Hot copper...

Hot copper explorers
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Monday, 10 January 2011


ALLAN Trench reviews the shareholder returns from 51 ASX-listed copper explorers and producers in 2010, and finds the explorers won out with several posting 100% gains.

Some years ago, a student from an overseas university contacted me seeking a suitable mineral finance project as part of a Master�s degree. As the copper price had been rising in near linear fashion, I suggested that an interesting project would be to conduct an empirical test as to whether explorer/developers or copper producers had gained greatest share price value from the red metal�s price ascent.

The student later called me despondent to advise that his research proposal had been rejected. His finance professor had told him the answer was already obvious: the greatest leverage clearly lay with the producers.

Those readers who invest in explorers and mine project developers may seek to differ with the finance professor � as did I, for that matter, at the time. After all, the market is forward looking � perhaps sometimes with over-enthusiasm as commodity prices rise.

Explorers benefit from this forward view, not just miners. There is also the small matter of ongoing discovery potential. A high-grade hole can make a big difference to the share price of a small company � all the more so when the commodity price is hot.

In theory, therefore, two contrasting hypotheses exist as to which group of companies should deliver greatest return in a rising commodity price market. The first hypothesis is that the producers will clearly win (in relative terms) over explorers simply from the increased cash flow from higher metal prices (leaving hedging issues and exchange rates aside for now).

The counter hypothesis is that the explorer/developers should benefit most. Why? Essentially because they maintain control of a pristine in-ground resource that is now worth far more under higher price conditions than was previously assumed. This in-ground value effect is present for the reserves and resources held by producers too, of course, so unravelling the issue in detail is not trivial.

This preamble brings me around to the present subject. In a rising commodity price market, are explorers or miners the better place to invest?

By way of a short-circuit analysis along the above lines, Strictly Boardroom quickly crunched the numbers on how ASX-listed companies with copper exposure performed in calendar 2010 as copper prices were once again on the rise. When I undertook a similar exercise for calendar 2009, the explorers won hands down. The 2010 result? The explorers win out this time around too.

To the overall returns: any investor who backed each and every company with copper exposure on the Strictly Boardroom watchlist of 51 companies would have done pretty well, returning a very strong 2010 calendar-year gain of 40%.

Those investors who decided to restrict their investment to just the 10 producers would not have done as well, returning a lesser, but still impressive, average gain of 25%. Backers of the 41 companies yet to reach production would have fared even better at a 43% average.

But any investor who had the stock-picking skills and wherewithal to spot the biggest winners among copper explorers and project developers would be smiling all the way to the bank.

Twelve of 51 companies returned more than 100% for calendar 2010 (to December 31 close), doubling shareholder money along the way. No copper producer achieved that feat. Here they are:

- Encounter Resources, 275%
- Botswana Metals, 193%
- Gunson Resources, 176%
- Marengo Mining, 158%
- Exco Resources, 153%
- Tiger Resources, 153%
- Discovery Metals, 141%
- Argo Exploration, 140%
- Sovereign Metals, 124%
- Sandfire Resources, 117%
- Augur Resources, 117%
- Redbank Copper, 107%

Finally, some brief credits to those companies that didn�t quite make it on to the 100% returns list. These include initial public offerings Hot Chili* (125% gain to end December) and Southern Hemisphere Mining (104% gain to end December), both of which have copper assets in their portfolios, but only listed during the year so were omitted from the full-year analysis.

As to the best-performing copper producers by 2010 shareholder returns, that honour goes to Anvil Mining at 68%, with Jabiru Metals (63%) and PanAust (58%) hot on its heels.

As for the finance professor, the latest analysis suggests he has now been wrong for two years running. What�s your prediction for 2011? Another overall win for the explorers or will the copper producers strike back this year?

Allan Trench is Adjunct Professor at the Western Australian School of Mines and a non-executive director of several resources sector companies. He is the Perth representative for CRU Strategies, the consulting division of independent metals and mining advisory CRU Group ([email protected]).

* The writer is a director of Hot Chili.