Top Stocks for 2010Aurora Minerals (ARM): With such a large zone...

Top Stocks for 2010

Aurora Minerals (ARM): With such a large zone of high grade surface manganese, Aurora Minerals could well be the outstanding resource stock of 2010.

They will commence drilling during the first quarter of 2010 and only need to replicate a small portion of their high grade surface expression into drill core results to define a substantial resource (on a global scale). There are few stocks which one can honestly say have the potential for returns of Fortescue type multiples, but ARM is certainly one such company. Sandfire Resources discovered high grade copper from drilling in 2009 to the north of Auroras discovery, from a finite 8km anomaly, and their shares rose from 10c to a high of $4.39 with the current price still at $3.70. SFR have a defined area with somewhat limited potential to broaden their discovery whereas Aurora has only tested a small area of their overall target zone.

So far ARM have discovered over 50kms of strike of high grade manganese in the bedrock Ullawarra formation and, in addition, have also identified over 70km2 of accompanied laterite manganese. Dont be surprised if this laterite discovery is increased substantially, plus they also have a further 36kms to test of the main bedrock formation. The key to the laterite discovery is that it is likely to be a high grade near surface deposit which should ultimately lead to lowest quartile mining costs. Future demand for manganese is likely to be strong as the Chinese, Indian and other South East Asian economies continue on their growth paths, with flow on effects for global steel markets.

I believe the recent price action leading to the continuation of the strong uptrend combined with an increased appetite for the stock in the lead up to drilling from late February into March will see Aurora test $1.00 or even higher quite quickly in 2010.

The Company has a conservative target tonnage of 10 million tonnes of manganese but that was before further discoveries at 5 fingers plus the large laterite zone of manganese. Looking at the market capitalisation of OM Holdings (Bootu Creek Discovery) and the sale price of the Woodie Woodie deposit (privatisation of Consolidated Minerals), you see roughly about $300 to $400 million of market cap upside per 10 million tonnes of manganese. So for every 10m tonnes discovered could represent up to $2.50 to $3.40 per Aurora share on a fully diluted basis. Capricorn Southeast could potentially host hundreds of millions of tonnes of manganese which would be more than enough to place the company under the watchful eye of the majors as the scale of the discovery becomes clearer. Using these figures you can start to understand why I have drawn comparisons between Aurora Minerals and Fortescue Metals Group in terms of the upside potential of ARMs shares.

Large amounts of manganese in a big system can be a geological footprint that may also lead to significant base metal discoveries. So there could be further upside in the share price from the identification of substantial base metals deposits particularly as they test the Talga Fault north of the manganese discovery. This area has geological similarities to the Mount Isa region in Queensland which has yielded deposits worth tens of billions of dollars. Significantly ARMs tenements cover the entire Talga Fault.

Finally, there is some added exposure to the uranium sector via the companys 50% interest in listed explorer, Desert Energy.

Cobar Consolidated Resources Limited (CCU): CCU has identified a significant silver/lead resource at its Wonawinta Project in NSW. The resource now stands at 57.1m tonnes silver and 254,000 tonnes of lead, with 56% of the inventory now classified in the indicated category.

The revised resource will likely lead to a substantial increase in the life of the project well beyond the 5 years used in the scoping study The scoping study projected a total development cost of $25-30m dollars based on a 1 mtpa processing plant, with annual production of 3.3m tonnes of silver and a life of mine cash cost of $6.25 per ounce (net of lead credit).

At 23.5 cents CCU represents outstanding value especially given the 75 cps valuation which was based on a conservative economic value of $2.00 per ounce, and that was prior to the recent resource upgrade. The recent high was 42.5 cents however the stock came under significant selling pressure because of the recent precious metals sell off, profit taking following the recent run and the triggering of the Australian Small Cap Investors stop loss.

With a cash balance around $2m the company is likely to raise capital in the first half of 2010. I believe their current strategy is to aim to complete the feasibility study (estimated cost of $1.84m) prior to the capital raising, in the hope that the price will rise based on the results of the study, however their will be a substantial temptation to act if the price returns anywhere near recent highs again early in 2010.

My strategy will be to maintain a reasonable sized position early in the year because I expect a strong start. I plan to reduce my holding in the lead up to a capital raising. In the period immediately following the raising I plan to increase my holding again with the view to maintaining a substantial holding though to a decision to proceed to mine.

Macquarie Harbour Mining Limited (MHM/MHMO): What attracts me to MHM is the Aluminium Salt Slag business they are developing. Initial profits will be driven by creating a processing business at a plant to be acquired from Sims Aluminium Pty Ltd near Geelong in Victoria. Completion of the deal is due in mid January in 2010. All conditions pursuant to the acquisition have now been fulfilled so the commencement of the waste processing business appears to be a formality.

The opportunity which MHM has seized arose out of changes introduced by the EPA which restrict Aluminium companies from dumping Aluminium Salt Slag as landfill waste. Aluminium Salt Slag is a waste stream that results from the recycling of Aluminium, a by-product that has traditionally been placed as landfill. The changes in legislation introduced by the EPA have meant that the secondary aluminium industy must find a solution in order to remain viable. Two directors of MHM have developed a closed loop process which processes aluminium salt slag but produces no waste. Three products are produced, aluminium metal, salt, and non metallic aluminium oxide. All products can be sold meaning no waste material needs to be consigned to landfill. Under the licensing deal MHM will be entitled to 60% of the profits from the Australian business

The Australian business is expected to generate net profits attributable to MHM in the vicinity of $8m per annum or 7.5 cents per share, putting MHM on a potential PE of 3.5 in 2011 (based on the December 31 close of 26 cents). There is additional upside to these figures as a result of the processing agreement announced with Sims Aluminium Pty Ltd on the 24th of December. Net profits from this agreement are not included in the $8m quoted above.

One of the key factors in deciding to maintain a strategic investment in MHM/MHMO is the fact that their primary customer is Alcoa. The real long term potential of this stock comes from the potential to expand the business to the US and elsewhere. In the US alone they produce 40 times the amount of Aluminium Salt Slag compared to Australia. Discussions have commenced regarding the establishment of two processing plants with potential profits margins of $20-30m per annum, on which MHM would have to pay a 5% royalty of gross income to the technology owners. Alcoa is proactive in terms of its desire to be seen as being environmentally responsible, which I believe, is leading to a strong interest in developing manufacturing plants using the process in the US. We should start to hear more news on the US expansion during 2010 after the Australian operations are up and running.

A couple of cautionary comments with regards to this opportunity would be that the technology, whilst proven in a pilot plant, needs to operate with higher processing volumes. However I am assured that this is unlikely to present any problems because it is a simple scale up scenario. Secondly the process is not patented but relies on the use of a proprietary chemical and could therefore be easier to replicate in the future by potential competitors.

MHM also has the additional potential of developing a Silica mine in Tasmania should Wacker AG of Germany, or another organisation decide to locate their manufacturing facility near their resource. Secondly they also have some very prospective exploration ground for gold and nickel, South of Macquarie Harbour, in Tasmania, with a planned program in 2010 designed to firm up drill targets for 2011.

Uranium Equities Limited (UEQ): UEQ have two interesting projects which have attracted large global partners. The first is the PhosEnergy process which seeks to extract uranium from phosphate (current global production of 100m tonnes of phosphate with 20m lb of contained uranium). The second is the Narbarlek Uranium Project which has an impressive past production record of 24m lb at 1.84% U308.

The PhosEnergy process combines conventional technologies in an innovative way to achieve high uranium recoveries (over 92%), at a low operating cost of $25-30 USD/lb, with reduced levels of waste. PhosEnergy is a new bolt on process designed for existing phosphate production facilities, without any material impact on the phosphate process. Over 5m lb of uranium was produced from phosphate in the 1980s however production ceased in the 1990s due to the high operating costs ($60 - $70 per lb) and low uranium price at that time. Given the expected increase in demand for Uranium over coming years, due to the increased number of nuclear power stations coming on line, the production of U308 from phosphates using this technology has the potential to deliver significant returns for shareholders. Cameco see enough potential in the process to fund ongoing development up to USD$16.5m plus a commitment to fund at least 50% of the first facility capital requirement. Discussions are underway regarding potential facilities and news can be expected on that front in the first quarter of 2010.

Narbarlek, the second project of interest, has also recently attracted a significant global partner, Mitsui of Japan, who have paid $2m for an option to acquire up to 25% of UEQs holding in the region for a minimum purchase price of $15m. The area has seen significant historical uranium production and the recent N147 discovery, located near the Narbarlek mine, with a peak value of 1544 ppm U308 should generate some interest once exploration gets underway in 2010.

UEQ also have several other uranium exploration projects which are joint ventured with Cameco, Vale and Intermet. With a cash of around $10m the company has the funds to undertake significant exploration programs on their properties in 2010.

With a market capitalization of just under $34m and an enterprise value of $24m there is clearly room for considerable upside this year.


Closing Comments:
I plan to review these stocks on a regular basis during the year and will post my thoughts here for all to read.

Finally Id like to express my thanks to all contributors on the Hot Copper forum. This site has certainly been a fantastic resource for me over the past few years and Ill continue to use it in the future. I wish all members the best for 2010.

Aksier.