With commodity prices on the march, it’s not surprising that resources stocks are back on the radar of savvy investors. As long as investors understand the cycles of commodity prices, junior resources stocks can occasionally be sound investments, particularly as they move through the progression from explorer to project developer to the long-term goal of actually producing, shipping and selling their particular commodity.
Here are five Australian resources stocks poised on the cusp of production. They are speculative, until they start producing profits – and hopefully, dividends – but at least investors can see the path to production and sales, and commodity prices that justify a bit of optimism.
Red River Resources (RVR, 24.5 cents)
Market capitalisation: $116 million
Zinc surged by two-thirds in price last year, and in November reached its highest point since 2007, making zinc one of the hottest commodities. That is good news for Red River, which is working to re-start production at the Thalanga zinc project, located south-west of Charters Towers in Queensland, which it bought from the administrators of failed miner Kagara Zinc two years ago. Thalanga, which is based on mining three deposits including West 45, Far West and Waterloo, is expected to re-start in the second half of the year, with Red River fully funded for re-start, following a $30 million placement completed in January. Red River expects only to need $17.2 million to kick off Thalanga, with the rest providing a strong working capital balance.
Red River expects to be producing zinc, copper, lead, gold and silver at Thalanga, which has been under care and maintenance since 2012, by the second half of the year. The first base metal (zinc, copper and lead) concentrates are expected in the September quarter. The company has forecast annual production of 21,400 tonnes of zinc, 3,600 tonnes of copper, 5,000 tonnes of lead, 2,000 ounces of gold and 370,000 ounces of silver over an initial six-year mine life.
The company hopes to extend this, with recent exploration results at the Liontown East and Thalanga Far West prospects demonstrating the strong exploration potential across its ground. Broker Hartleys forecasts a life-of-mine average cash cost of about 20 US cents a pound zinc price equivalent, net of credits for the other commodities – given that zinc trades currently at $US1.29 a pound, that would be a lucrative opportunity.
The tightening physical zinc market is forecast to move into supply deficit during 2017, which should further support the zinc price, particularly as LME (London Metals Exchange) warehouse stocks continue to decline.
Hartleys says Red River has opportunities to lift production while growing mine life over time. The broker has a target price on RVR of 44 cents: Thomson Reuters puts the analysts’ consensus target price on RVR at 47 cents.
Gascoyne Resources (GCY, 53 cents)
Market capitalisation: $200 million
Gascoyne Resources is getting all its ducks in a row for production at its 80%-owned Dalgaranga gold project in the Murchison region of Western Australia, recently upgrading the resource by 110,000 ounces to 1.23 million ounces of contained gold. But the resource upgrade does not include the newly discovery Sly Fox Prospect, where Gascoyne struck 36 metres at 2.3 grams per tonne (g/t) gold.
The Gilbeys Deposit resource now stands at 27.6 million tonnes at 1.3 g/t gold, giving 1.13 million ounces of gold, while the Golden Wings Deposit is put at 2 million tonnes at 1.6 g/t gold, for 100,000 ounces of gold.
Gascoyne is a few weeks away from an updated ore reserve, which will help it produce an updated mine plan, which will then form the basis for financial modelling as part of the debt finance applications.
On the company’s numbers, Dalgaranga boasts a pre-tax NPV (net present value) of $177 million and an internal rate of return (IRR) of 65%, based on a A$1,600 gold price over six years. The estimated all-in sustaining cost (AISC) over the estimated life of the mine is A$931 an ounce – that compares nicely with a gold price currently at A$1,592 an ounce. On Thomson Reuters’ collation, analysts reckon GCY has $1 in it.
Attila Resources (AYA, 19.5 cents)
Market capitalisation: $36 million
Junior Attila Resources is taking over the moribund Century zinc mine in north-west Queensland, which earlier this century – under Pasminco ownership – was one of the largest zinc mines in the world.
Century kicked off production of both lead and zinc in 1999, shipping both metals out through the port of Karumba on the Gulf of Carpentaria. But Pasminco imploded after getting its foreign exchange hedging wrong. The company was refinanced in 2002 after its bankers accepted shares in place of their debt, and it returned to the sharemarket as Zinifex in 2004.
Zinifex subsequently merged with Oxiana to become Oz Minerals: in 2007, it was forced into a drastic debt restructuring, and sold everything but its Prominent Hill copper-gold mine in South Australia – Century went to the Chinese-controlled MMG, which shut Century in late 2015, saying the deposit had been mined out.
Enter Attila, which has bought a 70% stake in the mine, processing plant, accommodation camp, laboratory, slurry pipeline, Karumba Port facility and airport.
Even though Century is mined out, the attraction for Attila is that the mine still contains 2.5 million tonnes of JORC (Joint Ore Reserves Committee) compliant zinc metal equivalent in its tailings: Attila says that translates to about $2 billion worth of zinc left at the mine, enough to keep it producing until 2050. Century also has several undeveloped phosphate deposits that interest Attila.
Attila might not re-start production at Century until 2018, but this is a company-maker of a deal – Attila could find itself one of the top 10 zinc producers in the world. Analysts’ consensus sees the stock appreciating to at least 90 cents.
Kidman Resources (KDR, 40 cents)
Market capitalisation: $145 million
Lithium demand is surging, as the soft metal is identified as a commodity of the future due to its role in lithium-ion batteries and clean energy applications. Australia hosts the largest hard-rock spodumene (lithium oxide) mine in the world, at Greenbushes in Western Australia – jointly owned by US company Albemarle and Chinese company Tianqi – and there are several more Australian deposits that are moving towards production.
Kidman Resources owns what has been described as the biggest and best undeveloped hard-rock lithium deposits in the world, Earl Grey – and it found it unexpectedly, while testing drilling cores at its Mt Holland gold project in Western Australia last year. The company expects to get the Earl Grey lithium project into production by the end of the year, which would beat most of its ASX-listed lithium peers: this would enable Kidman to participate in what is expected to be a multi-year bull market in lithium.
Kidman has completed more than 16.8 kilometres of drilling since July to produce a JORC compliant mineral resource of 128 million tonnes at 1.44% Li2O, giving for 4.54 million tonnes of lithium carbonate equivalent (LCE), which is easily enough to support a long-life open-pit mining operation. The Earl Grey deposit is 1.4 kilometres long, and still growing: the average thickness is 70 metres, and it’s consistent high-grade, all along.
Metallurgical testing gave lithium oxide recoveries of up to 89.5%, indicating that Earl Grey should be able to produce a highly sought-after lithium oxide concentrate. Not surprisingly, Kidman is pulling out all stops to develop Earl Grey as soon as it can to produce a high-quality lithium oxide concentrate for export markets.
There is also significant potential to boost the Earl Grey resource further, with high-grade lithium intercepts made just north of the current resource boundary. With what Kidman has identified as its exploration target, the already world-class deposit could be the biggest of them all.
Kidman’s capital spending requirements will be low, given that extensive infrastructure is already in place and the company has an exclusive option to process through Poseidon Nickel’s Lake Johnston facility. The metallurgical and engineering studies are underway, and they will form the basis of the feasibility study, which is due by the end of June.
And don’t forget, this lithium bonanza was found in the middle of a gold project – Kidman will develop Mt Holland in parallel with Earl Grey. The analysts who follow Kidman are bullish: their consensus price target on the stock is $1.12.
Pilbara Minerals (PLS, 50 cents)
Market capitalisation: $633 million
Pilbara Minerals is racing Kidman into production, with its Pilgangoora lithium-tantalum deposit in WA expected to be commissioned this year. Like Earl Grey, Pilgangoora has claims to be the world’s best undeveloped spodumene deposit – on its latest resource upgrade, in January, PLS says its measured, indicated and inferred resource at Pilgangoora stands at 156 million tonnes at a grade of 1.25% lithium oxide and 128 grams per tonne of tantalum oxide, containing 1.95 million tonnes of lithium oxide and 44.2 million tonnes of tantalum oxide. Within this resource, Pilbara has identified a higher-grade resource containing 110 million tonnes at 1.44% lithium oxide.
Considering that the company’s definitive feasibility study (DFS) was based on a resource of 128.6 million tonnes, the January figure was a cracker of an upgrade – and the latest in a series of resource upgrades that PLS has delivered since it bought Pilgangoora in 2014.
Pilbara plans an open-cut mine that on current reserves, is expected to operate for 36 years. The company envisages conservatively a 2 million-tonnes-a-year operation, with the potential to possibly double that – and that was before the January resource lift. The DFS showed that Pilbara expected to generate $9.2 billion in revenue and $4.2 billion in EBITDA over the 36 years of expected production – again, the January upgrade will boost these numbers. It’s no wonder that analysts’ consensus sees the stock at least at 90 cents.
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