded previous owners of the Thalanga project, post handsome profits. Pre-tax earnings in the March quarter reached $12.5 million, up $10.8 million on the December quarter.

On the market, Red River’s share price has been moving higher since early March, rising from 14c to latest sales at 20c, a gain of more than 40 per cent in just over a month.

A doubling in the price of zinc over the past three years to around $US1.30 a pound has delivered a major boost to the performance of Thalanga which some investors might remember as an asset of the failed Kagara Zinc.

Welcome as the current profits are for Red River the key to future success lies in the company’s ability to successfully develop additional sources of ore.

The growth process is starting with the Far West mine near Thalanga. After that, there are development projects at Waterloo and Liontown about 20km to the east of Thalanga.

If prices for zinc, copper and lead, the major metals produced by Red River remain high, the company should continue to perform strongly.