It's hot, miners hit boom times again Trevor Sykes 2003/10/04
Australia is in the grip of a raging mining boom. The stars of the show are emerging mid-caps - small, energetic companies that are rapidly becoming larger.
Their prices are being driven by a combination of factors. Firstly, metal prices are buoyant, particularly nickel, which has held above $US10,000 a tonne for more than a fortnight. Secondly, demand for metals is strong, largely fuelled by China, where a consumer boom has sparked explosive growth in goods such as computers and refrigerators.
Thirdly, the takeover of many large Australian mining companies by foreign predators has meant that investors who want exposure to the sector have to buy stocks in the smaller players. It's also much easier to make fast gains in low-priced mining companies than in the blue chips, many of which have been sin-binned anyway.
One spectacular example is County Diamonds, run by Sydney mining analyst Warwick Grigor, whose shares have shot from 5¢ last March to 28¢ after the company announced it had gold projects in China.
China is hot. The flagship for the China bulls is Sino Gold, which took over a former government-run gold miner in China. Sino floated at $1 towards the end of last year and has climbed to $3.70. In the process it has dragged a whole bunch of China stocks with it, notably the minnow Michelago, which - on the strength of its Chinese gold interests - has soared from a nominal 0.6¢ in mid-April to 15¢.
Veteran analyst Keith Goode of Eagle Research, who recently visited Michelago's Chinese projects, reckons the company will be producing more than 120,000 ounces per annum of attributable gold by mid-2004 from its joint venture in Shandong province.
Nickel is another hot area. It is at a price which it has only touched twice in the past decade, the last time being March 2000. This has happened just as half a dozen small to medium-sized Australian companies are launching nickel mines or expanding production.
This is why Jubilee Mines has surged from $1.50 to $3.87 so far this calendar year. Jubilee is mining an exceptionally high-grade nickel deposit at Cosmos in Western Australia. Reserves are quoted at a grade of more than 7 per cent and the nickel promises to live at depth. Even more encouraging for shareholders, the chairman Kerry Harmanis, has a substantial holding and believes in paying large dividends.
There is no shortage of other mid-sized nickel miners. LionOre Mining International is listed in Toronto as well as on the Australian Stock Exchange, but its operations are entirely in Botswana and Australia. It has the Tati nickel mine in Botswana as well as the Emily Ann nickel mine and Thunderbox gold mine in WA. At $7.40, LionOre's market capitalisation is approaching $1.3billion, ranking it among the top 100 mining companies in the world.
Other nickel stocks that have been performing well include Sally Malay Mining (which has a mine in the Kimberleys) and Mincor Resources, which bought the Miitel and Wannaway mines near Kambalda from WMC Resources.
Grigor, who gave a paper at the World Nickel Congress in Sydney last Tuesday, says that even though stocks have run hard the fundamental outlook for nickel remains very positive. He says: "Since June there has been a very strong run on resource stocks with nickel stocks, as a sector, being the most impressive. It is hard to find a stock that has not doubled in price."
He cited as the best performers View Resources, up 411 per cent since June; Reliance, up 290 per cent; Independence Gold (which would be better named Independence Nickel) up 265per cent; and Fox Resources, up 242 per cent.
Several of the emerging nickel producers can thank WMC Resources for their status. WMC decided it did not want to develop several mines and deposits around Kambalda and sold them to smaller companies. In each case, the companies agreed to ship their output to WMC's smelter for processing, so WMC earns revenue without the expense of digging and the new boys have a guaranteed market for their output.
Whether the nickel price can hold the existing levels is open to doubt. The price was driven high by a strike at Inco's Sudbury mine in Canada, the world's largest. The price has held up very well despite the strike ending, but if nickel starts trending downwards, some of the price-earning ratios of nickel hopefuls could start heading downwards too.
The Australian mid-cap miners are not confining their activities to Australia. Oxiana Resources is the first foreign company to mine gold in Laos. Kingsgate Consolidated is mining gold in a virgin area of central Thailand. Herald Resources has found promising gold in Indonesia.
Veteran stockbroker Paul Carter, with the Perth-based Paterson Ord Minnett, says the globalisation of the large resource companies has created a huge gap between them and companies such as Jubilee. "Suddenly everyone has gone positive resources," he says. "They have crossed the gap down to Jubilee and then kept going. We have seen a major change in pricing over the past two months."
The boom had been accentuated by a shrinkage in the number of stocks to buy. Carter says that in 1993 Australia had 40 listed gold stocks, but many of them had since been absorbed into American or South African multinationals.
Stephen Mallyon, associate director resources at Rothschilds, cites Kagara Zinc which is mining Mt Garnet near Cairns, as another success story. Kagara put together a number of high grade zinc mines and sent the ore to Korea Zinc at Townsville for processing. The result has been a doubling of Kagara's share price over the past year from 46¢ to $1.08.
The boom has been running at such a breakneck pace over the past two months that it would not be surprising to see it take a breather soon. Robert Turner, a senior portfolio manager for AMP, says "Timewise I think we are still fairly early into this boom but price-wise they have already moved a fair bit.
"If we are just moving out of the risk-averse cycle that has only been for six to nine months, which is not normally the length of a cycle. So we are not far into the cycle but we have moved quickly. A lot of companies have to start proving their share price performance is justified."
The prime example of a company that has to start performing is the one which has everybody gobsmacked. It's the star of the show - the exotic Ivanhoe Mines, whose market capitalisation is close to $2billion even though it has yet to turn a shovelful of earth on its big deposit.
Ivanhoe is listed on both the ASX and the Toronto Stock Exchange. Its shares have doubled from $3.64 to $8.30 in two months. Ivanhoe owns Turquoise Hill, an awesomely large, low-grade copper-gold deposit that stretches along the southern border of Mongolia. But the company's greatest asset is its chairman, the flamboyant Robert Friedland.
At the annual Diggers & Dealers Forum in Kalgoorlie last month, the mesmeric Friedland held an audience of a thousand experienced and cynical mining hands spellbound for a solid hour as he talked about the riches that could flow from selling Turquoise Hill's copper to China next door.
The latest estimates on Turquoise Hill is that the areas so far explored contain inferred resources totalling 642 million tonnes grading 1.19 per cent copper and 0.1grams gold at a cut-off grade of 0.6 per cent copper. That equates to 7.6 million tonnes of contained copper and 2.1million ounces of contained gold.
Ivanhoe is saying it has the world's biggest copper mine on the edge of the world's fastest expanding metal market. That's a lot of adrenalin for investors.
The figures should be treated with a little caution because in terms of geological certainty, an inferred resource rates a lot lower than a proven reserve. However, the numbers Ivanhoe is quoting are astronomical by mining standards.
And - as you'd expect - there is an avalanche of mining floats about to hit the ASX.
BDL Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
