Being resourceful at the bottomAuthor: Michael Vaughan.Date:...

Being resourceful at the bottom
Author: Michael Vaughan.
Date: 24/03/2007
Words: 1054
Source: AFR
Publication: The Financial Review
Section: Smart Money
Page: 44


Promising projects may be a means of unearthing some future mining giants, writes Michael Vaughan.
Investing in mining minnows has never been easy and it's not for the faint-hearted, but if you do pick a winner the rewards can be stunning.

The problem for investors now searching for the "next big thing" is that after a four-year bull run in resource stocks and commodity prices you have to ask yourself, is there any value left towards the bottom end of the market?

After all, the pace of returns from the mining heavyweights has slowed up of late; BHP Billiton and Rio Tinto are trading at low price-earning ratios.

While prices continue well above historic levels - particularly uranium and base metals - some commodities have shown signs of retreating from their record highs, leading to some nervousness in the market.

Nickel is one exception and continues to power on, along with uranium and iron ore.

If you invested in many of the cheaper resource companies in 2005 or 2006, it would be easy to look like a guru right now amid the commodities boom and investor frenzy that has taken hold.

But at the start of 2007 analysts warned that investors would need to become more selective when deciding where to put their money, both at a project and management level.

Three months into the year, their message remains the same: investing in resource stocks is an inherently risky business, especially at the bottom end of the market.

As a result of the buoyancy in the resources market, Eley Griffiths fund manager Brian Eley says he finds it difficult to see any value in stocks priced under $1. "I think we're a bit late in the cycle."

But others are more optimistic. LinQ Resources Fund chairman Clive Donner says his group's strategy is to look for companies assessing a project or edging towards production with a high likelihood of success.

"There's always value in any sector at any time and the key is to find the best assets and the best people," he says.

In keeping with this strategy, The Weekend AFR has talked to a number of analysts that scrutinise the industry and compiled a list of the promising stocks.

At the top of the list is Allegiance Mining. Allegiance is developing the Avebury nickel mine in Tasmania and expects to be in production in October this year. Nickel has been the stand-out commodity since the start of the year, breaking $US50,000 ($61,950) per tonne for the first time recently and the fundamentals remain strong.

Avebury will produce one of the highest-grade concentrates of any nickel mine in Australia and the company has an offtake agreement in place for its full production of 8500 tonnes of nickel in concentrate with China's Jinchuan.

Pan Australian Resources' big story is its Phu Kham copper gold development. All the financing is in place for Phu Kham and when it comes online in the first half of 2008 it will produce 52,000 tonnes of copper, 47,000 ounces of gold and 400,000 ounces of silver.

The quality of the company's Lao project means it is often linked to Oxiana. Oxiana's Sepon copper-gold mine is in Laos and after its recent acquisition of Agincourt Resources some speculate Pan Australian could be next.

CBH Resources has had operational problems at its Endeavour lead-zinc mine but now it appears to be back on track.

On Friday the company said it had raised $200 million in order to advance its growth projects, the first of which is the Panorama zinc-copper development which should be producing by the end of next year.

CBH is also assessing three other projects that could add gold and more base metals to its production profile, leaving plenty of upside in the stock.

Monarch Gold Mining is a textbook case of backing management with a proven track record. Executive chairman Michael Kiernan has reunited most of the successful management team that helped transform Consolidated Minerals into one of the best-performing mid-tier stocks on the bourse in recent years. Consolidated Minerals was trading below 50? when Kiernan arrived and during his time he pushed the stock above the $4 mark.

Monarch expects to begin mining at the Davyhurst mine in July and then at the Mt Ida mine in August.

Exploration outfit Indophil Resources lifted its interest in the Tampakan copper project in the Philippines, where it is in a joint venture with Xstrata, to 37.5 per cent during the past week.

The project is a world-class deposit which is expected to produce 210,000 tonnes of copper and 218,000 ounces of gold in its first 10 years of production.

Feasibility work started late last year so first production is some years away, but Xstrata's belief in the project is an indication of the upside still remaining.

In north Queensland, CopperCo is developing the Lady Annie copper project which is expected to come into production at a rate of 19,000 tonnes per annum in late July. The company has already planned an expansion to 25,000 tonnes per annum by mid-2008 and believes further upside remains in the material contained beneath the planned pit.

Mount Gibson Iron recently acquired Aztec Resources and added the Koolan Island iron ore development to its existing business in the Midwest.

In the process, the company attracted Russian and Chinese investors to its register. Both have big pockets and an interest in further consolidation in the mid-tier iron ore industry. This means the company has the potential to become the vehicle for merger and acquisition activity.

Atlas Iron hopes to be producing from its Pardoo iron ore project in the Pilbara by the first quarter of next year at an initially modest rate of one million tonnes per annum. With exploration success and the cards falling its way, Atlas hopes to ship six million tonnes of iron ore from Port Hedland by 2012.

The uranium sector has been going gangbusters, making it very difficult to find an opportunity at the bottom end of the market.

Korab Resources is planning to spin out its uranium assets in the next month or two in one of the largest uranium floats on the Australian market.

Meanwhile, Australian Zircon is developing a mineral sands mine in South Australia and has seen its share price move more or less sideways while construction took place. First production is expected in August and then assessment of a larger, more zircon-rich deposit in Victoria will begin.


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