Mining companies are far more inclined to spend money in the ground drilling to discover deposits and earn equity in that ground than to spend it in the share market inflating the price of the asset they are trying to acquire whilst adding nothing to its underlying value.
Rio could spend the next $14m in the share market driving up the AZY price and pick up maybe 20% of the company, but still have no certainty of there being anything of major interest on their ground. Or they can spend it on drilling, to earn to 65% in the Citadel JV, and possibly end up with 65% of a multi-billion dollar mineral deposit on that ground. Clearly the latter is a better way for them to spend the money.
The only factor that changes this equation is the Newcrest earn-in. If Newcrest find something at no cost to RIO and RIO find nothing, then clearly RIO would have been better off buying equity.
So If I were RIO under the present circumstances, I would be spending my money in the ground, but also very slowly and patiently accumulating a similar-sized shareholding to the competitor, Newcrest. And because of the time (and uncertainty) it takes to actually find a mineral deposit, even with a ten million dollar drilling program and an existing sub-economic gold resource, they will have plenty of time to patiently do this.
But the other side of the coin is NCM. They already have almost 10% of AZY, and so are positioned to benefit from whichever company makes a big discovery (RIO, AZY or NCM). AND they got their AZY shares CHEAP in one single placement, without having to bid the market up. But what they have not yet stated is how much they are going to spend in the ground.
NCM though have a compelling need to drill there, to urgently get their hands on some shallow higher grade mill-feed for Telfer (they won't be mining Havieron for years yet). And AZY ground that they ae earning back into is actually all the old NCM exploration ground that was dropped during the dire days of the <$300/oz gold price in the late 90s/early 2,000s. So NCM, still have a massive in-house database of all their exploration results from the 20 years they spent exploring that ground before they dropped it, and they will be very keen to revisit all their gold prospects that they thought weren't worth following up at $300/oz, but will certainly be keen to drill out now at 5 times the gold price.
Plus there is the Havieron factor, which should not be underestimated. This is massively important to NCM for several reasons:
1. It's a nice big gold deposit that they will mine at a profit in a few years time
2. More importantly right now, it has exploded the 30-year old fear that Telfer is a one-off and that there will never be another one of those in the Paterson. Telfer is not a one off. There are two! Two ten-million ounce plus gold deposits. RIght next to one another. And where there are two, there may be three or four. It is a massive game changer. Hence RIO's enthusiastic return to drilling out Calibre and Magnum on the AZY JV.
3. Havieron was an old NCM gold prospect that they dropped in the bad times instead of drilling deeper. And now they know that any one of those old NCM gold prospects, eg. on the AZY JV ground, could also have another big one at depth (as could Calibre, Magnum Minyari, etc )
4. And now NCM will have SO much information about Havieron, from their past 9 months drilling there, that they would know exactly what to look for next time, and have a much better idea which of those old gold prospects could be a look-alike.
So NCM should be raring to go on the AZY JV ground. Watch that space!
So my take on the likely course of things for AZY over the coming year is:
1. RIO will be quietly buying up a moderate stake in AZY, to match the shareholding that NCM now have, and meantime drilling the hell out of those two very large gold systems at Calibre and Magnum in search of 'Telfer III'.
2. NCM will be spending at least the $9M that RIO are spending on their AZY JV, to try and a) get themselves that urgently needed shallow mill feed for Telfer and b) find another discovery like Havieron, before RIO do and possibly make a move on AZY.
And then of course there is what AZY may spend and do on their own 100% ground. Which depends on the motivation of the share-holding directors, who might even decide that that they need a big JV partner as well - because their biggest motive is surely to get the share price up and to increase their wealth. Or they might better decide to go it alone there, because if AZY find something on their 100% ground (eg. on that soon to be drilled block just north of Winu), then the only way that either NCM or RIO can get a piece of that is to buy up AZY.
It's all going to be quite a lot of fun to watch:
There will be more than the usual competitive tension between the two big companies, fostered by senior company men with huge corporate egos.
And these guys will actually have a compelling need to keep any major positive drilling results from one another, as they need to guard the technical advantage of what the big one looks like, and how best to find the next one, and the corporate advantage of knowing they have made a discovery and can make a move on the small JV partner before the big competitor finds out.
But they are in a difficult position there, because they are in bed with a small company that has a legal obligation to release all material drill results to the ASX as soon as it gets hold of them. So they won't be able to play that game for too long.
I for one have sold all the crap in my portfolio weeks ago and put it all into AZY.
But now it's time to switch the share market off, and get back to proper work!
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