Good afternoon
back from Australia!! 39 degrees to about zero….!
I had a great time in this great country - as always! Meeting old colleagues, mates and in some cases, even friends! But I cannot say, that the mood was good! The improvement in sentiment - driven by better gold prices - has largely vanished over the last few weeks, and unless projects are outstadning, small caps find it very hard, once again, to raise fresh equity!
Just to elaborate on this a bit deeper is worthwhile, and represents probably the most important find from my trip:
Institutional investors are largely shunning the market in small, developing resources companies. As much as these guys are chasing tech stocks at 30 times revenue, as much are they trying to avoid the risk in small resources plays. The major reason for this seems to be, that there is a lack of experience to invest in this type of companies! Yes - we are talking Australian fundmanagers - but resouces, especially at the small end, is not what they HAVE to invest in - and is representing only a small percentage of major Indices…So if you miss it, nobody kills you - if you get it wrong, you might loose your job!
The only way for larger institutional investors to play in these stocks, is via placement….While in the old days, insto´s bought a few shares in the market, took a placement at a later stage, and bought some more in the after-market, are over…I think largely for compliance reasons. And even worse - there seems to be an increasing number of investors, who act as liquidity providers, take up placements, and sell them soon after listing - regardless of price. The good old kind of corporate investment we are used to - that is to invest in good companies with good management teams and promising projects, with a view to jointly going on the rough ride to develope these things, seems to be the exception rather than the rule these days!
For us, that means we have to concentrate even more to get it right - with regards to projects ( as ever! ), but perhaps even more so than ever in good management teams, who can play this game and are experienced corporate operators, with superior marketing capabilities.
Panoramic Resources - as soon as I had arrived in Sydney, my favourite nickel miner received an unwelcome bid from Independence Group, a 3.6 bill$ company, mining gold and nickel in Australia. Their script is widely regarded as expensive - partially because of a scarcety of halfway sizeable , diversified base metal miners listed in Australia. The bid is pitched at 1 share in IGO for 13 shares in PAN - theoretically valuing PAN at just over 47ct. While this is a nice premium to to the last traded price before the bid, I am personally of the opinion, that the bid is too low. IGO are smartly using the weakness in PAN, driven by a 12-month ramp-up of Savannah Nickel, which has been disappointing and led to various downgrades of company guidance, as well as analyst estimates, and management changes.
It is very important to emphasize the fact, that all ming of ore, and subsequently processing, is based on the production of remnant ore from the old Savannah ore body, NOT the “new” Savannah North. I see no reason to change my very positive assumptions for mining from this completely new ore body, with superior grades and great ecmomics. At reasonable price forecasts for nickel, this mine should still be capable of producing 100 mill A$ or so in free cash per annum - for 8 years proven, but most probably, for much longer to come. My old friend Peter Harold, known to all of you, has undoubtedly underestimated the task of mining remnat ore - and he is the first to admit this. In hindsight, the company should have raised more funds in the first place, and should have gone directly into developing the new ore body. Peter has also underestimated the task, to install a new A-team at the mine. Used to work with his old Panoramic-family of employees, it´s very hard to establish this thinking and this identy again. In hindsight, he probably should have gone the path of contract mining - using new equipment rather than the old one, and established work teams. Well, hindsight is always easy! So as of now, Peter has left the company - and with him, his year-long CFO Trevor Eaton, and Chairman Brian Philips - all three some of the most honest and pleasurable guys to work with for many years!
But where to from here?
The new MD, who started to work a week ago, is very impressive. He was nice enough to give me some time during what must have been a frentic week for him!! In his mid-forties, he has had operational roles with several mining companies incl Newmont, and MD-roles with Breakaway Resources and Echo Resources ( until their takeover recently ). Most impotantly, he has been Chief Operating Officer of Barminco, a very well know underground contract miner ( I think the largest in Australia ), overseeing many projects. He is a very experienced underground miner. Victor gave me a very detailed list of improvements planned for Savannah and Savannah North - the most important probably beeing a shift to contract mining. He will get the A-team in - could be as early as mid-January, I think, that will drive dramatically improved productivity at substantial lower costs than currently being experienced. Victor is conducting a 3 week review currently, which results will most probably become largely public - I expect them in early December. By that time, I also expect the company to conduct an equity raising ( as the most probable way to get additional cash )
A fact is, though, that PAN have receivee a takeover bid, with several conditions attached - one beeing, that IGO will get access to PAN´s books and operations, to enable full due diligence. Some of these contions have already been broken - so IGO could theoretically walk away every day. After having met IGO´s MD, my feeling is, that they will not do easily…it was clear from day one, that PAN´s largest shareholder ( 34,7% ), ICM Limitd, a company founded by Duncan Saville ), would not accept - making it hard to get the 50.1% minimum threshold for a successful bid. This is good and bad - if the takeover lapses, the stock might fall a few cent - if it´s successfull, IGO will probably get PAN at too low a price. For IGO, the PAN assets would be a great, strategic fit….
At this stage, I am inclined to wait…firstly, we might have other bidders emerge ( in the end, there are only very few strong, new base metal assets in Australia - not t talk about sulphide nickel..that´s even harder to find ) - and secondly, it will be very interesting to read the conclusion of the current Operational Review. Stay tuned…
Strike Energy - I have met several senior employees and very large shareholders of Strike, incl the MD, Stuart Nicholls…and I was impressed yet again! The JV-Partner of STX, Warrego, I also met…their comment for the relatively weaker valuation for Warrego was: Well, STX defintely have two things going for them: 1, their MD Stuart Nicholls, and 2, the fact that STX is the operator and would therefor be the place to go for other corporates to gain the project! Stuart did not only made a very decisive move for the West Erregulla asset, but also aquired a large, surrounding ground position. He got top consultants in, and he delivered very well on what is definitely not just an average Australian exploration well. I think we all agree with Warrego oh his qualities! Stuart is backed by a very strong board, consisting of Perth identity John Poynton, the ex-FMG CEO and legend Nev Power, Andrew Seaton, ex-Santos CFO, and also quite prominent Jody Rowe and Stephen Bizzell.
In my absence, STX announced a first resource estimate of 1,28 Tcf gas, one of the largest ever discovered onshore gas fields in Australia, consisting of high quality gas. This is a very substantial resource - owned with Warrego, who own the other 50% - exceeding all expectations. The resource esttimate excludes the Wagina formation, which may hold an additional 273 bcf, depending on some further testing. The resource looks like being at least 50% larger than Waitsia, which was owned by AWE and led to a prolonged takeover battle for the company. Strikes estimates, that the project can be brought into Stage 1 production by early 2022…The next step is now to drill two appraisal wells, to be drilled from mid-2020, to further increase the resources. In the meantime, STX will run seismics to get a better feel for the propsectivity of it´s ground in surrounding areas. Some analysts have put the potential size of the entire basin to 6 Tcf - that would be easily a size to get the major offshore players like Woodside, Chevron etc involved.
Strike raised 30 mill A$ recently, to pay all expected outgoings for the appraisal program ( 2 wells at 15 mill A$ each x 50% ) , seismics, corporate costs etc etc until at least the end of 2020. The placement price was 23ct….and while the majority has been plcaed with institutional investors, there has been some “hot” money in the placement as well…that contributed to the recent weakness, as these short term players sell out. Also, some investors questioned the independence of the resource estimate, as it has been completed by Tony Curtis, who is also STX´s consultant. There is some validity on this - Strike commented, that they have used Tony, as he is the guy knowing the asset best . Also, independent consultants tend to be overly conservative in their resource estimates, to avoid potential litigation etc - which is true. However, Strike did not see the necessity to use a completely new consultant, as this first resource estimate is not being used for banking/financing purposes anyway. Some commentators believe , that Curtis might have been on the positive side of things as to the percentage of gas recoverable, but that he could well have choosen to estimate a higher, overall resource. This can only be validated by more drilling results next year. There are also some concerns as to whether the Western Australian gas market will be able to take all this potential gas. Strike is of the opinion, that firstly, there is still more demand to be filled, and also, that new supply will also create new consumers - some thruth in that, as Strike /Warrego alongside Beach/Mitsui ( for Waitsia ) will be the cheapest producers of gas in Western Australia - estim,ated costs are 1.50-2.00 A$, and prices seem to be around 4$ ( somle large long term contracts are substantially higher , still ) . However - I believe, that substantial interest in further offtake agreements has already been shown by large, industrial consumers….
The main two reasons for Strike being a bit soft recently is, in my opinion, that newsflow over the next 7-8 month could be a little bit boring from an asset view point…so while some long term holders might take some profits, newer investors are under little pressure to place the bets! From a corporate perspective, there have also been rumours around, that Strike might / should take out Warrego. That would probably make sense, as Warrego is priced at a substantial discount to Strike, the operator. The only problem: A successfull paper bid for Warrego would increase corporate appeal of STX, and probably also the potential valuation in any takeover by one of the large gas players in WA ( Woodside, Beach, Mineral Resources, Santos to name a few ). In the short term, though, a paper offer tends to put pressure on the price of the aquirer….the good old saying: short term pain for long term gain. But none of us know, how this play might work out…I am not trying to finess the market here. While a few mont ago, we owned a stock representing a good punt, we now own a stock with a company-making , excellent project! It´s really anybodies guess, what it might be worth ( a lot depends on future prices )- but based on the corporate transaction for Waitsia, the stock is on the cheap side, with substantial upside from further drilling and potential corporate action! I am relaxed….I also believe, that given the strong increase in market cap, research from the larger brokers should come forward , hopefully before Christmas.
Genex - what a disappointment! At the very last minute, the last piece of the puzzle went missing! Energy Australia´s Hongkong-based parent did NOT sign the expected long term power purchase agreement! I understand, that on the Australian side, everything had been given the ok - but when the holding company of EA had to sign, they baulked at the fact, that the 30-year or so offtake agreement would impact their balance sheet. I am 100% sure, that they had been well aware of this early in the game, but I assume, that the chaotic situation in Hongkong made them think twice of taking on additional risk. Amazing…let´s recoupe, what the company has achieved: 25 mill$ share subscrption agreement with J-Power from Japan, satisfying GNX´s equity reuirement / 610 mill A$ financing from the North Australian Infrastructur Fund / Funding package from the Quneesland Government for the transmission line! All these balls in the air…Management I feared to be devastated, but when I met them in sydney, tehy were absolutely positive ( well, in a way! ). I can understand them, as in the meantime, NAIF has reinforced their commitment and extended the offer of financing 610 mill$ to the 30th of June - so they are obviously fully committed. Great news! I understand, that the chances for J-Power to extend their committment of the equity are pretty good as well….and as to the long term power purchase agreement with EA, the understandiing is, that they are also still keen to get something done - but not for such a long time as the originally expect 30 years. According to Australian newspapers, there is a government body called Clean Energy, which has been resourced to just do, what is missing here: The long tail, guaranteed end of the agreement. According to that report, talks between them and Genex have already started.
Amazing, to this fall over…not only had EA advertised in Linkedin for a project manager - they also used information on GNX´s hydro-project publicly in a presentation to underline their desire to get out of coal-fired power! And another old saying applies here: A deal is a deal when it´s a deal - i.e. only once it´s signed! Anyway - everyone involved wants this project, and if anything, the economics of it have improved, as power prices in Queensland have traded often below Zero! Hard to believe, but a fact, that power prices in Queensland have been negative for nearly 5% of the time during the last Quarter, enabling somebody like GNX to pump the water back up and get money for it! I have no doubt, that negotiations of all the above facilities will take a while ….perhaps 6-9 month even. I expect to see an update on the project and it´s timetable at the AGM this Friday, the 22nd. I also believe, that financial close for the Jemalong solar project is imminent - and that alongside the existing solar plant at Kidston should pretty much account for the share price, as it is today. So don´t give up - I bought a few more last week!
Metro Mining - another one with big news in my absence! They received financing from NAIF for 47.5 mill A$ for up to 9 years, and I believe something like 4.5% interest. The total capital cost is about 4 Mill A$ on top of this - easily to be financed from cash flow. This includes a 10% contingency. As reported earlier, the expansion to 6 millt of bauxite p.a. ( from about 3.5 mill t this year, and a guidance of 4 millt for next year ) will reduce costs by 18% - mainly because of the ability to load larger vessels, which alone will reduce costs by 4$/t or so. An absolute no-brainer….just do the numbers: Last Quarter, the company achieved a margin on it´s shipments to China of 15,77 A$/t , which was a strong Quarter. So everything unchanged, the margin should improve by at least 4$ - in round numbers, 20$/t…..6 millt x 20 A$/t = 120 mill A$! That will not be achieved, as during the 1st Quarter, as you know, there are no shipments from the mine, due to the rainy season - and costs continue. But in any case, I think MMI will be able to generate 90 mill A$ p.a. in free cash, once the expansion is fully operational. in 2021. Thatz´s a huge number for a company with a market cap of a paltry 187 mill A$ as at today! And as you can get from these numbers, the company will generate more than the total outstanding loan within a year….Even if bauxite prices fall a few$ from here - this stock continues to be a give-away! They are producing within the lowest Quartile of costs worldwide, and have a huge freight differential to China compared with the main competition from Guinea - they have to ship all the way around Afrika! And Guinea is not one of the most stable countries on this continent, with elections looming large in 2020. The quality of ore is slightly better in Guinea - but MMI has built very strong relationships with several customers in China. Selling the stuff has never been the problem - even though generally, this has to be seen as a risk for companies active in products, which you don´t just ship to the LME, like the base metals. But the marketing side of things is one of the strength of MMI. So all going well here…I have bought more stock a while ago, as you know, and Metro is one of my biggest positions.
I think this stock is so cheap, because it´s difficult for investors to follow the bauxite price - beside of the fact, that most people would not have an idea, what bauxite really is! And they do not need fresh equity - hence it´s difficult for them to find coverage from analysts. This might change, when they go on the aquisition trale - but for this, it´s probably too early. Longer term, it will be positive, though, if they remove this one-mine risk! But show me the cash, first!
Tietto - I have met several people to get to the bottom of this one - from MD to analysts to close followers and top geologists.. The asset is regarded as one of the most promising development projects in Western Africa - and at least for now, Ivory Coast is one of the best countries to operate in in this part of the world! Some very smart money is invested here! Again in my absence, TIE announced a resource increase of 24% to 2,15 mill oz of gold contained, at an average grade of 1.5g.Perhaps even more importantly, the high grade part of the resource increased to 19.3 millt at 2,2g/t for 1,4 milloz of gold, including the first indicated resource of 9.6 millt with 2,5g gold/t for 760.000 oz.The high grade resource shows 4000oz per vertical m, indicating a very profitable mine one day. The company has already started a new, 50.000m drilling program + drilling of other exploration targets , and has ordered a 4th drill rig. TIE is doing all drilling in-house, with Chinese built drill rigs, which has resulted in them having very low drilling costs of just 35 US$/m. This is being financed by a 17 mill$ placement, announced today, which I believe has been substantially oversubscribed. TIE now have 20 mill A$ cash in the bank - enough for at least all of 2020 and probably longer. This is a great story! The small concerns I have had a while ago are totally unfounded, and I took part of the placement for my fund. Great story, and the expected weakness in the share price represents a great buying opportunity for this company.
West African - with regards to the project, everything is going EXTREMELY well here! The mine is officially puring gold in June 2020 - but looking at where they are with construction, pre-stripping, underground development etc, I am not quite sure what they will spend their time on? At least I think it´s safe to assume, that they will produce by midyear - and as you know, print cash like crazy. What is not so good is the recent incident concerning th death of 39 local workers, and injury of another 60 - most of which employed by Australian contractor Ausdrill, and contracted by Canadian miner SEMAFO. Terrible, and probably done by islamic insurgents from the Sahel zone. Notwithstanding, that this attack took place in Burkina Faso, the country WAF are operating in, there are a few important differences between the operation of SEMAFO and West African. The most important one is location: Sanbrado is close to the capital Ougadougou, just about 80km to the east - and just 12 km from an army base. The Semafo-project is about 250 km from Ougadougou, close to the border of terrorist-prone Niger, and just 15km from a large National Park, which offers lots of shelter to vagabunding islamists. While Sanbrado has several villages surrounding it, the Semafo-mine is in a pretty isolated area. An interesting side aspect is, that Semafo transports all expat workers via helicopter - the local ones via bus!!!!!! And this on a route, where two incidents happened before! Sanbrado is a very different place, with a very different philosophy and work culture - the surrounding villages are their strongest supporters and also their ”early-warning-system”! But nevertheless - this terrible attack is certainly bad news for anyone operating in Burkina. In my opinion, the implied discount of WAF is too large, and I am holding my entire position!
Saracen - the story of the day! Saracen agreed to buy the 50% of the Golden Mile from Barrick Gold for 750 mill US$! I think the deal might be ok - Saracen is buying an asset which has reportedly a 15 year mine life, improving their asset quality. The price is probably rather on the cheap side in the long run - but for the next 3-4 years, the mine cannot fully operate because of a wall slippage in 2018. big hole, big remedies, when something like that happens! The mine seems to pretae as a 500.000oz producer for the time of the cut-back - but I assume, will come back to the original 700.000oz p.a.in a few years time. But we know precious little about it, until operator Newmont updates the outlook, planned for December. Saracen has had a strong, operational run of late, including some excellent exploration results, and MD Raleigh Finlayson is very well regarded in Australia. The deal catapukts SAR to the big league in Australia - so we will have the usual story: Index funds have to buy the placement regardless! So I assume, that the equity raising will go ok. The company will have a net debt position of only 200 mill A$, once the raising is complete - should not be too hard to service, even with the current subdued production from the Golden Mile. I have to say, that the above is really a shot from the hip — I have not looked at this mine for 10 years…
The only thing makes me a bit cautious is the fact, that Northern Star reportedly has been an underbidder - they are very agressive. Given the subdued production for the next few years, I can understand Evolution not getting it - if they are sticking to their strategy of being a profitable producer throughout the cycle, they probably could not justify the purchase price. But as I said - I am very much shooting from the hip here!
Prairie - and finally, JSW have again reprted, to be talking to Prairie Mining about a possible deal, JV or some form of cooperation. But Prairie recently reported, not to have any contact with JSW. Very strange- somebody is wrong here! The stock saw strong turnover in Poland on Friday, and normal turnover today, at an equivalent of 0,26 A$.
have a nice evening
WS
Wille
WS
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