-- Posted Thursday, 19 January 2012 | | Disqus
Normally the title is a spam email from our national carrier Qantas but now it is all about our junior mining sector. I cannot blame speculators and those in the industry for their slow return in 2012 because let’s face it after a brilliant start 2011 will go down as a real bitch of a year. It was the first time our market had fallen two years in a row since 1981/1982 and with 15% of the broader index I would imagine even some quality speculative portfolios came off anywhere between 25-60%.
I do not see it as a waste of a year but rather another challenge to keep the faith in what you are doing before the onset of dare I say it, “upside”. I am calling the sector the cheapest I have seen it since the “Asian Crisis”. I remember the days of the teletext TV that would run through the mining companies and thinking just how undervalued the sector looked. I have spent hours tapping through stocks I cover and am interested in and wish someone would gift me a $100,000 scratchie. The market depths are similar to tax loss selling and although buying support appears thin it would not take much buying interest to see 30-40% recoveries for starters.
Even though the GFC was brutal, some stocks had fallen from higher levels with fear providing a catalyst for a recovery as it then became “The fear of missing out” and 2009/2010 were quite good years for the juniors.
Market Observations
· Australia has been in a “cider bubble” (apple, pear and exotic mixes) which is a welcome relief after sports betting, insurance, and funeral plans were allowed far too much airtime. Between now and the next cricket test in Adelaide it will be all about surviving the Christmas hamper commercials and avoiding getting hooked into a five set tennis match.
· An Australian company has just won the right to call itself “Nuckin Futs” after a year battle and this is going to up the box factory. This might finally lighten things up here as even at times you think the Kiwi’s and Canadian’s are more open to advertising humour.
· Hotcopper daytrading forum and market activity now dominated by the micro-cap biotech stocks. In the run up the Christmas traders were all over junior explorers in the 1c-5c range and the move towards the biotech’s reflects a slowdown in news flow in that sector.
· The trading activity is reminiscent of 2001/2002 when the speculative market was dormant and it was the steady increase in daytrading that led to a recovery and mini-bubbles.
· Quality juniors during late 2011/early 2012 were sold off at the worst possible times when buyers were scarce and this appears to have affected confidence despite a stronger market.
· Pleasing to see some strength in our mid-cap mining sector after some stocks were punished. Hopefully some of this buying interest will start to flow through to the juniors.
Asset Sales and HOA’s now the trend
I noticed that the number of straight out asset sales started to increase during the latter stages of 2011. This reflects the struggle for junior explorers to raise capital so they are forced to rationalise their portfolios and sell off the projects that they are unable to develop.
This trend will see bigger companies continue to grow however it will make it more difficult for the mid-cap sector to be strengthened in Australia.
The larger mining companies are starting to buy ounces and tonnes rather than go through the feasibility and construction processes and if you have desperate sellers why wouldn’t they?
Both BHP and RIO are now getting stuck into the Gawler Craton through deals with junior explorers such as Tasman (TAS) and Archer (AXE) and I would expect this to continue as new discoveries are certainly required post Carapeteena and Prominent Hill. It is also worth watching the activities in QLD and the juniors now surrounding Ivanhoe Australia (IVA) and their Osborne Mine. The last major regional bubble here was the Gawler way back in 1996/1997 and perhaps the majors are again assisting in the creation of another one.
Both WPG Resources (WPG) and Copper Strike (CSE) returned the bulk of their funds back to shareholders and now find themselves talent rich but asset poor. No doubt they will be looking at some of the juniors struggling to raise cash and will use their expertise to benefit from this.
Rational thinking in irrational times
I look back at the GFC and my major regret wasn’t buying IVA around 15c after they floated at $2.00 in August 2008. Even though I didn’t benefit financially from the absurd price it has helped me to think rationally when the market is irrational.
When the entire junior mining sector has looked like a screaming buy as it has now with the benefit of hindsight it was always looked back on as a major buying opportunity.
To highlight just how “stupid” cheap our mining sector is, here are two real examples:
Company 1 (14c)
· Market Capitalisation $14.5m, cash position around $5m
· Technical team were responsible for a major discovery in South Australia that is now an operating mine in the hands of a $3bn company.
· Have just sold their 55% stake in a low-grade gold resource for $6m in total (cash/stock).
· Announced a 1.5bn tonne magnetite iron resource in Australia with a scoping study well underway.
· Have an industrial mineral project with a resource upgrade and scoping study to follow.
· Possess investments in other ASX listed companies and hold 22m shares in a geothermal/alternate energy company. ($2m value)
· Major explorer in the Cloncurry region QLD for IOCG deposits.
· Hold a strong tenement portfolio in the Gawler Craton and could benefit from any further interest.
Company 2 (14c)
· Market Capitalisation of $13m-$14m, cash on hand reported at end of September qtr >$7m. The stock is very tightly held and has recovered quickly from the occasional sell down to 11c.
· Own a fully refurbished gold plant that has already successfully poured a dore bar and is ready to commence operations.
· Have JORC resources and are looking to take a measured approach to mining rather than rushing into it.
· RC drilling now underway on an exciting project in WA.
One of the barriers I have to overcome in these companies is the waiting period for others to notice. Sure they might be cheap, however, for larger investors and newsletters to get interested the liquidity has to improve. The flipside of this is the market cap and share price normally rises so we can get the benefit of being early even though at times you question your reasoning for staying put whilst other stocks are running. I am happy to provide readers with some samples of my research so please feel free to send me an email or you can visit my website.
Looking ahead
· Daytrading to continue in the penny stocks, although the market is conducive to reporting a decent mineral discovery.
· US and world markets have been cruising along nicely and perhaps we might see the odd triple digit drop as a reality check.
· Asset sales to continue with further investment interests from Chinese and Indian investors.
· Exploration JV’s to increase as the majors search for discoveries to replenish their precious and base metals production.
· M&A activity in the gold sector to provide the impetus for gold equities to finally perform. Might even see the return of the “takeover premium”
· Interest in platinum, shale gas, graphite, and zinc to increase as companies look past next week when it comes to their strategies.
· New brand of products with “obvious spoonerism’s” to increase to at least let some Australian’s enjoy the economic downturn with a smile on their face.
· The Kardashians popularity to continue its downtrend whilst Adam Sandler might actually come out with a decent movie and briefly dispel fears he is the next Eddie Murphy.
Having two negative years on the ASX doesn’t mean investors and speculators should write off the stock market has a mechanism for attaining capital gains. Once markets stabilise (and they always do) it will again reward those who are able to discover and develop mineral deposits. Whilst I would love to do a “Biff” and come back with the mining page from January 2014, it is all about risk/reward and market downturns are a necessary part of speculation.
Tony J Locantro
Managing Director
Email: tony@locantro.com
Website: http://locantro.com
About the Author: Tony Locantro is the Managing Director of Locantro Capital Pty Ltd, Locantro Asset Management Pty Ltd and Gold Australia Pty Ltd. He entered the stockbroking industry in 1998 and was an Associate Director at Patersons Securities Limited until 2010. In 2001 he authored The Green Room: A Guide to Speculating on the Australian Stock Market and is the current author of the newsletter, Locantro’s Life. He has been quoted extensively in the financial press and Dow Jones Newswires, has written articles for Kitco and other websites and also appears on Sky Business News. He is known as a passionate and respected supporter of the junior resource industry.
Disclosure of Interest: Tony Locantro, his companies, employees and associates may have personal interests in the majority of the companies or sectors covered in this article.
Disclaimer: This article is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular reader have not been taken into consideration. Individuals should therefore discuss, with their financial planner or adviser, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for readers.
-- Posted Thursday, 19 January 2012 | Digg This Article
| Source: GoldSeek.com
