T a k in g
STOCK exploring opportunities
Taking Stock Contents
bringing the investors back Looking forward 3 blackham resources LTD Gutnick in familiar territory
Centrex metals Ltd Dividends make the difference
Kupang resources ltd Gaining a competitive edge
RIU explorers conference Conference Programme
venturex resources ltd Cashed up and ready to drill
plD Corporation Ltd Hunting in Australiaâ€™s hottest address
State of the market Funding up as exploration falls
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Taking Stock 2014
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FRONT COVER: Centrex Metals Ltd (ASX:CXM) project geologist Matt Ackland on the companyâ€™s Kimba Gap Project.
Attracting Investors Back to the Resources Sector Although there is no denying that the 12 months since sector players last gathered at the RIU Explorers Conference have bought little good news, Patersons Securities senior resources analyst Simon Tonkin says resource equities have managed to keep the upper hand on the financials and that explorers with good management and solid assets will still find support among investors with an appetite for risk. Over the last decade, the resources sector has outperformed, providing significant benefits to Australia. Our country has been the â€œquarryâ€? to China satisfying its seemingly insatiable demand for raw commodities. This has allowed China to grow significantly through exporting finished products to the rest of the world while building new cities and infrastructure to the benefit of its more than 1 billion inhabitants. Chinese economic growth rates hit plus 12 per cent at their peak (currently approximately 7.7 per cent) with China buying-up significant amounts of our natural resources. During the peak period, commodities were well supported and resources companies dominated earnings. Resources sector employment was strong and wage growth was exponential. Since April 2011, mining stocks have been under pressure due to moderating Chinese growth rates, lower/range-bound commodity prices and political unrest, which has resulted in negative investor sentiment. Another contributing factor is that mining is a risky business. For example, there are almost always delays or unforeseen circumstances in mining projects that dent the confidence of investors. In a difficult market, investors have been drawn towards high-yield paying stocks which are currently considered a safe haven. Mining stocks have had a poor track record in paying significant dividends due to the fact that deposits are finite assets with significant capital requirements. Management usually focuses on using funds to drill for more resources/reserves or acquire further assets to extend the life of the company, rather than return money to shareholders. Despite the recent decline in the appetite for resources stocks, they have outperformed the financials over the last 10 years
(Figure 1. Source: Iress). However, that gap is closing with a differential of 12 per cent, the smallest gap since the Chinaled resources rally began. That said, the S&P 300 Resources (down 10 per cent) has held up significantly better than the Small Resources Index (Figure 2. Source: Iress). As a resources industry, we must look to attract investors back to the sector. The way forward is through providing confidence to shareholders. Obviously higher dividends would go part of the way in restoring confidence in large cap resources companies that make billions of dollars (eg. BHP/ RIO). However, the mid-cap and smaller producers will need to show good fiscal management through repaying debt and reducing capital and operating costs where possible. One of the key measures that we use is positive free cashflow, which is a sure sign that operations are being run in a fiscally responsible manner. Ideally, these companies would be able to keep levels of indebtedness at reasonable levels and continue to produce cash for shareholders. For junior resources companies, the market has been particularly brutal, most stocks are down on average 4050 per cent. These stocks are considered high risk, high reward. There have been some real standout winners, for example, Sirius Resources (ASX:SIR) and Syrah Resources (ASX:SYR), both of which have appreciated significantly. Unfortunately, there are many other resources companies that have struggled and need additional funding to continue as going concerns. The preferred choice of funding for small resources companies is through a rights issues to give existing shareholders the opportunity to participate. There is also share placements that provide much-needed funding for the mid-caps. Joint ventures at the project level have also been used to reduce capital outflow while retaining some of the upside. Merger and acquisition activity has been CONT. P12 u.
Figure 2 Taking Stock 2014
Gutnick targets shareholder value in familiar territory Respected mining veteran and Blackham Resources Ltd (ASX:BLK) chairman Joseph Gutnick has a clear belief in the value of the Wiluna Gold Belt and an equally clear belief in Blackham’s potential to unlock that value for its shareholders. After less than a year with Gutnick at the helm, Blackham has seen significant value in its flagship asset, the Matilda Gold Project, unlocked through the consolidation of complementary assets within the Wiluna Gold Belt, most notably the acquisition last month of the Wiluna Gold Mine. The newly consolidated belt is an old friend to Gutnick, having more than a decade ago been part of his Great Central Mines empire. Blackham has paid $2 million up front for the plant and infrastructure, which will be followed by $2.6m in deferred production payments. The purchase is being funded out of a $13 million facility Blackham holds with Great Central Gold Mines. Located in central Western Australia, the Wiluna Project is surrounded by Blackham’s 100 per cent owned Matilda Project. The consolidated project now has a resource of 4.3Moz of gold over a 780sq km landholding, including 55km of strike along the Wiluna mine sequence which has produced over 4Moz of gold. With key development and production infrastructure in place at Wiluna – such as a processing plant, airstrip, camp and power station – the acquisition will fast-track Blackham’s transformation from explorer to producer through the development of the Matilda asset for minimal outlay. Blackham acquired the Matilda Gold Project in November 2011, including the Matilda and Williamson Gold Mines and numerous other deposits and prospects, to make it the largest land holder in the Wiluna gold belt, one of Western Australia’s major gold-producing belts. “The acquisition of the plant saves Blackham millions of dollars in development costs for the Matilda Gold Project and will slash years off our development timetable, both of
Joseph Gutnick Non-Executive Chairman
Level 2, 38 Richardson St West Perth Western Australia 6005
Bryan Dixon Managing Director Greg Miles Executive Director Alan Thom Executive Director Mike Robbins CFO/Company Secretary
Taking Stock 2014
T: +618 9322 6418 F: +618 9322 6398 WEB: blackhamresources.com.au ASX CODE: BLK
The Wiluna gold plant.
which should be a significant win to Blackham’s shareholder returns going forward,” Gutnick said. Blackham managing director Bryan Dixon said it was not often that a company got the opportunity to buy a plant and related infrastructure in the middle of its existing gold project. “This significantly reduces the risk of re-commissioning the Matilda Gold Project,” he said. According to Gutnick, during the evaluation of the Wiluna Project numerous exploration targets were identified, which Blackham is continuing to evaluate in comparison to existing targets at the Matilda Project. Drilling will continue across both projects ahead of a feasibility study. Gutnick said the exploration strategy would be focused on the identification of new oxide resources and/or free-milling shallow (<500m depth) underground resources, consistent with the current strategy at Matilda. “We intend to spend the next year undertaking an extensive drilling campaign to build up the mineable reserves in excess of the half-million ounce mark, before completing a rigorous feasibility study as a precursor to a development decision,” he said. Since the acquisition of Matilda in late 2011, Blackham has increased the resource at the project by almost 400 per cent. The JORC-compliant resource at the Matilda Gold Project now stands at 24Mt at 1.9g/t gold for 1.4Moz, with 519,000oz in the measured and indicated categories.
Dividends put this deal-making junior in a league of its own Centrex Metals Ltd (ASX:CXM) is a rarity. In the junior resources sector, where profits are scarce and dividends even more scarce, Centrex has delivered two special fully franked dividends to shareholders in the past 12 months. The second special dividend of 5 cents a share, delivered last month, follows an announcement by the company in late 2012 of its intention to review its capital management strategy with the aim of solving advanced project development funding requirements through dilution, in return for foreign investment. To this end, the company already has three Chinese-backed joint ventures in place over iron ore and base metal projects. The strategy is a major departure from the generally accepted resources development model that often does not see significant returns to shareholders until an asset moves through the development phase and into production, an often-lengthy timeline. The Centrex development model involves the company funding projects from acquisition and through early exploration itself, before seeking foreign investment in return for project equity to fund advanced development through a joint venture. Once feasibilities are completed, Centrex along with its foreign partner would take the project to market via a float for project financing, at which point Centrex becomes a minority shareholder. The strategy brought its first tangible results in 2010 with the completion of the Company’s largest deal to date with Wuhan Iron & Steel (Group) Company (WISCO), that along with development funding for its Eyre Iron Magnetite Joint Venture saw payments totalling $78 million directly to Centrex. This result lead the way for shareholders to be rewarded in February 2013 and again in January 2014, when the Board announced special dividends totalling $31.4 million. After payment of the latest dividend, Centrex will hold a cash balance of $34.5 million, of which $28.6 million is uncommitted. Centrex management says its current cash position will be, in part, used to develop a new metals portfolio to provide the potential for short to medium-term value recognition from smaller-scale assets, to balance out its historical longer-term iron ore portfolio value. In all cases, the company will advance its exploration assets with the aim of attracting further foreign
DIRECTORS/MANAGEMENT David Klingberg AO Chairman Kiat Poh Non-Executive Director
John den Dryver Non-Executive Director Mr Bingqiang Lu Non-Executive Director
Graham Chrisp Non-Executive Director
Ben Hammond Chief Executive Officer
Jim Hazel Non-Executive Director
Gavin Bosch Chief Financial Officer
T: +61 (0) 8 8100 2200 F: +61 (0) 8 8232 0500
Unit 1102 147 Pirie St Adelaide South Australia 5000
WEB: www.centrexmetals.com.au ASX CODE: CXM
Drilling at Centrex’s Fusion Project.
investment and working toward becoming a shareholder in a selection of diversified mining projects. To increase its foreign investment networks beyond China, the company has taken on the high-profile former senior trade commissioner AK Tareen as a strategic advisor based in India. Centrex has a diversified set of assets within Australia, including iron ore, zinc-lead and gold projects, as well as port infrastructure. Its iron ore portfolio in South Australia includes, the Eyre Iron Magnetite Joint Venture (Centrex 40%/WISCO 60%), Bungalow Magnetite Joint Venture (Centrex 70%/Baotou Iron and Steel Group 30%), Kimba Gap Magnetite Project (Centrex 100%), and Wilgerup DSO Hematite Project (Centrex 100%) all around 100km or less from export infrastructure, including the company’s own conditionally approved Port Spencer Joint Venture (Centrex 50%/WISCO 50%). In line with its strategy, Centrex has reported significant progress in isolating the funding requirements for its magnetite joint ventures from the company’s current cash flow reserves, including the recent signing of a supplementary deed with WISCO for its Eyre Iron Magnetite Joint Venture. The new arrangements provide a funding path options to take the JV’s flagship Fusion Project through to the end of a bankable feasibility study with Centrex further diluting to 30 per cent in return. The pre-feasibilty study for the Bungalow Magnetite Joint Venture is also under review by the Baotou Iron and Steel Group which holds an option to invest a further $16 million to complete the BFS and take their interest to 50 per cent. Centrex’s metals portfolio in New South Wales includes, the Goulburn Zinc-Lead Joint Venture (Centrex 65%/Shandong 5th Geo-Mineral Prospecting Institute 35%) with Shandong spending $2 million in exploration in 2014 and an ability to fund the project through to production for an 80% interest. Exploration is also under way by Centrex at the nearby Gundaroo and Woolgarlo Gold Projects (Centrex 100 %).
Taking Stock 2014
NEW INDONESIAN export LAWS give KUPANG resources a competitive edge While many foreign miners are working their way through Indonesia’s latest restrictions on raw mineral exports, Kupang Resources Ltd (ASX:KPR) is fortunate to be able to continue with its plans without such impediments at its Kupang Manganese Project. Kupang Resources head of operations Simon Youds said the company was actually in an improved position because of the new laws. “Manganese concentrate has been exempt from the same export restrictions that concentrates of aluminium and copper are subjected to,” Youds said. Kupang’s unique business model satisfies Indonesian authorities by working with local business owners; by purchasing tonnes from the local manganese miners (through the Manganese Society of Kupang Island), the company aims to blend the different high-grade ores at its own plant into a concentrate, and then ship via the island’s only deep-water port of Tenau both domestically and abroad. The new laws to come out of Jakarta prohibit the shipping of raw manganese ore and requires product to be beneficiated to more than 49 per cent manganese before it can be exported. This has resulted in additional benefits to the Kupang Project Joint Venture. “We are finding that with raw manganese exports now banned, groups on the island which were once competitors are now likely to be customers of ours,” Youds said. “This increases the customer base from which we can source the high-grade ore for processing. This is the underlying intent of the new laws.” In joint venture with a local consortium of Kupang business leaders, Kupang Resources has the capacity to blend 30,000t per month at its processing plant at Bolok, and can export up to 80,000t per month through the ship-loading and deep-water port at Tanau. As long as the Manganese Society and other sources can supply enough manganese to the Kupang Project Joint Venture, the plant will keep running and product will continue to be shipped to any of the interested South-East Asian smelters. Nusa Tenggara Timur, the Indonesian province where Kupang Island (also known as West Timor) is located, is known in the
Ben Elias Non-Executive Chairman
18 Oxford Close West Leederville Western Australia 6007
Anthony Sage Managing Director Jason Brewer Non-Executive Director
T: +61 (0) 8 6382 5500 F: +61 (0) 8 6388 2304 WEB www.kupang.com.au ASX CODE: KPR
Kupang’s deep-water port facility at Tanau.
industry as a source of quality raw manganese. Youds said the island of Kupang was endowed with unusually high-quality manganese free of diluting elements, hence the reason for many miners on individual concessions. However, getting the ore off the island in a sizable quantity and was the challenge that Kupang is poised to overcome. “The benefit we have is an existing processing plant, equipment and expertise to deliver to a certain spec,” Youds said. “Others in the region don’t have the same ability to deliver like we do. “Despite these new laws, that have knocked some of the bigger players in the resource industry around, we are in a good position because of our solid relationships in country. That is an amazing result for a small company like Kupang and our commitment to the area and our unique business model that benefits the local suppliers of West Timor.” First production is planned for first quarter this year, although the authorities’ administrative challenges of the recent changes may end up pushing this into April/ May, as Kupang Resources fine tunes the ramp-up in delivery capacity and finalises discussions with relevant officials. “We notified market of Q1 2014 first production,” Youds said. “On current advice we have received from our operational team, we are planning for a March delivery. Given the scale of the changes we do expect some delays as we are in the process of putting the finishing touches to our own internal systems. “We have great relationships with the Government and local villages, but this is a big deal for all involved, so getting the details right is of paramount importance to all parties.” If the expected delivery increases occur to the plant by midFebruary, Kupang Resources will be Indonesia’s newest manganese exporter.
Taking Stock 2014
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Taking Stock 2014
cashed up venturex lays out a drilling program to test top targets Exploration and development company Venturex Resources (ASX:VXR) is set to embark on its exciting 2014 exploration program following recent cash injections from both government grants and the sale of non-core assets.
Late last year, Venturex Resources announced it had been awarded funding from the West Australian Government totalling $299,600 to co-fund exploration on its Midway copperzinc and Southern Hills prospects. The funding was allocated through the highly successful Exploration Incentive Scheme (EIS), a government initiative supported by the Royalties for Regions program. Venturex managing director Michael Mulroney said the company was very pleased to have received the co-funding which would make a significant contribution toward driving its 2014 exploration programs. Venturex Resources is currently undertaking a diamond drilling program at the Midway copper-zinc prospect in the Pilbara region of Western Australia. The Midway prospect is just 4km South-East of Venturex’s Sulphur Springs copper-zinc deposit. The 1,350m diamond drilling program, which received $149,600 from the total funding, will target an untested anomaly derived from a high-resolution HyMapper multispectral survey conducted by the CSIRO in 2002. Analysis of the survey results indicate that the Midway area has a similar alteration signature to the adjacent Sulphur Springs and Kangaroo Caves massive sulphide copper-zinc deposits and represents a high-priority greenfield exploration target along strike from known mineralisation. “It is particularly exciting given the prospect’s close proximity to both the Sulphur Springs and Kangaroo Caves copper-zinc deposits and this program represents the first exploration drilling undertaken between the two known massive sulphide deposits,” Mulroney said. Following the Western Australian Government’s funding of the Midway copper-zinc prospect, Venturex received an additional
Drilling operations at Venturex Resources’ Midway prospect.
$150,000 to be used for a 1,550m diamond drilling program targeting the Southern Hills area, located south of the Mons Cupri copper-lead-zinc sulphide deposit. Previous diamond drilling in the adjacent Mons Cupri SouthWest prospect in 2011 intersected an extensive zone of typical footwall alteration within the target Mons Cupri sequence with one drill hole intersecting fragments of preserved zinc-rich massive sulphide mineralisation. The drilling program will target an untested zone of combined ASTER and geochemical anomalism around a complex synvolcanic fault system. “This extension of the exploration program to assess new multidiscipline targets in covered areas is a first step in our long-term plan to unlock the exploration potential for new deposits within the broader Whim Creek area,” Mulroney said. The drilling is anticipated to be completed by mid-2014 following the receipt of the pre-requisite heritage and site approvals.
Anthony (Tony) Kiernan Non-Executive Chairman
Level 2 91 Havelock St West Perth Western Australia 6005
Michael Mulroney Managing Director Ray Parry Non-Executive Director John Nitschke Non-Executive Director
T: +61 (0) 8 6389 7400 F: +61 (0) 8 9463 7836 WEB: www.venturexresources.com ASX CODE: VXR
The recent sale by Venturex of the Whim Creek Hotel and adjacent accommodation village in WA’s Pilbara for $1.7 million boosted the company’s cash and receivables position to $5.2 million, ensuring it is fully funded for its 2014 exploration program. “The divestment of these non-core assets allows the company to focus on exploring and developing our extensive copper-zinc assets in the Pilbara region while providing additional funding to drive these programs through 2014,” Mulroney said. Other drilling planned for the first half of 2014 includes diamond drilling immediately west of Sulphur Springs. Venturex is also exploring for gold in Brazil through its wholly owned subsidiary CMG Mineração Ltda.
Taking Stock 2014
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PLD HUNTING IN AUSTRALIA’S HOTTEST EXPLORATION ADDRESS PLD Corporation Limited (ASX:PLD) is poised to commence a works program on high-priority targets in the highly prospective Albany Fraser Belt in Australia’s SouthWest – home to Sirius Resources’ spectacular Nova and Bollinger nickel-copper discoveries. Following a comprehensive operational review in 2012, PLD entered into two binding option agreements with Heron Resources Ltd for an exclusive 12 month period to acquire the Rocky Gully Nickel Copper Project in the Albany-Fraser Belt, WA, where the company would pay a total of $280,000 to exercise the option for a minimum 90 per cent of the Rocky Gully Project. Recently, PLD agreed to pay $30,000 to extend the exclusive option over the Rocky Gully project for a further six months and also signed a similar agreement with a private group for an exclusive 12-month option to acquire a 100 per cent interest in the Rocky Gully East Project, also located within the Albany-Fraser Belt. The change of direction came with a new board of directors which has considerable experience across the resources sector and has, in six months, cemented the company’s position in one of Australia’s hottest exploration addresses. Under the lead of managing director Matt Gauci, who has previous exploration experience in the Fraser Range, PLD recently completed a program of field exploration that confirmed the presence of two high priority and eight new priority nickelcopper targets at the Rocky Gully Project. Following the discoveries of the Nova and Bollinger deposits by Sirius Resources NL the under-explored Proterozoic-aged Fraser Range district is now recognised as a very prospective exploration region that is strongly analogous to the prolific Thomson and Cape Smith Belts in Canada. The Thompson and Cape Smith Belt in Canada is host to multiple Proterozoic circum-cratonic intrusiveassociated magmatic nickel-copper deposits which are generally large tonnage, high grade, low operating cost and capital efficient operations.
Andrew Daley Non-Executive Chairman
Level 9 575 Bourke St Melbourne Victoria 3000
Matthew Gauci Managing Director Chris Bain Non-Executive Director
T: +61 (0) 3 9606 3888 F: +61 (0) 3 9606 3800 E: firstname.lastname@example.org WEB: www.pldcorporation.com.au ASX CODE: PLD
PLD managing director Matt Gauci on site in the Albany-Fraser Belt.
The Rocky Gully Project covers a total area of some 1200sq km and is underlain by the Proterozoic rocks with late stage mafic to ultramafic intrusions, which are favourable hosts for nickelcopper sulphide mineralisation. Gauci said planned work programs for the two of the 10 highpriority targets would involve an infill soil sampling program, followed up by a closer-spaced Ground EM survey, and a 2000m reverse-circulation drilling program. “The drilling program in particular, will be seeking to extend known nickel-copper mineralisation, penetrate geophysical targets and to evaluate if magmatic fractionation processes are evident as drivers for magmatic nickel-copper sulphide mineralisation similar to the Nova-Bollinger discovery,” Gauci said. The new direction for the company has had market support, with successful recent capital raisings including a placement that raised $600,000 and a share purchase plan offer that raised $135,000 to put the company in a strong cash position with no debt. Currently trading at under one cent a share, a research note from Bell Potter in December 2013 confirmed PLD’s Rocky Gully Project was “an attractive exploration opportunity with potential to obtain significant results” and gave the stock a buy recommendation. “We have established a 12-month target price for PLD of $0.03 per share on the basis that the company achieves exploration success at Rocky Gully,” the note said.
Taking Stock 2014
Investors look to management track record FROM P3 u
limited, with a 40 per cent decrease in 2013 compared to the peak Recently, nickel had a short-term boost with Indonesia imposing in 2007. In this environment, where capital is tight, we believe a ban on raw nickel exports, which impacts about 20 per cent of it is important to demonstrate to shareholders that the company supply and as such should support prices in the short to medium has good fiscal controls in place which allow maximum funds to be term. Over the last 12 months, nickel prices were down some 20 per cent compared to nickel equities, which have fallen by 35 per spent in the ground or on the project. At the same time, a stable and experienced board is important cent. This places around 40-50 per cent of the nickel producers to drive the company to discovery or feasibility. Investors want underwater and we expect further mine closures to eventuate, to see a clear timeframe to development or drilling, and that which will allow the commodity price to recover. management teams can execute on their promises. It might sound Copper prices have remained relatively stable over the past 12 months, down around 10 per cent (USD terms). This relatively minor, but having a website which is upcompares with the equities which are down about 50 to-date and has the latest company presentation is per cent. Copper tends to be protected from Chinese very important as this will often be the first place control with South America supplying over 40 per investors look to find more information about a cent of global demand. Over the medium term, there company. Analysts can also play a role in bridging is the threat of further supply coming on stream the gap between the company and the investors which could impact prices. and can often be a first port of call once information The small amount of optimism that was creeping is made public. into the coal markets towards the end of 2013 has Underlying commodity prices and exchange been dealt a blow after the benchmark price of hard rates have significant influence on the value of coking coal for the March 2014 quarter was set 9 per resources companies. Over the past 12 months cent lower than the previous quarter at US$143/t. commodity prices have remained weak with the Thermal prices have also edged back down to US$80/t. major commodities being down between 10 per Simon Tonkin Thermal and metallurgical coal prices (USD) are cent and 20 per cent, with the exception being iron Senior Resources Analyst down 11 per cent and 13 per cent respectively over ore. In comparison, the equities have significantly T: 08 9225 2816 the past 12 months while the associated equities are underperformed commodity prices being down Simon Tonkin joined the Patersons team in E: email@example.com down 28 per cent. September 2010 as Senior Resources Analyst. between 10 per cent and 60 per cent, as negative The uranium equities received a short-term boost This follows a successful stint in the United States investor sentiment towards resources continues. and Canadian markets as a resources analyst with Paladin Energy Ltd signing a deal with China The depressed equity values suggest that commoditycovering pricesthecould uranium, base metals and gold Nuclear for the purchase of a minority interest in its Langer sectors. have further to fall or that the equity is significantly undervalued. Heinrich Mine. Uranium prices are down around 20 per cent over Highlights of Simonâ€™s career include outstanding A positive over the past nine months has been the declining stock picks, international the mine past site exposure 12 month with equities up 2 per cent. Australian dollar which has fallen around 17 per cent from its on the North American and regular appearances For investors, despite the negative sentiment toward resources, Business News Network (BNN). highs. This provides some protection for Australian miners against there will be further opportunities for significant capital Previously, Simon worked for Perth-based any future decline in commodity prices. broker Hartleys. He holds appreciation. a Diploma of Applied There will be future exploration discoveries which Finance and Investment from Finsia (now Kaplan) The most significant decline is in gold, with prices down 24 per cent investors. We see opportunities in the tin market specialising in the company will analysis captivate stream. (USD terms) since its collapse in early 2013. Investor sentimentTELEPHONE with08a9225 significant decline in supply due to the closure of several 2816 firstname.lastname@example.org has been battered with our gold producers equities index down by EMAILmines. The macroeconomic outlook for zinc looks good with the almost 60 per cent as junior producers struggle to rein in costs. closure of significant producers over the next couple of years and Iron ore prices have remained well supported with equities LME stocks comparatively low. reacting positively (up 66 per cent) over the past eight months. This is significant for Australia, given that we produce something Patersons Securities Limited Level 23, Exchange Plaza, in the order of 20 per cent of global supply. 2 The Esplanade Perth, WA 6000
Graphite also has significant hi-tech growth opportunities and lithium and its use in batteries cannot be ignored, especially if China adopts electric cars quickly.
Patersons Securities Limited ABN 69 008 896 311 AFSL No. 239 052
Taking Stock 2014
Funding up but exploration and M&A activity continue to fall The latest State of the Market report from SNL Metals & Mining shows that while funds raised by the mining sector in the quarter to end-December outlined a welcome increase, jumping almost three-fold from the (restated) US$2.2 billion raised during the September quarter to US$6.2 billion, the minerals exploration sector recorded lower drilling activity. The report found that while the December quarter was not markedly worse than the preceding three-month period, neither was it noticeably better. It brought to an end what has been a dreadful year for the international mining industry.
International Monetary Fund warned the world’s leading economies against withdrawing their financial stimulus too soon, and expressed concern about the threat of deflation in the Eurozone.
Last year brought a brutal upheaval for exploration and mining companies. With metal prices falling and funding drying up, explorers have been focused on survival, and producers on cost cutting, productivity and better-value deals. The new chief executive officer of Rio Tinto, Sam Walsh, admitted that the industry had become “too focused on growth”.
The outlook for economic growth in China is also uncertain. The country’s economy grew 7.7 per cent (year-on-year) in the December quarter, which was slightly ahead of the recent consensus forecast but down from the 7.8 per cent annualised growth in the September quarter. Also, monthly figures showed that industrial output, fixed investment and retail spending all weakened in December.
The ‘highlight’ in the March quarter last year was a sharp decline in mergers and acquisitions, followed in the June period by even lower commodity prices and a collapse in financing. The September quarter signaled a return of (some) investor confidence to the sector but not for explorers. These broad trends have continued in the three months to end December 2013. There is increased optimism but the exploration scene remains depressed. Drilling activity fell again (except for copper), with an associated decline in new resources and reserves announced during the quarter. There was also a welcome increase in funding during the December quarter, especially from Canada, although most of this was earmarked for producers. Despite the extra funds, the value of mining M&A activity fell again, leaving a total of just US$25.9 billion for the year (227 deals), compared with US$80.0 billion (299 deals) in 2012 (although this latter total did include the Glencore-Xstrata transaction). Most of the deals in 2013 were for gold assets (33 per cent of the total value), with iron-ore transactions accounting for 22 per cent of the total. Taken overall, the funds raised and resultant improvement in cash holdings amongst producers suggest that a more bullish time lies ahead for the industry. Not that a continued recovery in the global economy is certain. In mid-January the
Taking Stock 2014
Nevertheless, confidence is clearly returning to the general market. The first two weeks of January saw US$120 billion worth of deals unveiled, more than twice the value in the same period of 2013. Dealmakers are suggesting that 2014 has all the ingredients to be a vintage year: low interest rates, macroeconomic stability, high levels of cash on corporate balance sheets and a banking sector eager to lend. With excess capacity for the supply of many metals, the mining industry might not benefit to the same extent as the general economy. However, the sector’s turn will come and, in the meantime, there is significant value to be had from the acquisition of development properties. For all the still-gloomy prognostications about the current rates of economic growth, long-term metals consumption is linked fundamentally to per capita wealth and population, and both are growing. The world is still getting richer. Within a couple of decades, a world that is predominantly poor will be mostly middle class, and consuming more metal. Philip Stephens, writing in the Financial Times, notes that Brazil, Indonesia, Mexico, Turkey and Vietnam, for example, will become important consumers. By 2020, another billion consumers may join the ranks of the middle classes.
2014 RIU Sydney Resources Round-up Sofitel Sydney Wentworth 13, 14 & 15 May 2014 Gold Coast Investment Showcase QT Gold Coast Hotel 11 - 12 June 2014 Australian Copper Conference Hilton Brisbane Hotel 17 - 18 June 2014 Australian Uranium Conference Hyatt Regency Perth 16 - 17 July 2014 RIU Good Oil Conference Esplanade Hotel Fremantle - by Rydges 9 - 10 September 2014 RIU Melbourne Resources Round-up Sofitel Melbourne on Collins 24 - 25 September 2014 Mining 2014 Resources Convention Hilton Brisbane Hotel 29, 30 & 31 October 2014 International Events
ChinaMining Tianjin Meijiang International Convention and Exhibition Centre 20 - 23 October 2014
Resource Conference Specialist