For investors who understand the risks, resources stocks are still one of the best places to get good bang for your investment buck. Here are two situations in which speculators might well consider the odds on their side.
- Peninsula Energy (PEN, 10.5 cents)
Market capitalisation: $335 million
12-month total return: 8.9%
3-year total return: –8.3% a year
Analysts’ consensus target price: 22.9 cents (Stock Doctor/Refinitiv, four analysts)
Australian company Peninsula Energy is making good progress on its plan to restart production at its flagship Lance Uranium Project in Wyoming, USA, with construction on budget and the project on track for a production restart in late 2024.
Lance is one of the largest US uranium projects in size and scale, with a defined resource of 58 million pounds of uranium oxide. The facilities were built in 2015 and operated from 2016 until July 2019, when a combination of weak uranium market conditions and lower-than-expected recoveries caused the project to be mothballed in mid-2019.
Peninsula has taken the opportunity to expand the production capacity and change the product from a resin to “dry” yellowcake (uranium oxide), with in-house resin processing capability. The low pH in-situ recovery (ISR) process it will use will produce up to 2 million pounds of dry yellowcake a year, for use in nuclear power facilities. Lance is the only US uranium project that is authorised to use the low pH process; successfully transitioning Lance from a high-pH operation to a low pH ISR operation will provide a platform for Lance to become a viable, long-term operation. The Lance project is on track for first production late in 2024.
The initial project life is ten years, but there is plenty of exploration potential to expand the resource and mine life. Currently, the Lance project comprises three areas, namely the Ross production area, the Kendrick production area, and the Barber exploration and development area.
Importantly, Lance is coming online during a period where the importance of nuclear as a critical element of the clean energy mix to meet aggressive decarbonisation targets continues to grow. UxC, a leading uranium price reporting agency and market forecaster, projects a cumulative supply gap of 983 million pounds over the next 15 years. Peninsula will be in a strong position to supply this market, from the competitive advantage of being the only ASX-listed uranium company providing US production and direct market exposure. The company has long-term sales contracts extending to 2033, covering up to 5.25 million pounds of uranium oxide at US$56—US$58 a pound, with major utilities across Europe and the US (current spot prices are around US$84 a pound).
The company expects its current cash balance to continue to support operating and capital expenditures until it generates self-sustaining cash flows, a situation projected for the third quarter of 2025.
- Burgundy Diamond Mines (BDM, 15.5 cents)
Market capitalisation: $220 million
12-month total return: –34%
3-year total return: –19.8% a year
Analysts’ consensus target price: 28 cents (Stock Doctor/Refinitiv, one analyst)
Australian-listed Burgundy Diamond Mines owns the Ekati mine in Canada’s far north, which was discovered 33 years ago by BHP, the world’s biggest mining company and later sold to a syndicate of investment funds. Burgundy, which was established as a diamond exploration company that also operated cutting and polishing facilities, transformed itself into an integrated operation in July 2023 when it bought the Ekati diamond mine in Canada’s Northwest Territories, for $136 million.
Overnight, the company became a globally significant diamond producer, and as well as the largest ASX-listed diamond company, and one of the biggest listed anywhere in the world.
Ekati, which commenced operations in October 1998, Ekati is the seventh largest diamond producer in the world and has the third largest diamond endowment. COVID halted production in March 2020, but it was restarted in February 2021. Ekati was developed by BHP in the late 1990s; it had several other owners before BDM bought the mine. There are two active mining operations at Ekati, including the Sable open pit and the Misery underground operations; the mine is Canada’s first surface and underground diamond mine.
In 2022, Ekati’s diamond sales were 4.2 million carats, making it a top ten global producer. That year, Ekati’s operating entity generated revenue of US$494 million and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of US$200 million. The mine sold 4.2 million carats of diamonds at an average price of US$117 a carat.
In the July 2023—December 2023 period in which Burgundy owned Ekati, it mined 9.2 million tonnes, down 28% over the same period in 2022, but recovered 2.6 million carats, up 27% versus the same period in 2022. Burgundy ended 2023 with 1.3 million carats in ending inventory up 43% versus ending inventory in 2022 (0.9 million carats). During the period, Burgundy held seven rough diamonds auctions in its Antwerp sales office, and sold 2.6 million carats, 18% more than in the same period in 2022.
After buying Ekati, Burgundy withdrew from its diamond exploration activities in Botswana, Namibia and Chile, and pulled out of the Ellendale alluvial diamond project in Western Australia. It is now concentrating on Ekati and capturing incremental margins along the diamond value chain as an integrated producer, by cutting and polishing Ekati’s coloured diamonds at its Perth facility and leveraging collaborative sales agreements with international jewellers.
Burgundy is in the right place at the right time. Russia and African nations currently account for about 80% of global diamond suppl, and with ESG issues increasingly driving Western consumer preferences, Burgundy’s Canadian location positions it nicely in the luxury goods market.
For 2023 (Burgundy uses the calendar year as its financial year), the company made a reported net loss of US$13 million, on sales of US$268 million, but that should turn into a net profit this year. The company has reiterated its 2024 guidance of 4.2 million tonnes—4.7 million tonnes ore mined, and 4.9 million carats—5.3 million carats in sales: from that, broker Bell Potter predicts net profit of $US53 million.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
