Minefield: discovery and a deal

Growing a mining company is not easy because there are few ways it can be achieved, with discovery or asset acquisition at the top of the list.

In this edition of Minefield, discovery and a deal feature prominently, plus an unusual third growth mechanism; redesigning the way ore is processed to extract more valuable minerals.

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

Sandfire Resources (SFR)

A star in its younger days, Sandfire has been struggling to replicate the remarkable share-price performance which followed its 2009 discovery of the high-grade copper and gold orebody at Doolgunna in WA.

From true penny dreadful status with a price as low as 5c in March 2009, the stock soared by more than 15,000 per cent to $8 by the end of 2010.

It hasn’t been all downhill since but it has been a struggle as investors grew wary of Doolgunna which is an extremely rich structure but also one with limited reserves that will run out in the next few years.

Deals to buy a stake in nearby discoveries have kept the process plant at Sandfire’s mine working to capacity, which is important in mining, but substantial growth has proved elusive.

Enter the deal-making phase of growth, with Sandfire stepping off in two directions.

Firstly, with a plan to develop another relatively small but rich copper project, albeit a long way from home – the north-west U.S. State of Montana where a government approvals process is nearing its end.

Secondly, with a merger announced last week that will see Sandfire acquire MOD Resources which has made a significant copper discovery called T3 in the mining-friendly African country of Botswana.

The initial reaction of investors to the MOD deal, being achieved with a mix of cash and shares, was not enthusiastic. Sandfire’s share price dropped by 11 per cent to $6.28 immediately after the announcement last Thursday.

Since then there has been a steady recovery back to around $6.90 as investors consider the new look of Sandfire as it changes from its mine wonder to a copper producer which could soon have three mines in different stages of development in three countries.

Investment banks have been mixed in their reaction to the MOD deal which comes at a critical time for Sandfire which needs to keep Doolgunna operating at peak performance for as long as possible while clearing the final approval hurdles in Montana and finalising the design of MOD’s T3 mine in Botswana.

Credit Suisse is unimpressed because of the $167 million price being paid for MOD, plus project development risk and past mining problems in Botswana, including the failure of Discovery Metals and its Boseto project. The bank has lowered its Sandfire price target to $6.15 and said sell.

Other banks see the deal differently. Macquarie sees the MOD acquisition as a positive move with a buy tip on Sandfire and a price target of $8. Morgan Stanley agrees with a target of $8.45, and Shaw goes further with a price tip of $9.

Silver Lake (SLR)

It’s been a slow climb back for goldmining specialist Silver Lake which suffered a near-death experience after a period of rapid expansion gave way to a period of painful indigestion which knocked the stock down from $3.90 in 2012 to 13c by mid-2015.

At recent trades around $1.16, the stock is very much back on the radar screens of investors with a taste for gold which has also enjoyed a revival over the past 12-months, despite a recent correction in the wake of easing trade tensions.

What’s caused Silver Lake to more than double since the start of 2019 is a combination of the gold price and a series of discoveries close to the company’s home of Kalgoorlie in WA.

Three weeks ago it was the Mount Monger mining centre of Silver Lake located to the south of Kalgoorlie which caught the eye of investors after a thick and rich gold strike in the Aldiss project with a best hit of 24.7 grams of gold a tonne over 17 metres, with another hit of 9.39g/t over 24m.

Last week it was the turn of Silver Lake’s Deflector project in WA’s Murchison region about 100km inland from the port of Geraldton to catch the eye with a discovery that returned grades as high as 89.4g/t over 1m and 18.4g/t over 5.5m.

The latest discoveries put Silver Lake on course to hit its annual production target of up to 150,000oz of gold at an all-in sustaining cost of between $A1350/oz-and-$A1390/oz. comfortably below the current Australian gold price of $A1989/oz.

Greenland Minerals (GGG)

Originally a uranium hopeful with a share price up to $1.68 in 2007, Greenland was hammered to as low as 2c in 2016 by a collapse in the uranium price after the Fukushima nuclear reactor meltdown in Japan and the collapse of investor interest in uranium.

Today, Greenland is a born-again story thanks to a fresh look at its flagship Kvanefjeld project in the south-west corner of the North Atlantic island of Greenland with rare earths in the orebody replacing uranium as the commercial target.

Reinventing an orebody is nothing new in the world of mining with rising (and falling) metal prices causing a change in focus. Greenbushes in the south of WA started life more than 100 years ago as a tin mine, morphed into tantalum production to meet demand from modern electronics and is now the world’s biggest lithium mine – all from the same location.

The latest plan for Greenland as a rare earths’ producer is attracting attention on the stock market where the stock has been an unrecognised star over the past three months, more than doubling from 5c to 14c.

Strong demand for rare earths, particularly neodymium and praseodymium which are used to make the permanent magnets needed in electric motors, has coincided with threats from China to limit exports if its trade relationship with the U.S. deteriorates.

Uranium, once the reason for Greenland exploring Kvanefjeld, is now listed as a by-product, along with zinc and fluorspar while the main product is planned to be a basket of rare earths sold by the Australian company’s biggest shareholder, Shenghe Resources of China.

Developing Kvanefjeld will not be easy for Greenland but the shift away from uranium to more easily marketed rare earths could help with approvals and financing.