Rio Tinto selling quality assets at bargain prices – which junior explorer took advantage?
Times continue to be tough in the mining industry – mining big guy Rio Tinto is in cost cutting mode and is selling all ‘non-core assets’.
What this means is that fast moving juniors can pick up some amazing, company-making bargains.
The Next Small Cap has uncovered one such company who recently picked up two coal tenements from Rio Tinto’s latest bottom of the cycle fire-sale in the Bowen Basin – arguably the best coal postcode in Australia.
…all for a tiny upfront payment of just $375k.
Historic drilling shows that there is a lot of coal in these tenements with some seriously hard hitting neighbours surrounding them – and we think we may have a potential multi-bagger on our hands here with our tiny company.
But isn’t coal seriously out of favour at the moment?
Of course it is! That is what makes it a good time to take a position… and the worst possible time to sell!
Never buy at the top of the price cycle. Always buy at the bottom, which is exactly what this company has done.
NEWSFLASH: The Chinese are back and buying coal again!
With a few take overs occurring recently in the Bowen Basin, we are pretty excited about this tiny stock and its prestigious address.
Just take a look at the takeover of Bowen Basin coal junior Carabella which happened just a week ago. The initial takeover offer was a 110% premium to the Carabella share price.
The Next Small Cap has found an ABSOLUTE bottom floor entry in a decimated market in a junior who has snaffled an impressive asset from forced seller Rio Tinto.
With drilling in the first quarter next year and a resource due not long after, we are proud to present:
MOZAMBI COAL (ASX:MOZ)
MOZ is a tiny company with a market cap of barely $2m and came onto our radar after acquiring two highly prospective coal assets from a bottom of the cycle fire-sale by RIO in the best coal postcode in Australia – The Bowen Basin.
Investing with tiny companies can be very high risk in nature, however when MOZ snapped up these bargain assets from Rio Tinto, we couldn’t help but notice. From such a very low base, there exists potential for a significant re-rating and we are hoping for a multi-bagger here. Of course, you should know that small cap companies are ultra-risk – so be careful! No promises here.
On the announcement of the deal MOZ gained some pretty serious journalistic coverage, with well-regarded newspapers The Australian and the Sydney Morning Herald taking notice:
MOZ has plenty going on in the near term, hence our excitement about the story in addition to our belief that it is grossly undervalued.
Here is what we are waiting on in the near term:
Targets for exploration Announcement of drilling program Drilling of targets by Q1 2014 Announcement of resource estimates MOZ highlighted itself from the crowd in several key areas, including:
Level of market enthusiasm likely to be generated in the lead up to and during drilling in the next quarter; Genuine likelihood of a takeover with M&A activity in the Bowen Basin; Astute management able to pick up quality assets at bargain prices, and; Management have done the hard yards in coal exploration before. With drilling upcoming in the first half of 2014 and a resource likely soon after, MOZ investors will be watching closely!
RIO’s cost cutting is MOZ’s gain
Mining giant RIO has taken an all-round hammering this year, and have been forced to sell a heap of non-core assets which don’t relate to direct production.
Like all big, lumbering mining giants, these non-core assets were acquired at high prices back when they were the flavour of the month. Now that times are tough in the resources game, RIO have been forced to bunker down and sell at the bottom.
So, for just $375k, MOZ picked up two very attractive coal exploration permits from RIO.
That’s a 100% acquisition of exploration rights for both assets.
Although Rio Tinto as a company is divesting their assets at the bottom of the cycle, a few clever folks on Rio’s side of this deal clearly know that the assets picked up by MOZ are very valuable – and the reason we know this can be found in one of the clauses of the deal:
MOZ will need to make additional payments of $3 million on ‘delineation’ of a resource larger than 50 million tonnes if and WHEN coal exports begin.
Obviously a few smart folks at Rio Tinto knew there was massive potential in these tenements, striking a deal that would see Rio Tinto make more cash when production goes ahead, but still adhere to the current corporate directive from the Rio Board.
This part of the deal is very favourable to MOZ, as the major payment is not due until AFTER plenty of value has been added for MOZ shareholders.
Unfortunately Rio Tinto’s aggressive cost cutting drive is excluding them from the high potential, high risk world of exploration at this point in time – the perfect opportunity for a smart junior like MOZ.
If you want an introduction to the stockbroker we use to manage our investment in MOZ, just fill in your details, we will make an introduction and they will be in touch with you shortly.
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Our track record
The team that brought you The Next Mining Boom and The Next Oil Rush have now begun identifying the most promising small cap companies at The Next Small Cap.
Whilst we would all love one of our small cap favourites to turn into something much bigger, investing in these companies is extremely high risk. So consider this a warning – you may get torched. Having said that, the potential upside for the patient, savvy investor is serious multi-bagger gains.
Regular readers of The Next Oil Rush and The Next Mining Boom will be familiar with our long-standing interest in reporting on high potential stocks that we uncover and add to our portfolio as long term holds.
We published a report on Swala Energy (ASX:SWE) titled The last junior oil explorer operating in this exciting region with this same JV partner went up 800% in a matter of months. SWE has traded as high as 150% since.
The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance
Our report on Rey Resources (ASX:REY), revealed them to be the mystery third man in the Canning Basin, and following our article release, REY has been up nearly 75% since.
The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance
TSX:AOI was our ‘tip of the decade’ in February 2012 at around CAD$1.8 and has been as high as CAD$11.25 since – that’s over 600%!
Following a recent report on Pura Vida (ASX:PVD) titled Why has this stock got analysts predicting four thousand percent gains? the PVD share price rose as high as 40%.
In the mining sector, we have covered Trafford Resources (ASX:TRF) which has been up 30% and Tigers Realm (ASX:TIG) which has been up over 20%.
The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance
In addition to our full coverage of MOZ, we will be assessing the company against our exclusive Pre-Investment Checklist Criteria. You can read in detail the full 20 point check list) in our eBook: “How to Make Money Investing in Junior Resource Stocks”.
Rio Tinto – Selling Assets at the Bottom of the Cycle!
Rio Tinto is a great company, and a few of us here at The Next Small Cap are shareholders in Rio Tinto – which is why we find it very frustrating that the Rio Tinto Board insists and handing policies of buying when the market is hot, and then selling when the market is in the dumps!
It must be very frustrating for Rio Tinto staff and shareholders to have to sell of these great assets at the request of the board.
We all remember how Rio Tinto bought Alcan for $38 billion at the height of the mining boom and wrote off $29 billion of that value:
Now it seems that RIO are at it again, buying assets at inflated prices during the boom like they did with Alcan, and then SELLING ASSETS at fire-sale prices during a mining DOWNTURN – great news for astute buyers like MOZ.
In fact, just google “worst mining deal ever” and RIO comes up all over the first page!
It certainly wasn’t a bad deal for ALCAN shareholders!
Aside from this, Rio Tinto also copped billions of dollars of write downs on its acquisition of Riversdale Mining – so much so that CEO Tom Albanese was forced to quit.
Put it this way – when RIO is selling, you want to be buying… and MOZ have done exactly that, picking up excellent assets for just a $375k upfront payment.
Whilst we have a bit of a poke at RIO’s apparent “buy high, sell low” strategy, we also note that although Rio Tinto’s corporate directive from the top is to sell all ‘non core’ assets, some of the clever folks at Rio who knew the true value of the assets have written in a clause into the MOZ deal that will ultimately reflect their true value.
Part of the deal is that MOZ must pay $3 million on delineation of a 50mt resources and commercial production- which shows that there is confidence in the assets and that production to go ahead – there is $3 million at stake!
As mentioned earlier, this part of the deal is still very favourable to MOZ, as the major payment is not due until AFTER plenty of value has been added for MOZ shareholders.
During tough times, mining majors (like Rio Tinto and Anglo) aim for ZERO risk with large profits via their massive existing operations. When they need to cut costs, it’s easiest to offload exploration assets and sell them quickly. Enter MOZ – who acted fast and grabbed assets with resource potential of 170 Mt for just $375k – certainly not too small for a lucrative takeover down the track.
In the current mining environment, all the major miners have been instructed by their bean counters to cut costs EVERYWHERE possible.
They are pulling projects, shedding staff, selling valuable assets to lucky buyers at fire sale prices (just ask MOZ) and stopping all exploration. They simply focus on mining out their existing producing assets.
So when the commodities market turns the majors will need to start re-hiring staff, kicking off projects and buying back assets at inflated prices.
Right now the mid tiers and small caps are trying to establish themselves. Generally the smaller guys get halfway or two thirds down the track of becoming a producer and then get taken over. MOZ have now started on the road with 100% owned assets. Once they make some progress we expect bigger companies with takeover bids to come knocking.
There are only three mid-tier explorers left who are semi-independents: New Hope, Whitehaven and Yan Coal – who have all cut back their exploration budgets.
There is current lack of funding and an absolute void of genuine coal explorers – which is why we are so excited about MOZ, their highly experienced (in coal!) management team and the assets they purchased from RIO’s poorly timed fire sale.
Why The Next Small Cap has invested in MOZ – the checklist is our guide!
We’ve analysed MOZ using our eBook check list, which outlines key aspects to research prior to making an investment in a speculative resource stock.
You can read about the Pre-Investment Check List (and a lot more) in the eBook: “How to Make Money Investing in Junior Resource Stocks”
If you’ve already read our eBook, you’ll know that the most potential for profit for a shareholder is when a small-cap company is in its exploration phase – exactly where MOZ is right now. It’s a two sided coin – there is a chance that nothing is found and all that cash goes down the drain – or, if a company finds resources, or better yet, proves reserves, that can mean significant gains for shareholders.
Assets: What assets do the company own? Which asset is most important? Is the asset base diversified?
Asset #1 – Bowen Basin – EPC 1768
MOZ’s prime tenement is to the west of the Bowen Basin, 100 km west of Mackay, an area of 30 km2.
For those new to the coal industry in Australia, the Bowen Basin contains the largest coal reserves in Australia. It’s prime real estate for coal projects – no other place in Australia can beat it.
EPC 1768 (that stands for Exploration Permits for Coal – in case you didn’t know) has a great address, next door to Aquila Resources and Xstrata Coal, and right near rail infrastructure, all big ticks for the Next Small Cap.
The area covered by EPC 1768 was previously drilled by Xstrata between 2006 and 2009, prior to Rio Tinto acquiring the project. This drilling was widely spaced but all drill holes were reported as having intersected coal.
MOZ is busy now compiling and data basing all the historical drilling, local field mapping, photo geological studies, and interpretation of airborne geophysics available, with the intention of having a resource delineated early 2014, after some additional drilling in Q1 2014.
So what is the potential of EPC 1768?
An excellent result for MOZ would be to define a resource of the 30 to 50 Mt mark. This could translate to a 1 to 2 Mt /year PCI or coking coal resource. Even better would be to hit their upper exploration limit of 170Mt at EPC 1768:
Is there takeover potential? Does the company have a Joint Venture? Is there ‘nearology’? Who is operating in the surrounding area?
The Next Small Cap has done some research and have found several companies that MOZ would do well to emulate over the next 2 to 3 year period.
The ultimate goal for MOZ is to be taken over by a much larger company. This is why we are taking a position in this story at the ground floor – and we think we could have a multi-bagger on our hands here if company comparisons and recent M&A activity are anything to go by:
Carabella Resources (ASX:CLR)
A recent bid by China Kingho Energy affiliates Wealth Mining Pty Ltd shows that even in these times, it’s not all doom and gloom! The Chinese are active in the Bowen Basin and snapping up cheap assets.
China Kingho Group Co Ltd is a China based, top 500 private company with A$6.95 billion in total assets and $1.9 billion in revenue and a top 100 China coal miner (including inner Mongolia) with 15 mtpa output.
The offer of $0.42/share was a 110% premium to the share price at the time.
The recent news of the bid is certainly a positive sign for QLD coal juniors and MOZ.
CLR have spent 2 to 3 years proving up their resources and finally have been rewarded with a handsome takeover bid. CLR did all the right things in the exploration phase. They clearly knew what they were doing, all ex- Anglo guys who explored correctly with their target sizes and methodologies.
This bid is a very tangible sign that capital markets are becoming more willing to fund and support new coal developments.
The market obviously responded positively to this news and re-rated CLR to match what the Chinese paid:
The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.
If MOZ can seek to follow in the footsteps of CLR, who knows what the rewards might be.
Liberty Resources (ASX:LBY)
Liberty Resources (ASX:LBY) are small cap at $10 – 12 million with a small tenement in the Bowen Basin neighbouring the majors – a lot like MOZ, just with a market cap five times the size!
EPC 1949, explored by LBY, intersected coking coal. Just a stone’s throw from MOZ’s tenement EPC 1768.
LBY has kicked off a fully-funded drilling program at the wholly-owned tenement EPC1949, which is strategically located within the same prolific coal producing Bowen Basin that MOZ is exploring in.
EPC 1949 was granted in June 2013 and drilling commenced on the 8th of August with 957m completed in eight drill holes, including 2 core holes for initial coal quality testing.
The latest news from LBY has reported a high quality coking coal fraction can be produced based on the samples processed:
LBY is now investigating the hard coking coal quality and quantity that might be present in EPC 1949, and what costs might be expected to produce a saleable product.
For LBY to have a market cap 5 times the size of MOZ is certainly important to note. MOZ have found a role model here, and if they can follow in the exploration progress of LBY, there is strong potential for company growth. In MOZ’s case, it’s early days, representing a chance to get in on the ground floor.
Price Catalysts: Are there upcoming catalysts?
MOZ looks like having an exciting period coming up on their way to delineating a resource in 2014.
Price catalysts are of utmost importance to The Next Small Cap – a company with no news flow means the share price has little opportunity to grow.
MOZ has plenty going on in the near term, hence our excitement about the story in addition to our belief that it is grossly undervalued.
Here is what we are waiting on in the near term:
Targets for exploration Announcement of drilling program Drilling of targets by Q1 2014 Announcement of resource estimates The Next Small Cap Conclusion
MOZ is the one that highlighted itself from the crowd in several key areas, including:
Level of market enthusiasm likely to be generated in the lead up to and during drilling; Genuine likelihood of a takeover with M&A activity in the Bowen Basin. Astute management able to pick up quality assets at bargain prices. With drilling upcoming in the first half of 2014 and a resource likely soon after, MOZ investors will be watching closely!
Do you want an introduction to the stockbroker we use to manage our investment in MOZ?
Just fill in your details, we will make an introduction and they will be in touch with you shortly.
INTRODUCE ME TO THE STOCKBROKER WHO IS AN EXPERT IN THIS STOCK If you want to be introduced to the broker who manages The Next Small Cap's investment in this stock, please fill out the form below and we will make the introduction
The Next Small Cap always uses a full service broker when making investments. We have identified the best broker for this stock, who knows the company inside and out and spends a lot of time researching and following stock.
Why we use a full service broker - find out more
Name*
Email*
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Capital to Invest*
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Send me an alert when a new article is released on Next Small Cap NOTE: We greatly respect and value your privacy. We are just making an introduction here, the information you provide in this form will be sent to the broker so they can contact you and have a basic idea of your investment profile. We will not use this information in anyway. Read Privacy Policy
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