Stocks for 2011 Here are my stock picks for 2011. These stocks meet my critical criteria being, quality management with a proven track record of success, a clear path to substantial cash flows and good projects which lay the foundations for growth and provide the potential for multiple upside in the share price. I have also provided a list of stocks worth watching on the basis of their potential to become tier one investments.
Firstly a review of my 2010 picks: Aurora Minerals: Start $0.740 End $0.620 Down 16.2% Cobar Consolidated: Start$0.235 End $0.575 Up 144.7% Macquarie Harbour Mining: Start $0.260 End $1.16 Up 446.2% Uranium Equities: Start $0.160 End $0.170 Up 6.25%
The average return from the stocks was 153.3%. I hope to achieve a similar performance with my selections for 2011.
Key Stocks for 2011: WPG Resources Limited (WPG): The company has recently finalized the equity portion of funding for their Peculiar Knob direct shipping iron ore operation. The project has a resource which is one of the highest grade and lowest impurity deposits in the country. The NPV for the project is around $1.50 per share based on the projected production rate of 3mtpa commencing in late 2011. Further upside should come from the Hawkes Nest DSO project which adds around $1.00 to my valuation. Blue sky projects include the Penrhyn Coal Project and a large Hematite and Magnetite BIF (Banded Iron Formation)iron ore project which are the subject of a $50m JV funded by Wisco. Provided the company delivers on its timeline for the development of the PK deposit, I expect a substantial re-rating to occur this year.
Silver Mines Limited (SVL/SVLO): Silver Mines upgraded it's resource at the company's flagship Webbs Silver project in late 2010 to more than 10 million ounces of contained silver at an exceptional grade of more than 250 g/t Au. $2.4 million was recently placed to fund an aggressive drilling program aimed at defining additional resources. With a further $4.0 million to come in from the exercise of options this year, the company is well funded to continue activities aimed at moving the project towards production. Further drilling has already commenced and early results have been encouraging. There should be a steady stream of results coming from now on as the drilling activity increases. Metallurgical testing results should also be available during the first quarter. These results will be used to update scoping studies for the project which will enable me to model a more detailed valuation for the stock including a net present value model.
Given the grade at the Webbs Silver Project and the potential to grow the resource by multiples of where it is now, SVL is, in my opinion, the standout silver stock listed on the ASX. If the silver price continues to appreciate and more resources are delineated, SVL has the potential to provide multiple upside for investors. If the resource continues to grow quickly then the company could easily become a takeover target.
Phoenix Copper Limited (PNX): 2010 was a hallmark year in the history of Phoenix Copper as the company made the transition from explorer to producer of Copper. Although the rate of production is currently modest, at just above 2 tonnes per day, the Leigh Creek Project is starting to produce substantial cash flows thanks to record copper prices above $9,000 per tonne (currently A$9,500). The rates of production should continue to increase substantially early this year. At a rate of 5 tonnes per day the Leigh Creek operation should deliver revenues above $1.0 million per month. Operating costs should be low and are expected to settle below $1.50 per pound, providing a substantial margin for the operation. I have modeled the company's future cash flows based on the expansion of production across two "hub and spoke" operations at Leigh Creek and Burra. The two operations combined could produce approximately 5,200 tonnes of Cu per annum. Over an eight year period the projects should generate more than $100m in free cash flow for PNX with an NPV of $1.10 at current copper prices.
There is also potential for substantial upside from the company's Yorke Peninsula tenements which are located next door to Rex Minerals large Hillside discovery. Exploration is scheduled to commence late in the 1st quarter of 2011 with drilling to follow in the June quarter. There is further upside provided by the potential to make significant discoveries on the company's tenements around Leigh Creek and from Burra to Kapunda.
Phoenix Copper is well funded following a $2.5m placement to a group of strategic investors from New Zealand at a premium to the share price. Cash flows should also provide funds for further exploration from now on.
Altura Mining Limited (AJM/AJMOA): With a suite of projects that can deliver multiple sources of cash flow, Altura Mining has the potential to increase significantly this year. There are two projects of immediate interest. The Mount Webber Iron Ore project (30% interest) which is in a joint venture with Atlas Iron has the potential to move towards production with a scheduled start-up set for 2012 at a rate of 3mtpa of direct shipping ore. I see two possible scenarios here, the first being that AJM sells its minority stake in the project to Atlas for a substantial up front cash and or cash /equity payment to realize significant value from the asset immediately; and the second being that the project gets developed under the joint venture providing the company with significant cash flows commencing in 2012. The first news on the project is likely to come early in 2012 with drilling results aimed at converting resources into reserves.
The second project which should deliver significant cash flows is the Tabalong Coal Project which could conceivably commence production as early as this year. The company is currently seeking mining approvals which are expected to come through in coming months. Although the project is modest in size with annual production of 30K tonnes per month this would still deliver cash flows in the order of $9m per annum.
Altura also has a company which provides drilling services that generates net cash flows of around US$2.0m per annum.
The company has other projects which are prospective for uranium, gold and lithium. Exploration at the lithium project is scheduled to commence early in 2011. Given the previous results including 60m @ 1.65% Li2O from surface and 51m @ 1.77% Li2O from 5 metres the exploration program should attract some speculative interest to the stock. Altura has substantial cash reserves in the order of $15m which can be used to fund the company's expansion plans.
I have modeled the cash flows from Mt Webber, Tabalong and the drilling services company. The net present value of these projects plus the cash on hand equates to $0.63 per AJM share. This places no value on the company's other exploration projects which could provide blue sky to the valuation.
Hawkley Oil and Gas Limited (HOG): The company is on the verge of a transformational move into significant production from their Sorochynska well in Ukraine. The 9km of pipeline should have been laid by now with connection to the local gas network likely to be achieved any day. The production level is expected to be substantial, in the order of 12mmcf/day of gas plus 500 barrels per day of condensate. Provided these levels are achieved this well alone could generate revenues in the order of US$45-$50m per annum. It is expected that the Sorochynska well will be capable of producing at these high rates for 8-9 years before significant declines are seen. The anticipated production life of the well could be in the vicinity of 30-40 years. There are several significant announcements on the horizon including commencement of production and revenue generation, a potential significant increase in reserves of the field and plans for a second well to tap into the same structure as the Sorochynska well, the Dnieper Donets Basin.
I have not yet calculated the NPV for the project because I do not have enough information on production costs. I anticipate getting this information in late January and will post my valuation during February however I can say that I expect the NPV to be many multiples of where the price currently sits, especially if a substantial upgrade in reserves is announced and plans for a second well into the same structure are developed.
Other Stocks to watch Aurora Minerals (ARM): I expect Aurora Minerals to have a better year in 2011 driven by a ramp up of exploration activities on several fronts. Drilling results from the company's 20,000m campaign at the Capricorn Southeast Manganese project are due any day and could provide the impetus for a re-rating. Other projects of interest in the near term are Glenburgh where the company has uncovered a copper anomaly and Camel Hills which is the subject of a JV with Dessert Energy with the potential for iron ore, copper/nickel and gold.
Aurora has a suite of first class projects in Western Australia in premier locations. Results from any of these could transform the company. The price action towards the end of 2010 was certainly encouraging with the stock increasing by close to 50% in the final weeks on good volume. With cash reserves above $15m the company has the resources to undertake significant exploration activities.
C @ Limited (CEO/CEOO): The company has clearly indicated its intention to acquire significant coal assets in Mongolia which is expected to be a "hot" area for investment in 2011. News is due on this front at any time. If the project or projects acquired are at an advanced stage then this could transform the company into a significant player overnight. The price finally broke through resistance at 2.6 cents on the 31st f December and is likely to continue moving when trading resumes next Tuesday.
Gulf Industrials Limited (GLF/GLFOB): Gulf Industrials recently became a producer of Vermiculite from its East African Project. Vermiculite is currently experiencing an increase in demand combined with a shortfall in supply. This project has the potential to generate substantial cash flows. The company recently acquired the Soalara Limestone Project in Madagascar where they are targeting first production in mid 2012.
Sir Sam Jonah recently joined the board as Non Executive Chairman. Having a person of such a high calibre guiding the company through the transformational phase into a produced on several fronts is a significant positive factor for Gulf Industrials Limited.
Finally I'd like to thank all contributors to HC as the site has again been a great resource for me during the past year. I hope all members have a safe and successful 2011.
