IDEAS

Minefield: small miners with big friends

These three explorers are attracting work and capital from some heavyweights.

27 September 2018 04:30 PM

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Trade war fears have rocked the resources sector, for good reason. A contraction in global trade could mean a fall in demand for basic raw materials such as copper, zinc, aluminium and nickel.

But deep down, at the end of the corporate food chain, there are signs of a new type of value-creating deal emerging which sees small explorers with bright ideas teaming up with a cash-rich big brother.

Grubstaking is the name of the game and it’s as old as mining itself and dates back to an era when a benefactor would provide the food and equipment for a prospector to “kick the rocks” in a remote location with the reward being a share in any discovery.

Three examples of “corporate grubstaking” have developed recently with each offering investors in the smaller participant the comfort of knowing that there’s a financially strong party in the deal, even if it means sacrificing a share in any new mine development.

Ausquest (AQD:ASX)

Rarely mentioned, even in trade journals or at mining conferences, tiny Ausquest has struck a unique working relationship with one of the world’s biggest base-metal miners, South32.

Both companies are based in Perth, but the difference in size falls into the chalk-and-cheese category. South32, a BHP spin-off has a stock-market value of $19 billion. Ausquest is valued at $8.4 million.

Size, however, is not everything in mining with small and nimble companies able to do things and go places that can be awkward for big companies. They can also as operate more cheaply.

It is the differences which have drawn Ausquest and South32 into a unique Strategic Alliance which has the aim of finding potential major new orebodies with a focus on the sort of minerals preferred by South32, copper, zinc, nickel and other members of the base metal family.

Born out of a chance encounter at a geophysics conference organized by the CSIRO between Ausquest managing director, Graeme Drew, and South32 staff the arrangement is a perfect example of corporate grubstaking.

In earlier times a rich benefactor provided food and equipment for a prospector to explore remote locations with any discovery being shared.

In the Ausquest/South32 alliance it is the big partner providing much of the cash needed while Ausquest gets on with the job of conceiving exploration targets, conducting the early-stage surveys, and then presenting a prospect ready for the most expensive part of the process, drilling.

Funds from South32 flow in at different stages of the process at both a corporate level directly to Ausquest and at a project level. Exploration opportunities put to, and accepted by South32, attract an initial payment of up to $500,000 to advance them to a drill-ready stage.

After that a joint venture can be created with South32 earning up to 70 per cent of each project after it spends $US4 million with the primary target locations being in Peru and Australia.

The deal is working well with 11 projects in the alliance. Drilling was recently completed at the Chololo copper prospect in Peru which is said to have revealed the potential for a buried porphyry copper system in the project area. (A porphyry is type of orebody, generally very big but relatively low-grade).

A second Peruvian project, De Fierro, is being prepared now for drilling which is expected to start by the end of the month.

South32 likes the arrangement because it unleashes the creative talents of the small team led by Drew, a geophysicist who worked for 20 years in the exploration division of Rio Tinto, and Ausquest likes the alliance because it provides funding for its original exploration concepts without having to call on shareholders.

The proof of the deal will be in discovery but with 11 projects in different stages of assessment it only needs one to hit the jackpot – much like the way venture capital deals are structured in the technology sector.

On the market, Ausquest shares have not shown much reaction to the South32 alliance, stuck around 1.6c for much of the past 12-months, a price which could be re-rated with a discovery.

This was 4 years ago.... When the first deal was struck with S32... We have a few more shares on issue and our relationship with S32 is stronger .As it mentions in the article, 1 find will rerate the company..