The Pick Issue 12 by PPR Publications

Issue 12 December 2013

Australia’s leading investor-focused publication

Titan energy in texas Company-making drilling

market sentiment

Time’s ticking on the next boom

Cape lambert resources Marampa on track to development

Brokers’ best picks Stocks, commodities and sectors to watch

Contents 1

State of the sector Christmas run for the bulls?

sundance resources Set to shine in Africa in 2014

WBHO Civil

Keeping costs down in the Pilbara

baraka energy & resources On target in the Northern Territory

Uranex Ltd Company-making graphite in Tanzania

orinoco gold

Cash plans in Brazil

titan energy

8-9

Drilling its destiny in Texas

Cape lambert

10-11

$80 million dispute close to resolution

golden saint resources First diamonds shipped from Sierra Leone

broker picks

14-15

Tips from the experts

US Market

Why your company needs an ADR

australian market Timeâ&#x20AC;&#x2122;s ticking on the next boom

quick picks

18-19

News from the bourse

sector watch

Explorers yet to feel the love

EDITOR: Denice Rice denice.rice@ppr.com.au

WRITERS: Wayne Cant, Trevor Carlsson, Colin Hay, Danielle Howson, Colin Jacoby, Luke Sizer

Professional Public Relations 1 Altona Street West Perth, WA 6005 Ph: +61 8 9388 0944 WEB: ppr.com.au COVER: Orinoco Goldâ&#x20AC;&#x2122;s Faina project in Brazil.

A publication by DISCLAIMER: PPR has taken care to collect and publish this information in good faith but makes no warranties or representations as to the accuracy of any facts or representations, and has relied upon information provided to it in doing so. PPR does not accept any responsibility for the accuracy of any facts or representations published, or for any opinions expressed. PPR is not a financial adviser, and nothing within the publication is financial or other advice whatsoever. Subject to any terms implied or expressed by the law, PPR does not accept any responsibility for any reliance, loss, damage, cost or expense incurred by any reliance upon this information or anything published by PPR herein, or by acting upon it or for any error, omission or misrepresentation conveyed. The information published is general only and does not take into account any individual objectives of investors.

state of the sector

A Game of two halves As the year draws to a close and the London capital market community wraps up its last deals for 2013 I thought it would be interesting to review the year and speculate how 2014 may open for junior miners. A quick look at the 2013 statistics indicates a year of two distinct halves across both the senior Main Market and AIM market. The first half was marred by a lack of equity issuances generally which was particularly pronounced in the mining sector. Junior miners had to resort to relying on all manners of financing products to keep the lights on given the dearth of interest from the equity markets. As 2013 unfolded the IPO window has increasingly opened. In the last quarter of 2013 London has enjoyed its most fruitful IPO market in many years. London has enjoyed several successful high profile IPO’s with substantial interest and healthy post-market returns. The Royal Mail IPO led the path which was heavily oversubscribed by both institutional and retail shareholders. In fact, the Royal Mail IPO was too successful for the politicians and has drawn its fair share of criticism for being under-priced, although it would have been catastrophic if a marquee IPO of this nature would have been allowed to fail in arguably fragile market conditions. The AIM market has returned to health in 2013 too. Activity in 2013 has overtaken both 2011 and 2012 for total new funds raised by IPOs and the traditionally busy months of November and December numbers have yet to come in. The second half saw a total of 39 companies IPO raising a total of £510m. However, the mining sector has not been a beneficiary of this renewed appetite in comparison to the technology and financial sectors. It should be noted that there was limited activity in the first four months of the year with only £144m raised, however, by the end of October a total of £811m has been raised through IPO’s on AIM. Also, more positively, the AIM market has begun to function again for exiting listed companies. A total of £1.7 billion has been raised during the year to date through secondary raises.

the ability to raise new equity whilst leveraging a “new” story or simply a route to deeper pockets.

The mining sector has drawn only £179m to October 2013 compared to £587m for the full year to 2012 or £1.1bn in 2011 (secondary raisings only). This highlights the relative lack of activity in the sector and the difficulty the mining sector has faced with so many other sector performing well. More positively, the junior mining market has begun to climb out of the

“...it is a relief to see the equity markets return to a degree of normality ... I could not have said that six months ago.”

abyss and a whole swathe of junior miners have now raised capital in recent months, albeit in modest amounts of up to $5m. Shareholders have finally begun to re-enter the sector and look for stories that offer progress over the shorter term. We can now look forward to news in early 2014 from companies updating the market on their projects that were hitherto in hibernation. There is no replacement for positive news to drive sector sentiment and exploration success to act as a share price catalyst. The other positive indicator is the nascent development of M&A activity in the mining sector. A number of juniors have found that this route offers

There are many examples of projects in hibernation that are perfectly feasible but will simply not be supported further by existing shareholders. However, we have finally begun to see juniors adopt a more pragmatic approach to consolidation which has been discussed in recent years. It appears that the equity capital freeze has finally forced management to look away from the hypothetical fully funded project NPV number. More generally, a number of factors have helped drive investor sentiment across the UK market and in mining too. Investors in the UK have more recently been waking up to newspaper headlines reporting positive economic data across recession ravaged economies of the UK and USA and relatively firm commodity prices. Earlier this year both gold and iron ore were under serious pressure but have so far come through better than expected. I look forward to when a number of mining companies begin to report good news and positively surprise investors. I notice that Australia’s home-grown Fortescue has already enjoyed its own positive re-rating following strong operational news. The more pressing question going into 2014 will be whether this interest can be sustained and developed beyond a rally from the doldrums of early 2013. This will invariably be led by macroeconomic issues and mining companies delivering returns to shareholders. However, it is a relief to see the equity markets return to a degree of normality, where IPO’s are successful, companies are raising funds and the capitulation in the mining sector is grinding to a halt … I could not have said that six months ago.

Jonathan Evans Director, Fox-Davies Capital THE PICK December 2013

company news

Sundance set to shine in 2014 With a world-class iron ore asset on the cusp of development in the “African Pilbara” Sundance Resources Ltd (ASX:SDL) is lined up for a transformational year in 2014. The West Australian-based explorer and developer has well and truly settled the dust on the failed Hanlong Mining takeover deal and refocused on developing its flagship African iron ore project.

Sundance has moved quickly in recent months to secure both the permitting and the working capital required to finalise the funding process for its giant Mbalam-Nabeba iron ore project.

Mbalam-Nabeba ranks as the biggest undeveloped direct shipping ore (DSO) iron ore project in Africa not held by the majors. The project, which is based around a group of iron ore deposits covering the border of Cameroon and the Republic of Congo, has a current resource of 775Mt of DSO at 57.2 per cent iron, with 436Mt in reserve at 62.6 per cent iron. Unlike many of its West and Central African peers, the Mbalam-Nabeba deposit is build-ready with a full feasibility study, rail concession, mining convention and export agreements in place, effectively giving Sundance firstmover advantage in an area described in recent research as “fundamentally outstanding and of strategic importance”. While Mbalam-Nabeba is an integrated mine, port and rail project, Sundance managing director Giulio Casello said the company had taken the strategic decision to financially separate the development of the port and rail infrastructure from the mine development and its associated iron ore product sales. “The decision to do this was driven by the fact that approximately 70 per cent of the capital expenditure for Stage 1 (estimated at A$4.7 billion) is associated with the port and rail infrastructure development,” he said. Development will include the construction of a 580km rail line to transport the ore to the Cameroon coast

and construction of a new deep-water iron ore export terminal, which will be designed for future increased capacity of up to 300,000 DWT “China-max” carriers. With targeted annual production capacity of 35Mtpa for a minimum of 30 years, Stage 1 of the development will focus on producing DSO-quality highgrade hematite over a 10-year period, with the second 20-year stage producing 35Mtpa concentrate product from itabirite hematite. Sundance recently finalised legally binding agreements to raise $40 million, through the issue of convertible notes and options to notable strategic investors including Noble Resources, which will give the company sufficient capital funding while completing the project development negotiations. Construction is expected to commence in 2015 with first production scheduled for 2018. Sundance is currently waiting on the tender documents to be submitted by interested international Engineering, Procurement and Construction (EPC) contractors for the infrastructure construction and debt financing following commencing the tender process in October 2013. It is expected that the company will review submissions with a view to finalising an agreement with the preferred EPC provider in Q1 2014. Sundance has also issued term sheets for the sale of equity and take-or-pay iron ore off-take agreements for the project which will be used as security to fund the EPC infrastructure contracts. Conclusion of the off-take and equity agreements will align with the conclusion of the EPC tender process early next year, fundamentally positioning Sundance to take the leap into development of a world-class iron ore project.

www.sundanceresources.com.au 4

THE PICK December 2013

company news

WBHO Civil keeps a lid on cost pressures in the Pilbara “Completed on time and on budget” are words that are often missing from the mix during project development in the resource sector in Australia, but not for civil construction company WBHO Civil. Against a background of dampened economic sentiment and growing emphasis on the cost of doing businesses in Australia, WBHO Civil last month announced it had completed, on time and on budget, the first two contracts of its flagship Technical Ammonium Nitrate (TAN) project on the Burrup Peninsula near Karratha, Western Australia. Managing director Will Grobler acknowledged that completing the first two contracts on time and on budget was “a significant achievement in the current WA cost environment”. “We look forward to replicating this success on our other A$82 million civil works contract for the TAN project over the next 16 months,” he said. “Our track record and expertise in providing specialised civil work and long-term maintenance services in Western Australia was an important factor in being awarded a significant tranche of the US$600 million TAN Burrup project.” The total end project value of contracts for WBHO Civil on the TAN project is A$113 million. The first two contracts were completed

over 11 months for a total value of A$31 million, which included A$24 million for services covering site preparation (excavation, trim and installation of perimeter drainage pipes) and A$7 million for services relating to the construction of temporary facilities (fabrication and installation of office and warehouse facilities). WBHO has now commenced its third contract at the TAN Burrup project. This contract is worth A$82 million and focuses on specialised civil works services, including detailed earthworks; in-situ concrete works (foundations, pedestals and slabs); installation of site services (sewerage and electrical ducting); and access and internal road and pavement works. The project is scheduled for completion by March 2015, with full operation expected to commence in the third quarter of 2015. The TAN project contracts were awarded to WBHO Civil by leading international engineering and construction company Técnicas

Reunidas. Located adjacent to the existing ammonium plant in the Burrup industrial estate, the plant will produce each year an estimated 330,000t of technical ammonium nitrate, which is the base ingredient for explosives to meet demand from the fast-growing iron ore mining operations in the Pilbara region of Western Australia. The site will include two storage facilities for the finished product, a bagged product storage facility and a bulk storage facility for the overflow of product ready to be bagged. WBHO Civil formed from the acquisition of CECK, established in 1987, Carr Civil Contracting and Northcoast Contractors by WHBO Australia, empowering a strategic alliance with internationally renowned South African Company WBHO Construction. With a long-standing reputation for successful projects across WA, WBHO Civil provides integrated innovative solutions, high quality products, an international pool of resources and extensive local and industry knowledge.

www.wbhocivil.com.au THE PICK December 2013

company news

Baraka-Statoil on target for Bakken-style oil shale in NT When you find a company that has assets valued at an estimated $74.5 million, has its project located in one of the hottest frontier onshore oil and gas plays in the world but has a market cap of only $12 million; then you know you are on to something with tremendous uplift in potential value. Information Administration (EIA), are both present within its two licences.

That is certainly the case with Australian oil and gas junior Baraka Energy and Resources Ltd (ASX:BKP, Frankfurt Exchange RBD:GR) which is on the cusp of major re-rating opportunities in 2014.

Alongside the new seismic data that has been closely analysed by Statoil’s highly regarded technical teams, the exploration risk for the 2014 drilling program has been significantly reduced by the 2012 Owen-3H well which produced a 32m section of core that was seen to “bleed” considerable amounts of oil, and is located immediately to the North of the anticipated drilling program on Baraka’s EP-127.

This includes its participation in a multiwell drilling campaign with one of the world’s great oil and gas companies, Statoil, in the Georgina Basin in the Northern Territory, Australia. Backed by the results of a 304km, 2D seismic survey over the EP-127 and EP-128 exploration permits and the technical input from Statoil’s Norwegian technical team, where Baraka holds a 25 per cent working interest, the Statoil led JV is looking to spud its first well in the second quarter of 2014, after the completion of the 2013/2014 wet season.

While the shale oil and gas potential contained in EP-127 and EP-128 is a tremendous opportunity, Baraka Energy is also excited by the “conventional” oil potential within the permits. Previous independent studies conducted by the highly respected Ryder Scott highlighted a number of conventional prospects and traps in the permits which has been estimated to have the potential to contain up to 47 million barrels of recoverable oil at the Unrisked Prospective level and up to 374 million barrels at the Unrisked, Undiscovered level.

A final decision has yet to be made on the location of the wells and the size of the drilling program, but whatever the number, it will be closely watched by an industry that has identified the Georgina Basin as a prime location for potential shale oil and gas riches and is considered to be analagous to the prolific oil producing “Bakken” oil shale play in Canada/USA.

Baraka is hoping that Statoil will consider testing those targets in the course of its future exploration and drilling programs.

A Ryder Scott report written for Baraka stated: “We believe the Southern Georgina Basin, Onshore Australia, is one of the most Prospective Onshore Basins in Australia.” Global oil and gas giants such as Statoil and Baraka’s near neighbour Total of France, have come to the Georgina Basin with massive budgets, targeting an area that is known to have very thick, oily shale sections and huge potential. While a total of only 29 test wells have been drilled in the Georgina (compare that with the hundreds that have been drilled in the Marcellus Shale in North America), the basin was recently estimated by Ryder Scott to have the potential to contain total risked shale oil and condensate in-place of 25 billion barrels and total risked wet and dry shale gas of 67 trillion cubic feet 6

THE PICK December 2013

barakaenergy.com.au (Tcf). Those are not just company making numbers, they are country changing numbers. The good news for Baraka and its shareholders is that both Dulcie and Toko Synclines, the prime target areas for shale oil and gas identified in that recent report released by the U.S. Energy

With Statoil committed to spending up to $175 million on exploration activities in its Georgina Basin permits by the end of 2016 and Total planning to outlay up to US$190 million on exploration programs over four blocks, including EP-132 which adjoins Baraka’s EP-128 permit, and the others sitting to the south of EP-127, Baraka and its shareholders are in for a very exciting ride on the back of these global oil and gas giants and some worldclass prospectivity. Baraka’s share register is increasing with the addition of investors from Hong Kong, Singapore, China and other Asian countries.

company news

Uranex drills big numbers on its Tanzanian graphite deposit The year 2013 will go down as a company-changer for diversified Australian explorer Uranex Ltd (ASX:UNX) with the exciting discovery of a potentially world-class graphite deposit at its 100 per cent owned Nachu project in the south-east of Tanzania. Investors recently recognised the potential in the project with the company raising $2 million late last month to fast-track a diamond drilling program with the aim of producing a maiden resource and scoping study in Q1 next year.

to be extremely excited as the project moved from strength to strength. “We see great potential in our project with 829 hectare of strong conductor zones. Additionally, we now have the Uranex moved quickly after discovering the deposit in confidence of our shareholders and the financial certainty to March this year. A maiden reverse cycle drilling program on take this project to the next level,” he said. targets identified by an electromagnetic survey has confirmed The tenement is located approximately 200km by road to the mineralisation over an 829 hectare area, with large flake sizes port city of Mtwara. and excellent grades (up to 54.7 per cent graphitic carbon Many analysts believe increasing industrial uses for graphite content) identified. and its in-demand derivative graphene have the potential to Uranex CEO Rod Chittenden said double, or even triple, demand for that with 51 out of 52 holes drilled in graphite in coming years. the target area showing significant Between 2008 and 2012, highintersections of mineralisation quality graphite tripled in price. It is and with several holes still open at graphite’s ability to act as an energy depth (beyond 70m), the RC drilling store in the batteries that power the program had been a fantastic result www.uranex.com.au mobile devices that increasingly run for the company. our lives and the cars we drive , and “It is very pleasing to have a drill will drive in the future, that has put program confirm our original assessment that there is a very it in the spotlight. The lithium-ion battery in Nissan’s Leaf significant amount of mineralisation on this tenement,” he electric car, for example, contains 40kg of graphite. Graphite said. is also a key component in solar panels and nuclear power “Added to the quality of this discovery, the company is well stations. supported by an experienced board and management team One of the biggest supply side factors affecting graphite at the with specific skills in project development from the exploration moment is China, which has emerged in the past decade as a major global supplier but recently introduced a 20 per cent through to mining and production. Uranex is confident of significant exploration upside at Nachu, export tariff on graphite. According to the Chinese Ministry of Science, the government aims to have one million electricwith the original EM survey taking in only 40 per cent of the powered vehicles on the road by 2015. tenement package. The combination of predicted supply side constrains and Multi-element analyses completed to date by Uranex has demand-side pressures look set to provide Uranex with indicated there are no deleterious elements included in the the perfect cost environment in which to develop what the mineralisation. company believes could well shape up to be one of the world’s Uranex chairman Johann Jacobs said the board continued largest know graphite deposits. THE PICK December 2013

company news

Cash plans come together for Orinoco in Brazil Precious metals explorer and developer Orinoco Gold (ASX:OGX) is seeing its near-term development plans fall neatly into place with the return of some impressive gold recoveries at its Faina project in central Brazil. Orinoco last month reported that bulk samples from the Cascavel high-grade target within the Faina project had returned gravity gold recoveries of 94 per cent, with total contained gold results still pending at the time of going to press. The 70 per cent Orinoco-owned Faina project also hosts the extensive Tinteiro target which recent exploration has shown to have the hallmarks of being a massive iron-oxide-copper-gold project. Orinoco managing director Mark Papendieck said that while the highgrade Cascavel target was perfectly positioned to provide short-term cash flow, the big picture took in the huge potential the company saw in Tinteiro, which had recently emerged as an exciting polymetallic target. “We are very pleased with initial recovery results from Cascavel because they confirm that a very high percentage of the gold is amenable to gravity recovery,” Papendieck said. “Bench-scale metallurgical testwork shows that we can recover 94 per cent of the gold from a gravity circuit alone, which clearly has some very positive implications. “When combined with the fact that

these excellent gravity recoveries were achieved with a very coarse grind, we remain confident that any potential operations at Cascavel will have significant advantages in terms of both capital and operating costs given the free nature of the gold. “These excellent gravity recoveries at such a coarse grind size clearly demonstrate the potential for development of a gold operation at Cascavel, with a gravity only operation requiring lower capital and operating expenditure, and having a smaller environmental footprint, than a circuit requiring cyanide to recover the gold.” Orinoco estimates capex of $10 million for a simple gravity plant at Cascavel where preliminary works have begun for a 200m exploration decline and collection of a ~500t bulk sample. Papendieck said near-term cash flow from Cascavel would be directed to developing Tinteiro, where the

most recent fieldwork had identified previously unknown gossans, breccias and old artisanal workings. The Tinteiro trend is a plus 4km set of geophysical and geochemical anomalies associated with favourable structural sites and high-grade silver intercepts up to 17.6m at 1,263g/t at the system’s edges. Current exploration at Tinteiro is focused on delineating drill targets for an initial drilling campaign expected to take place in early 2014. Results from rock chip sampling to date include: 23.9g/t gold, 0.4 per cent copper, 41 per cent iron, 0.0125 per cent uranium, 1 per cent cobalt and 0.6 per cent nickel. Papendieck said company’s decision to develop the total Faina project by firstly generating cash flow from Cascavel, then using that cash flow to assist in the development of the larger Tinteiro target meant shareholders had the best chance at a greater final share in what was a potentially world-class project. “Added to the potential we have already established is the very real potential of finding repetitions of those structures within the 194sq km Faina tenement package,” he said.

www.orinocogold.com 8

THE PICK December 2013

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PROJECT MANAGEMENT THE PICK December 2013

While 1.2 million barrels of oil may not seem like a large amount of oil when you think of the size of some of the fields being developed by the petroleum majors, however, for a micro-cap sized junior oil company like Titan Energy Ltd (ASX: TTE) it represents a potentially company-changing sized project.

Young Titan ready to drill its destiny in Texas Titan Energy recently announced it had received an independent report that had estimated that the initial targeted drilling site within its Perry Ranch project area in Texas has prospective total, 2P recoverable reserves of more than 1.2 million barrels of oil. NB, that is recoverable oil in an area where there is already significant oil production infrastructure which makes commercialising any drilling success quick, cheap and easy to develop. Estimates that a 1.2 million Perry Ranch oil discovery was worth approximately A$120 million has grabbed the markets attention, particularly when it was equated to Titan Energy’s market cap of just over A$5.2 million.

Located on the eastern flank of Titan Energy’s currently producing Allen Dome oil field in Texas, Perry Ranch has ticked all the boxes for Titan Energy’s board and the company’s experienced US Chairman, John McKnight.

“We have been intrigued by the prospectivity of the eastern 10

THE PICK December 2013

company profile flank of Allen Dome ever since we acquire control of the northern and southern flanks of the Allen Dome salt dome in early 2012. “While undertaking our successful workovers and our JT Reese #S2 oil and discovery on the northern flank of the dome we have noted that the data was encouraging towards the East Flank of the Dome. A few of the old timers have also suggested to us that the eastern flank was the place to look,” Mr McKnight said. Those indications were quickly validated when Titan Energy obtained 3D data covering the area soon after it acquired a 100 per cent working interest in the 302 acre Perry Ranch project in April 2013. The first thing that jumped out was something that created tremendous excitement within the Titan Energy team was that the potential reservoirs may be thicker and the structures very much larger than those that have been producing oil on the northern and southern side of the dome. That has certainly been validated in Titan Energy’s reprocessing of the 3D data using time and depth migration, its new contour structure maps and log data from surrounding wells. That information was utilised by independent consultants Energy Recovery Concepts’ report which assessed potential reserves in sands identified at depths of 2600 foot, 3300 foot and 4000 foot, along with a deeper Basal Miocene target at 5200 foot. Energy Recovery Concepts is probably best known in Australia for its work with another ASX-list Texas salt dome specialist, which also started out targeting smallish oil pools in historically proven salt domes and now has a market cap of $240 million. It has estimated that the 2600 foot sand at Perry #1 Prospect location to have potential 2P recoverable reserves of 376,995 barrels, the 3300 ft sand a further 424,119 barrels, the 4000 foot sand an additional 235,622 barrels and the Basal Miocene a further 188,498 barrels, for combined potential total of 1,225,234 barrels of oil. Depending on rig availability, Titan Energy is targeting the spudding of Perry #1 in the first quarter of 2014.

Sargent Ranch 1.1M boe opportunity

Titan has also received an independent assessment of the remaining reserves contained in the Sargent Ranch project in Texas. Formerly operated by leading Australian oil and gas company Santos Ltd in the early 2000s, the Poole #3 well at Sargent Ranch was shut in after suffering mechanical issues. However, Titan Energy now believes that 10 years later with a lift in gas prices and an opportunity to undertake a workover program with new technology can provide significant value to it and its shareholders. That confidence has been supported by Energy Recovery Concepts’ in-depth Independent Technical Specialist’s report on its estimate of the remaining reserves in the Poole #3 well. A third party, private independent oil & gas company, is currently negotiating with Titan for a 50% working interest in the project . The ERC report has estimated there is a total 184,000 barrels of oil and 5.5 billion cubic feet (bcf) – or approximately 1.1 million barrels of oil equivalent (boe)

– remaining in the Poole#3 well location. This is in range of a previously Ultimate Recovery (EUR) estimate for the Sargent Ranch area. Previous studies have suggested that the Poole #3 well has the potential to produce upwards of 75 barrels of oil (bopd) and 1 million standard cubic feet per day (mmcfd). Titan Energy US Chairman John McKnight said, “Sargent Ranch offers a low cost opportunity to add to new production and cash flow. “The project area is located just three miles (4.8km) west of our Allen Dome oil field and offers significant synergies for the company,” he said. Titan Energy is currently negotiating for the use of the very significant production and processing equipment that is in place at Sargent Ranch and hopes to begin activities there in early 2014 with a re-entry of Poole #3 well.

Multi-well opportunities

Drilling at Perry Ranch and Sargent Ranch would herald the start of a very busy period for the company with the potential to participate in the drilling of upwards of six wells in a range of projects where it holds interests in Texas, Colorado and Louisiana in the USA, and in the Perth Basin in Western Australia. Each of these wells is independent of each other and has the potential to create significant shareholder value for the backers of this dynamic young oil and as explorer and producer.

www.titanenergy.com.au THE PICK December 2013

$80M dispute near closure as Africa fires up for Cape Lambert Cape Lambert Australian mineral investment company Cape Lambert (ASX:CFE) has moved substantially closer to recovering a disputed $A80 million payment from Metallurgical Corporation of China. The breakthrough in the long-running dispute came when MCC agreed to comply with an order from the Singaporean arbitrator hearing the dispute to deposit the $A80 million being claimed by Cape Lambert into an Australian escrow account pending the outcome of the arbitration. The long-running dispute with MCC relates to a contingent payment due to Cape Lambert associated with the $A400m sale of the Cape Lambert magnetite project in Western Australia in 2008. The $A80 million payment is highly material to the company. Cape Lambert executive chairman Tony Sage said the company remained confident in the veracity of its claim and having the funds in escrow meant it could now also be confident about the enforceability of the arbitrator’s final decision. “While not an outcome of the substantive legal dispute, we believe the fact MCC has now complied with the order from the arbitrator and deposited $A80 million into an externally controlled escrow account in Australia, pending the outcome of the legal action, is important and may see a resolution to this matter in a more expedited fashion,” he said. The terms of the original sale of the Cape Lambert project to MCC were for an upfront cash payment

of A$320m, with a further payment of A$80m due upon the granting of a mining permit, or if MCC had not used its reasonable endeavours to procure the mining approvals, within two years. The basis for Cape Lambert’s claim is that MCC did not undertake reasonable efforts to obtain the mining permit. The payment by MCC into the escrow account on November 25 2013, also puts Cape Lambert in a strong bargaining position to force a more favourable outcome. The arbitrator has indicated a final decision on the dispute will be made in 2014.

Marampa Iron Ore Project

Latest analysis and research on the African iron ore sector has also been further positive news for Cape Lambert and its flagship 100 per cent owned Marampa iron ore project in Sierra Leone. Marampa, which is at the development and permitting stage, has a total JORC mineral resource of 681Mt at 28.2 per cent iron (above a cut-off grade of 15 per cent iron). A scoping study on the Marampa has outlined three separate development scenarios for the project which trade off a lower capex 5Mtpa option with two staged development options moving to 15Mtpa. An environmental licence has already been issued for the project, which marked the first key step in the permitting process and Cape Lambert recently lodged a mining licence application for the project with the authorities. The granting of the mining licence, which Cape

www.capelam.com.au 12

THE PICK December 2013

Lambert anticipates will occur early in Q2 2014, is the final key step in the permitting process for Marampa. Sage said granting of the licence would derisk the project and add value from a potential investor’s perspective by providing a clear path to development. “The granting of the mining licence is the last key hurdle for progressing the Marampa project to eventually become Sierra Leone’s third iron ore producer,” Sage said. “Marampa has demonstrated to be a financially robust project and gaining the necessary governmental approvals will significantly enhance the asset’s appeal to potential investors, in turn adding significant value for our shareholders”. Consistent with Cape Lambert’s business model - to acquire distressed or undervalued projects, add value and then realise that value - the company plans to sell Marampa either via a trade sale agreement, or through listing on London’s AIM exchange once market conditions improve. The project was originally scheduled for listing in late 2012; however, Cape Lambert took the decision to delay the process due to weak capital markets. A research note released by Investec Mining Research late last month identified six West African iron ore provinces with which it believes will attract the attention of China as investment targets because of their proximity to infrastructure corridors and the opportunities they present for collective development. “We believe that China is uniquely positioned and incentivised to collectively develop West African iron ore projects, as an alternative to its overdependence on Australian/Brazilian imports, pushing the marginal cost, and price, of iron ore lower,” the note said. High on the list of what Investec believes will be preferred investment targets is Sierra Leone,

where it cites the advantage of infrastructure sharing arrangements that are already in place between Cape Lambert’s Marampa project and African Minerals, with its Tonkolili project. An infrastructure agreement with African Minerals Ltd provides Marampa with access rights to export 2Mwtpa (wet-equivalent to 1.8 Mtpa dry) of concentrate via the recently refurbished and currently operational Pepel rail and port infrastructure. Additionally, African Minerals has an option to purchase 2Mwtpa of Marampa concentrate at mine gate for the first three years of production. Investec says there is considerable scope for China to develop a >50Mtpa iron ore hub in Sierra Leone, which in addition to significant existing infrastructure has the added advantage of government support for the development of iron ore exports. “The economics of developing West Africa into an iron ore hub appear highly appealing for China … given China’s dependence on imported iron ore, and high levels of fixed asset investment – most of it by local governments,” Investec said. “Under nearly any imaginable scenario, we believe China would achieve a double digit internal rate of return by constructing incremental iron ore supply and thereby pushing down the marginal cost of iron ore production as well as accelerating the change to marginal pricing from incentive pricing.” In addition to the Marampa project, Cape Lambert also has exposure to iron ore, copper, gold, uranium, phosphate and lead-silver-zinc assets in Australia, Europe, Africa and South America.

Resources Ltd

THE PICK December 2013

company news

First diamond shipment for Golden Saint AIM-listed Golden Saint Resources (LON:GSR) last month delivered on its promise to shareholders for early delivery of uncut diamonds from its Sierra Leone diamond fields with the export of its first shipment of around 400 carats of diamonds. Golden Saint is a diamond and gold exploration company that holds three exploration licences in Sierra Leone: Tongo which is prospective for diamonds; Baja which is prospective for gold and diamonds; and Moa which also is prospective for gold and diamonds. Last month’s shipment of uncut white, brown and yellow diamonds, varying in size from one carat up to 13.9 carats, was achieved just under 120 days after the company listed. The shipment of gems was delivered to Perth, Western Australia, where they will be sorted by Golden Saint’s JV partner, Solid Gold Jewellers, before being sent to be cut, polished and GIA (Gemological Institute of America) certified, a process which the company says should take no longer than 90 days. The cut and polished diamonds will be laser inscribed with the letters “GSR”. Once cut, polished and certified, the diamonds will, initially, be offered to members of the company’s Diamond Club, before being sold more

widely. Diamond Club members are shareholders that hold at least 10,000 ordinary shares of nil par value in Golden Saint Resources. The sale of these diamonds will represent the first revenue for the company. Executive chairman Cyril D’Silva said the company was thrilled to have delivered on this near-term objective, which gave Golden Saint further confidence in its longer-term development strategy. “We are delighted that Golden Saint is producing gem-quality diamonds and will soon be in a position to sell them to the market,” he said. “The initial sale of these diamonds is being offered to larger shareholders of the company as a sign of our gratitude for the continued support that we receive.”

Golden Saint listed in June 2013 with a two-part strategy to commence nearterm small-scale alluvial diamond and gold mining at the Tongo and Baja project areas; and secondly to identify gold and diamond assets on all of the exploration licence areas for large-scale mining. A recently granted export license also allows Golden Saint to buy stones from registered artisanal and small-scale miners not only on all of its three licence areas, but as well as from surrounding areas. The company currently has one diamond washing plant operating on its properties, with a second expected to arrive in mid-January 2014. Golden Saint has also recently purchased four gold-washing plants. The Golden Saint properties are situated within the Archean Man Shield, part of the West African Craton which has extensive known deposits of both diamonds and gold. One of the largest ever gems found was the 969.8 carat Star of Sierra Leone, which was discovered in Sierra Leone in 1917. Exploration efforts for the coming 12 months will concentrate on detailed data sampling and interrogation of the licence areas, including high-resolution satellite imagery from the just-completed airborne magnetic surveys, continuing interpretation of geological data, desktop studies, geological mapping and logistics, geochemical sampling, sample processing, bulk sampling of alluvial targets and upgrading access roads in preparation for further exploration and mining activities. The following year, the company expects to be in a position to commence drilling and constructing camps in strategic locations within its exploration licence areas as well as continuing to expand its alluvial operations on all its areas, with near-term revenue being the main focus of its operations.

www.goldensaintresources.com 14

THE PICK December 2013

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S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of Avestra Capital Pty Ltd (AFSL No. 292464). The past performance of stocks in our portfolio is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. Stocks in our portfolio, like all other financial products, are subject to market forces and unpredictable events that may adversely affect future performance. Any advice is general advice only. Your personal objectives, financial situation or needs have not been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice. S3 Consortium Pty Ltd does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of these reports. Investors should consider these reports as only a single factor in making their investment decision.

THE PICK December 2013

broker picks

Stock picks for Q1 2014 Platsearch (PTS): PTS is the only company in the world to hold exploration leases in France. Its employees, formerly from BRGM, know where the good deposits are and how to get French title. PTS have first pick and a head start over areas of known, high-grade mineralisation. MetalsX (MLX): MLX produces tin; cash costs in the September quarter were about $16k/t. MLX recently purchased two operating gold mines for $40M, which in the September quarter generated a cash surplus, after all costs, of $15m.

Commodity to watch in Q1 2014 Pieter Bruinstroop

Tin: Demand peaked in 2007 at 373kt and was just under 340kt in 2012. A major contributor to the fall was miniaturisation; a desk-top computer uses about 6.3g of tin solder, a laptop about 3.0g and a tablet about 1.0g. Even so, the market is near balanced and supply will continue to struggle.

Sector to watch in 2014 Q1

Fertilisers: The Potash cartel has held prices high but the cartel was broken on 30 July when Russian company Uralkali exited part of the cartel predicting prices could fall below $300/t as a result. BHP and many juniors are working on projects so that despite high demand growth, supply could be excessive.

Stock picks for Q1 2014 Fitzroy River Corporation (FZR): FZR holds a 2 per cent royalty interest over most of the central Canning Basin region, including the promising Ungani oil trend. Shareholders should feel like a Wright or Hancock. Woodside Petroleum Ltd (WPL): WPL shareholders will thank management for resisting the urge to splurge on coal seam gas and shale gas in years to come as the price of oil rises in real terms.

Commodity to watch in Q1 2014 Tin: Hot commodity for 2014 will be tin. Ongoing shortage of new production combined with expanding new uses should support prices for this boutique metal.

Peter Strachan

Sector to watch in 2014 Q1 Shale oil and gas: The sector to watch in early 2014, for all the wrong reasons, will be shale oil and gas. By 2017, growth in this business will be peaking out in the USA. High costs will limit early expansion of shale gas in Australia, so caution is recommended.

Stock picks for Q1 2014 Minotaur Exploration (MEP): Well managed, cashed up junior with a copper-gold tenement package in WA and QLD built through the takeover of Breakaway Resources. Early target generation has already been successful, with development assets to be monetised or the subject of JVs. Ramelius Resources (RMS):Undervalued and unloved WA gold producer with recent share price weakness a result of a ball mill motor failure at the Mt Magnet Mine. Once rectified, higher grade ore is to be sourced and all-in costs could fall further from $A1300.

Commodity to watch in Q1 2014 Tony Locantro

Zinc: The much-maligned base metal is set for a change of fortune as mines close and head grades fall. The potential “supply crunch” expected in late 2014/early 2015 is also the result of a lack of investment in the sector, with delays expected in new operations and firing up mothballed mines.

Sector to watch in 2014 Q1

Australian ASX gold producers: Gold producers have been decimated over the past 2 years with the likes of Newcrest down 73%, St Barbara 83% and Perseus 87%, the sector is priced for failure. Gold bulls haven’t given up and are “Yellen” for a continuation of QE as the US economy continues to struggle for traction. M&A the likely driver that could see a rejuvenation of the “Australian mid-cap gold sector”.

THE PICK December 2013

broker picks Stock picks for Q1 2014 Tangiers Petroleum (TPT): Focus is on the Tarfaya Block, in current exploration hot spot offshore Morocco, retaining 25% following a farm-out to operator Galp Energia which has 50%. TPT are freecarried for the first well planned for H1 CY14. Cash of ~ $20m and highly regarded management. Liquefied Natural Gas (LNG): Only ASX listed with exposure to the US LNG export market. Rapidly closing in on development of the Magnolia Project in Louisiana USA, and 4Mtpa of LNG. HOAs in place with two customers and an equity funding package already in place.

Commodity to watch in Q1 2014 Oil, Copper, Zinc: Preferred commodities are those leveraged to growth in China and the US. We favour copper and oil in the short-medium term and in the longer term, zinc - prices will rise with the demand/ supply gap tightening and as older mines, such as MMG’s Century mine, shuting down in coming years.

Mark Hinsley

Sector to watch in 2014 Q1

Technology: Driven by smart phone use, the mobile advertising thematic is growing at phenomenal rates. Marketers have seen a drastic change where dollars are spent when it comes to online advertising and investors are seeking exposure to expanding markets. Billion dollar valuations on companies such as Facebook, Twitter, LinkedIn, Instagram, Tumblr and Snapchat is testament to the interest in this space.

Stock picks for Q1 2014 Regal Resources (RER): Acquired the high-grade Kalongwe copper project, 15km from Ivanplats’ Kamoa Cu project in the DRC. Historical drilling includes: 90.23m at 3.38% Cu and 0.93% Co, and 77.60m @ 4.14% Cu and 0.57% Co. Planning a program of infill and extensional drilling shortly. Base Resources (BSE):Recently began production, delivering on a schedule set in 2010 when construction commenced. The highest margin mineral sands producer in the sector, with revenues secured under what are effectively “take or pay agreements”. A robust balance sheet.

Commodity to watch in Q1 2014 Duncan Hughes

Zinc: Supply growth is moderating in response to years of low pricing. Majors have not invested in new zinc projects and a supply gap is emerging as mature mines are depleted. Inventories are high but are falling. Improvement in key consuming industries such as construction and automotive should also support prices.

Sector to watch in 2014 Q1

Junior mining: We see several opportunities in the junior mining sector. The sector has been oversold. A number of junior miners have had dramatic share price growth in recent weeks, especially on London’s AIM market. There are opportunities to invest in undervalued high-grade resources, development projects that require minimal capital expenditure and those with near-term cashflow.

Stock picks for Q1 2014 Caravel Resources (CVV): CVV as purely an exploration play is as exciting as one can get. Getting First Quantum Minerals as a 12.9% shareholder is a tick of approval for its assets and current drilling program at Calingiri project is on track to confirm the area as a new base metal district. Independence Group (IGO): IGO is making reasonable amount of cash at all its operations and with capex requirements subsiding NPAT is set for an uplift in FY14. Tropicana is the growth engine and we expect substantial cashflows over the coming years.

Commodity to watch in Q1 2014 Gold: Currently unloved with no near-term catalysts but we think the downside is limited with many producers struggling. A drop to $1,000/oz could see a substantial number of mines not viable. We expect a bounce to over $1,300/oz and with AUD/USD weakening the gold price Australian producers enjoy might get even better.

Peter Kopetz

Sector to watch in 2014 Q1

The IPO sector: A successful October/November saw investors take to new stories. A number of floats did extremely well such as Virtus Health (VRT), OzForex (OFX) and Freelancer (FLN) to name three. We expect other new upcoming floats to do well such as Veda (VED) and Q1 14 looks promising.

THE PICK December 2013

US market

Why your company needs an ADR Publicly-traded Australian companies that are seeking access to the U.S. market have no simpler, more cost-effective tool than the American Depositary Receipt (ADR). Established in 1927, ADRs have been used by non-US companies for decades as a means to increase their US share ownership without the expense of a full US stock market flotation. Today, there are approximately 2000 ADRs of international companies trading in the U.S., 75 per cent of which trade on the OTCQX, OTCQB and OTC Pink marketplaces, operated by OTC Markets Group. Approximately 150 of these are of Australian companies ranging in size from multi-billion market cap global companies like BHP Billiton (NYSE: BHP) and Fortescue Metals Group (OTCQX: FSUGY) to smaller, global growth companies like Novogen (Nasdaq: NVGN) and Starpharma Holdings (OTCQX: SPHRY). What is an ADR? ADRs are US securities that represent shares of a foreign company traded in the US. They are issued by a US bank, which is called a “depositary bank,” and trade on the New York Stock Exchange and NASDAQ, as well as the OTCQX and OTC Pink marketplaces. There are two different classifications of ADRs – sponsored and unsponsored – and four different types of ADR – Level I, Level II, Level III, and SEC Rule 144A or Regulation S ADRs. Sponsored ADRs are issued by a depositary bank appointed by an issuer company and are the focus of this article. Sponsored Level I ADRs trade on the OTCQX, OTCQB or OTC Pink marketplaces and are the simplest way for non-US companies to access US capital markets. Companies that establish a sponsored Level I ADR are not required to register with the US Securities and Exchange Commission (SEC), yet they benefit from making their home country disclosure available in the US to facilitate US investors analysing, valuing and trading their securities. Companies with a sponsored Level I ADR program that have committed to publishing their disclosure in English in the US may qualify for OTCQX, the best marketplace of the US off-exchangetraded market. ADRs that trade on OTCQX are more visible to US investors and are, on average, more actively traded

What are the benefits of ADRs to companies?

than ADRs that trade on the OTC Pink and OTCQB marketplaces. Sponsored Level II and Level III ADRs enable non-US companies to raise capital or make US acquisitions. They can trade on a US stock exchange but require SEC registration and US Sarbanes-Oxley Act compliance, as well as the ability to meet the listing requirements of the exchanges. In addition to the three levels of sponsored ADR programs, a non-US company can also access the US capital markets through an SEC Rule 144A private offering or an SEC Regulation S offering which become tradable as US depositary receipts after a seasoning period. Non-US companies that raise capital in these offerings need not register with the SEC, yet Rule 144A offerings can only raise money from qualified institutional buyers (“QIBs”) in the US while Regulation S offerings can only raise money offshore from non-US investors.

There are numerous benefits to ADRs for non-US companies: • Increased visibility and access to the US capital markets, the deepest pool of investable capital in the world • Enhanced reputation for a company’s products or services with customers, suppliers and other stakeholders • A flexible mechanism for raising capital in the US and a vehicle or currency for US mergers and acquisitions • A vehicle for employees of subsidiaries located in the US to invest more easily in the parent company Seventy per cent of all ADRs are held by US institutional investors and funds, so they can be a great way to increase US institutional ownership of your stock. For example, there are currently 3000 US institutions that hold Level I ADRs ranging from the largest US fund management companies like Thornburg, Vanguard and BlackRock to smaller regional institutions.

Contact: OTC Markets Group’s Corporate Services division at +1-212-896-4420 or issuers@otcmarkets.com.

THE PICK December 2013

Australian market

Time’s ticking on the next boom While the boom-bust cycles of the mining sector are well documented, picking the top and bottom of those cycles has never been an exact science, however there are consistent pointers that investors can look for.

History provides a consistent record of sector valuations increasing in a boom and then collapsing in a bust over periods of 5 to 10 years. These cycles are associated with the value of mining equities as they are driven by liquidity, usually in response to sentiment. Several previous mining booms have been the result of industrialisation of large Asian economies, such as Japan in 1955, Korea in 1975 and China in 1990. Mining markets have also responded well to extraordinary exploration success, which stokes the optimistic fire of a mining boom. A bust is brought on when the market attitude toward risk changes, and in the past this has most often been tied to globally significant macro-economic events (the global financial crisis, Asian currency crisis) or the bursting of a speculative bubble (1987 stock market crash, 1980’s gold bubble). From an investment point of view, it is hugely beneficial to time investment and divestment decisions according to the market cycle, and understanding the cycle means taking advantage of it. Lion tracks the mining cycle with the Lion Clock, a representation of how the boomcrash relationship comes about. This is difficult to perfect: it is much easier to determine if the boom is on or off than to pick the turning points at the top and bottom, and as the Lion Clock depicts, there are three grey sections – blurred points in time so to speak. There are no ideal measures, and judgment is often clouded by human emotion: the tendency to judge the short-term future on the basis of the immediate past, without taking into account the entire cycle. In 2009, mining stocks began an almost immediate recovery from the GFC. Funding and takeover conditions also recovered quickly and with them exploration activity. Unlike other mining cycles though, the recovery was short lived, about two years. From mid-2011, mining equities began a two-year decline with funding conditions

also deteriorating for miners. A mining cycle commences immediately after a crash, such as the GFC. Liquidity conditions are toughest after a crash and improve slowly as the next boom gathers pace. Typically, the boom phase is much longer than the short, sharp crash. The symmetrical mining equity performance of 2008-2013 poses the question: What is the Lion Clock time now? Despite the lack of a long or large boom, and corresponding lack of a sudden and rapid crash to end the boom – the period from late 2008 to mid-2013 shows all the symptoms of a full mining cycle. We are now in the early stages of a new cycle. The implication for mining equities is that further material downside seems unlikely. However, we anticipate funding conditions to remain challenging, which could have negative implications among the juniors, especially where companies have marginal projects or poor access to funding. Mining equities have been discounted for a negative outlook on commodities. Since 2008, there has been wavering sentiment towards the future sustainability of economic growth in China. This is in stark contrast to 2005-2007, when China’s growth was steady and few commentators thought otherwise. The lingering memory of the GFC and then the banking crisis in Europe have left the market with little appetite for risk, while the aftermath prompted more accommodating monetary policies in the world’s largest economies. It is debatable that stimulus measures taken in the world’s largest economies may have restarted markets too early, but even so, it established a market platform for several mining deals that were in the pipeline before the GFC. Subsequently, cheap money went chasing yield which benefited largecap stocks, at the expense of juniors, and saw investment shift away from mining to other sectors. Tough funding conditions now prevail for mining companies, perhaps as a hangover from the GFC. THE PICK December 2013

quick picks Zijin transaction imminent for Nkwe Nkwe Platinum Ltd is expecting receipt of the first tranche of $7 million from development partner Zijin Mining Group Ltd – and finalising the full $20 million – before December 31, 2013. The company has received all key South African approvals and will apply for commencement of quotation to coincide with the receipt of the first tranche. Nkwe executive director Peter Landau said that the deal was more than “just about the money”; it reinforced the business relationship and potential that Zijin wants to realise in the Garatau project. “This is the most significant milestone to date in Nkwe’s history and the board looks forward to continuing our strategic partnership with Zijin as we progress our Bushveld Complex projects. Increased Range in Trinidad Six wells have been scheduled for drilling by Range Resources Ltd on its Trinidad tenements in an effort to step up oil production and cash flow. Mast upgrades were recently finished on Rig 8 in the Morne Diablo field and will look to restart drilling of the MD248 well to its target depth. If successful, Range will either drill adjacent locations to establish continuity, or move to a new location to target the Herrera formation. The Lower Cruse horizon remains largely untapped and significant rapid development has been earmarked due to its location to production facilities and the main infrastructure area.

Kaboko’s Peco grows RC drilling results have confirmed the potential mine extension of Kaboko Mining Ltd’s Peco manganese mine at the Mansa project in Zambia. The 2,760m program confirmed the reef widening visually in key areas and mineralisation remains open to the north-west and south-east. Exploration work has found that the manganese mineralisation now extends much deeper than 70m. Chief executive Tokkas Van Heerden said the exploration results were the best received to date. “These results add significant support to existing mining operations and to preparation of a maiden JORC compliant resource statement,” he said. Kaboko intends to release the maiden resource in Q1 2014. Greenland’s green light for Kvanefjeld In October, Greenland’s parliament repealed the longstanding zero-tolerance policy towards uranium mining. The timing greatly benefits Greenland Minerals and Energy and the company’s flagship Kvanefjeld project – one of the world’s largest undeveloped rare earths and uranium resources – which has moved in to the permitting stage.Technical work programs to refine processing methods have been progressed during the quarter with the company confident it can extract the minerals from the non-refractory ores without the need for complex high-energy processes usually required for rare-earths. Environmental baseline monitoring studies are continuing.

Cauldron extends takeover offer Cauldron Energy Ltd has extended its takeover offer for Energia Minerals Ltd shares to 5pm February 16, 2014.The conditional offer sees Cauldron offer one of its own shares for eight Energia shares. Energia is a neighbour to Cauldron in the Carnarvon Basin region of Western Australia. If the takeover offer succeeds, the merged Cauldron/Energia entity would hold one of the largest, contiguous land packages of uranium ground in the region, with over 190km of strike. The Bennet Well prospect has been driving Cauldron’s exploration at its Yanrey project, with the latest high-grade uranium intercepts returning 6.48m @ 602ppm uranium oxide with grade width of 3,901 ppm uranium oxide. Bonanza for Black Mountain The New Departure Silver project in Montana continues to return high-grade silver results for Black Mountain Resources Ltd, with grab samples from the New Departure Silver Mine delivering grades of up to 5,194 g/t silver. The grades underpin the company’s belief in the prospectivity and confirm the historic data inherited with the project. Development drives now provide access to three historic blocks of mineralisation; underground surveying has been completed and 3D mine modelling is now under way. Metallurgical test work has been completed and returned encouraging results; optimised flotation has returned increased silver recoveries to over 85%.

THE PICK December 2013

quick picks Fe offloads non-core assets to Singapore Fe Ltd has reached agreement with a private Singapore-based metals and mining trading company to sell its wholly-owned subsidiary Gympie Eldorado Mining Pty Ltd (GEM). Under the agreement, Fe will receive AUD$200,000 upon completion of the transaction and will retain a 3% net smelter return royalty for gold produced from the mine. Fe will also receive a reimbursement of $2.24 million from environmental bonds within one month of the transaction going through, and will receive 10% of any profits from any future sale of freehold land. The sale was part of Fe’s strategy to relinquish non-core assets in its portfolio.

Alcyone upgrades Twin Hills crusher Silver producer Alcyone Resources Ltd has completed the second stage upgrade of the crushing circuit at its Twin Hills mine in Queensland. The upgrade is anticipated to increase crushing levels by up to 40%, lifting primary circuit capacity to 1.1Mtpa, and will optimise output, cut costs and improve the stacked ounces for leaching.This will allow the leaching department to increase the grade at the pregnant pond, which Alcyone management said would result in faster ounces for recovery. The Twin Hills mine had experienced difficulty in recent years to meet production performance indicators and the crusher upgrade was one of the changes instigated to improve operations. Kupang eyes first shipment in 2014 Kupang Resources Ltd is targeting first shipment from its shiploading facilities at the Port of Tenau, Indonesia, in first quarter of 2014. First shipment was delayed due to a slower than expected ramp-up in delivery capacity and communication delays between relevant authorities. Kupang has exclusive access to the Port’s bulk manganese stockpiling area and has its own loading facilities for ships up to 80,000t capacity. Kupang has secured an initial 15,000t supply agreement with local manganese miners to move ore on behalf of them. In the September quarter the company received both tranches of the $2 million placement it had secured in July 2013.

Record production from OM Holdings The September quarter saw OM Holdings Ltd hit record production of 68,748t of manganese sinter ore from its Qinzhou processing plant in China, and production of high-carbon ferro manganese alloy (HCFeMn) reach 23,359t, a 26% year-on-year increase, with year-to-date production reaching 70,358t. Sales for the quarter hit 19,017t of HCFeMn and 43,207t of sinter ore. Despite continued strong demand for manganese, the manganese ore benchmark index price fell during the quarter. Spot prices rebounded in October to US$5.23/dmtu CIF China. Bootu Creek, OM Holdings Australian manganese mine was broadly in line with expectations and continued to improve at depth, with 0.467Mt produced in the quarter. Latin buys Rio Tinto’s Borborema Latin Resources Ltd has acquired the Borborema iron ore project in Brazil from Rio Tinto Ltd for US$200,000 plus a 3% net smelter return royalty. Borborema consists of 24 exploration claims and four applications covering 40,483ha. Two proposed public railways will run past the tenements to two existing export ports. Rock chip samples returned iron ore grades of 36-41% iron. Two days later Latin announced a US$9 million farm-in with Peruvian business Compañia Minera Zahena SAC (CMZ) for 70% of its Ilo Norte copper-gold project. The deal will see exploration expedited with CMZ funding a US$1.35 million 4,800m diamond drill programme on new targets.

Maiden resource caps off Artemis’ year Artemis Resources Ltd has exceeded grade expectations with its maiden resource at the Eastern Hills antimony-lead project’s Tapian Zone. The independently-assessed, total mineral resource estimate is 1.31mt @ 1.3%Sb and 2.5% Pb for 22,400t of antimony metal and 32,700t of lead, using a 1.0% antimony cut-off. This estimate exceeds Artemis’ exploration target released in January. The indicated resource accounts for 71% of the total resource, calculated at 0.8mt @ 2.0% Sb and 3.1% Pb. This resource calculation only includes mineralisation from the Taipan Zone. The recently identified high-grade Dugite Zone is scheduled to be drill tested in the 2014 field season. A scoping study is planned for 2014.

www.proactiveinvestors.com.au THE PICK December 2013

sector watch

Explorers yet to feel the love While market watchers are seeing investor confidence returning to the sector, it would seem neither money nor sentiment have yet flowed through to the explorers. It has been signalled before but, for half of the world’s mining companies, the worst is surely over. Such predictions are more an art than a science, let alone an exact one, and the indicators are far from certain. Indeed, by most measures the mining industry continued to decline in the three months to end-September. Drilling activity, resources uncovered, mergers and acquisitions, financing and market capitalisation all fell.

However, the price of many metals improved, and, most elusive of all, for the first time in nearly three years some optimism has returned. The feelgood factor is certainly returing to the UK investment scene. The Financial Times noted recently, there were several measures of this; the biggest banks are hiring again, deal pipelines are filling up, house prices are booming, and Britain has overtaken Germany as Ferrari’s largest European market. Over the past three years, the global value of merger and acquisition activity has been steadily increasing (but is still well short of the deal-making activity of 2006 and 2007). According to Thomson Reuters, worldwide merger and acquisition activity rose 2 per cent in the nine months to endSeptember, reaching US$1,700 billion (although the number of deals is down 8 per cent). Looking ahead, business and consumer surveys worldwide are showing higher orders and increased production. The Chinese economy remains

crucial to this global growth, and the country’s likely performance is subject to intense speculation. Authorities have announced their intention to move from an investment-led economy to one driven by consumption, targeting a rise in household consumption from the currently estimated 34 per cent of GDP to 50 per cent within 10 years. This adjustment will have an impact on the demand for individual metals, with a switch in the Chinese emphasis from the building of roads, railways and plants, to delivering consumer products. This is for the future, however, and although the second and third quarters of this year saw an unexpected upswing in global economic growth, the new-found optimism has yet to translate into a significant boost to the still sluggish world economy. Analysts remain generally pessimistic

Source: IntierraRMG

on the supply-demand balance for most metals. They fear disappointment on actual consumption figures over the next two years, and warn that too few producers have announced cut-backs in mined output. The consensus among commodity analysts is for lower metals prices next year. Nevertheless, there has been a temporary halt (at the very least) to the long decline in metals and mineral prices. The occasion was celebrated at the recent London Metals Exchange (LME) Week, where users and suppliers of base metals meet to start negotiating trade terms for the coming year. The mood amongst these LME Week delegates is a useful barometer of the wider mining industry. And, like UK bankers, their outlook is distinctly buoyant. This mood is largely reserved for traders and producers, and does not reflect the situation facing the exploration sector. With access to capital still almost non-existent, the market valuation and cash holdings of junior companies remains parlous. In physical numbers, companies with a market capitalisation under US$10 million represent half the global mining industry. For these companies, things might still get worse. Unless there is a sudden, dramatic, improvement in investor sentiment towards risk and grassroots exploration, many exploration companies will be forced into corporate restructuring and/or creative fund-raising solutions to remain in business.

Fre at w e rep ww ort s .int ierr umma aRM ries Q3 Reports on Global Mining, Finance and Exploration Activities G.c om

State of the Market Reports

Despite the continuing downward trend in overall mining activities, the price of many metals improved in Q3 and market conditions are starting to stabilise. Special features in the current Edition 4, 2013: ► Metal price and production forecasts for 2014 ► Summary of experts’ market expectations for 2014

To subscribe, e: miningreports@intierraRMG.com

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the legal angle

The hidden value of optimisation As the mining boom softens, mine operators and suppliers are focussing on optimising products and processes to maximise returns and reduce costs. Optimisation creates intellectual property. Depending on the nature of the optimisation this intellectual property can be a valuable asset capable of creating its own income stream or monopoly position. But beware â&#x20AC;&#x201C; while you are creating your own intellectual property your competitors are doing the same, and this could give them a competitive advantage.

The Good

Intellectual Property can be a valuable asset, adding to the financial position of the company and creating a unique market position. Creating a Monopoly

Optimisations that improve yield, speed or value can be protected by patents or can be maintained as valuable confidential information. In any case the patent or confidential information creates a monopoly for the owner. This monopoly can be exploited to prevent competitors from using the same optimisation on other projects. Exclusive optimisation will increase the potential income from a mine operation and enables, at a minimum, a more attractive position to be negotiated, and at best will prevent competitors from competing for that project. It is a misconception among many in the mining sector that an optimisation for one project is specific to the conditions at that site and cannot be extended to other projects. Some process optimisations will be unique to the composition of a particular ore body, but most optimisations can be replicated or modified for wider application. Optimisation creating Licencing Income

An alternative to using intellectual property to create an absolute monopoly is to licence the intellectual property to others, creating an income stream from the licence fee (either up front or royalties). Where the owner of intellectual property created from optimising a product, system or process has no interest in a country, application or project the owner can licence its intellectual property to an interested party. That generates, for the owner, an alternate income stream from mine operation that it cannot, or does wish to, be involved in. Clearly 24

THE PICK December 2013

Robynne Saunders

Robynne is a leading Intellectual Property (IP) lawyer and patent specialist who works closely with clients from industry sectors such as resources, engineering, building, construction and consumer goods to develop and implement IP protection strategies. She has considerable experience in patent litigation and dispute resolution, particularly for clients in the heavy industry, natural resources, manufacturing and building and construction sectors.

this has the potential to multiply the return on investment.

The Bad

The majority of mine operators and suppliers are also optimising their products and systems and creating their own monopoly IP rights. Competitor-Owned Intellectual Property

Where a competitor owns intellectual property relating to an optimised product or process it will enable them to make a more attractive proposal for a project - lower cost, higher returns, or improved performance. This will put others at a significant disadvantage. In some circumstances the existence of the intellectual property rights will prevent any person other than the rights owner from offering a competing product or performing a similar process. This will prevent others from approaching certain projects, effectively avoiding any competition and allowing the owner to set its price. Supplier-owned Intellectual Property For mine operators, their suppliers are developing exclusive rights to aspects of the supplied products (freight wagons, generators, maps) and processes (refining processes, tracking and control software). Optimised products and processes will provide the mine operator with the best outcome - getting the maximum yield and revenue from any project. However, these optimisations will likely come with an increased price. Mine operators should also be wary that they acquire the intellectual property rights from the supplier for the entire

life of the project. Where a supplier provides a product or process and the mine operator only has a licence to the intellectual property for a fixed period they will have to negotiate a new or extended licence in circumstances where it will be very difficult to cease using the product or process. The operator is thus in a very difficult negotiating position.

The Ugly

The worst case is where a product or process is implemented which breaches anotherâ&#x20AC;&#x2122;s intellectual property rights. The resulting litigation will be lengthy and costly to all parties. While the financial damages could be considerable a greater risk for the mining industry is that an injunction is ordered, preventing the on going use of the product or process. Injunctions can be ordered with little warning, and may impact the extraction, refining or transportation of resources. Obviously if resources are not leaving the site this will adversely affect cash flow and can quickly cripple a project. This creates a powerful incentive to enter into a commercial arrangement, and will be used as leverage by the rights owner. Summary

Optimisation creates considerable advantages both for the instant application but also other later projects. Owners should look to maximise the opportunities to extend the optimisation to other projects or create revenue from licencing - increasing financial return. Watch with caution your competitors as they will also be looking to maximise the value of their optimisation, and may do so to your detriment.

state of the sector

Is it the season to be bullish on resources? While bullish may be like many other things at this time of year, excessive, changing forces within the sector are not simply imaginings fuelled by Christmas spirits. Given the recent tempering of global growth estimates for 2014 and the fact the mining industry remains in “reform mode”, yes, bullish may be too strong a word. Remembering that flat commodity markets are generally unexciting for today’s momentum investors, tactical may be a far better way to describe where we think the opportunities lie for today’s resource investors.

Miners are underperforming, but for how long?

Mining stocks have significantly underperformed their financial and industrial peers during the market’s rally back to five-year highs. Since the GFC lows of early 2009, the ASX200 Industrials Index has nearly doubled (up 93 per cent) while the ASX200 Resources Index has recovered by only 16 per cent. The contrast is more pronounced over the last 12 months (up 27 per cent versus flat at 2 per cent) and this also excludes dividends.

ASX200 vs Industrials and Resources over the last 12 months

in bulk materials markets that may be able to provide the catalyst.

Bulks seasonality explained Key seaborne supply of iron ore and coal is at most risk of disruption during the southern hemisphere summer as weather (cyclones, monsoons, floods) affects Australia, Brazil and Indonesia. Large swing supplies of Chinese production can also be affected by mining and transport constraints depending on the severity of the northern winter. Conversely, steel production (iron ore and met coal demand) tends to remain steady through the northern hemisphere winter reflecting inventory rebuild after the summer construction season. Power consumption (thermal coal demand) can also surge during the northern winter depending on the severity of cold weather on the major populations of Asia and Europe. The result is that pricing for bulk commodities regularly tightens as customer concerns mount around the peak in seasonal supply disruption. This pricing tension has also become more pronounced since the introduction of short-term contract pricing.

Seasonality creates an option trade Buying exposure to the major iron ore and coal producers into the Australian summer has been a productive “option trade” in recent years, where downside risks are partially protected by seasonal dynamics in physical markets. Not since the global financial crisis summer of 2008-09 has any of the pricing for iron ore, BHP or RIO not increased in value over the months of November to January. Indeed, BHP and RIO each put on 15-20 per cent last summer as the market got over its paranoia about a China hard landing. Buy BHP and RIO as options over summer seasonality. Many financial and industrial stocks now trade on earnings multiples well above long-term averages, effectively pricing in strong earnings growth into 2014. Until we get more confidence in these earnings actually being delivered, we think such premiums in some instances look expensive. Conversely, the materials sector offers EPS growth of 15-20 per cent on volume growth (particularly iron ore) and aggressive cost out. We think the mining sector is overdue to begin unwinding this underperformance on a relative basis, but what will provide the catalyst? We recently noticed some interesting trading patterns around summer seasonality in relation to strength

BHP Price performance split by Nov-Feb and Mar-Jun since the GFC

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