SIFT­ING FOR VALUE IN THE JU­NIOR MIN­ING SEC­TOR

Shares in ju­nior min­ing com­pa­nies should not be put into the bot­tom drawer and for­got­ten, writes Char­lotte Mathews

Financial Mail - Investors Monthly - - Front Page -

Share­hold­ers would be for­given for har­bour­ing bit­ter feel­ings to­wards ju­nior min­ing shares. In the past few years many com­pa­nies have fallen by the way­side, leav­ing in­vestors stranded, some­times with­out ex­pla­na­tion.

But when com­modi­ties prices start a great leap for­ward, the risk/re­ward pay­off of ju­nior min­ers comes to the fore. Even share prices in ju­nior min­ers with noth­ing but a whiff of a de­sir­able min­eral can dou­ble or tre­ble.

A typ­i­cal ex­am­ple of what can hap­pen is Aus­tralian-listed Min­tails, which be­came an SA-fo­cused gold tail­ings re­cov­ery busi­ness in 2006, at a share price of A$2. In 2007 the shares went above A$6. The shares were sus­pended at A$0.02 ear­lier this year as the com­pany went into ad­min­is­tra­tion in Jan­uary.

The start­ing point for in­vestors is to take a view on the com­modi­ties with the best threeto five-year prospects.

It is dif­fi­cult to find point­ers through the plethora of dif­fer­ent and fre­quently chang­ing an­a­lysts’ com­men­taries.

An­a­lysts were caught off

guard by the sec­tor up­turn that be­gan at the end of Jan­uary, and while some are be­com­ing more pos­i­tive, oth­ers warn that the up­turn may not be sus­tain­able.

The Cap­i­tal Eco­nomics com­modi­ties team says there could be a cor­rec­tion, but “the re­bounds have been con­sis­tent with the big pic­ture of con­strained sup­ply, re­cov­er­ing de­mand and im­prov­ing sen­ti­ment that we ex­pect to lift prices fur­ther over the medium term”.

The Liberum min­ing team says re­stock­ing is ex­pected to buoy eq­ui­ties only over the next three months. Tak­ing a six-month view, they re­main un­der­weight the sec­tor be­cause un­re­solved struc­tural is­sues re­main. Draw your own con­clu­sions. The choice for in­vestors on the JSE look­ing for gold ju­niors is lim­ited to two shares: Pan African Re­sources and Cen­tral Rand Gold. Only the big­gest com­pa­nies can af­ford deep-level min­ing. The smaller gold com­pa­nies have ei­ther gone bust, like Great Basin Gold, or been bought out by Chi­nese in­vestors, like Gold One.

Cen­tral Rand Gold has been dogged by prob­lems since it listed. Lat­est de­vel­op­ments in­clude the loss of its long­stand­ing CEO, fail­ure to se­cure a buy­out by Chi­nese in­vestors, and a new court chal­lenge by its em­pow­er­ment part­ners, Puno Gold. It is not an in­vestable op­tion at this point.

Pan African, de­spite a re­cent di­ver­sion into coal min­ing which has shaken some share­hold­ers, still de­liv­ers con­sis­tently from its gold mines around Bar­ber­ton and low-cost plat­inum oper­a­tions near Brits. At 310c, the shares are at a five-year peak, which some might feel is a bit stretched since dol­lar gold is still about a third be­low its own five-year peak.

Mo­men­tum SP Reid an­a­lyst Si­bonginkosi Nyanga, writ­ing when Pan African was at 334c, main­tained an “add” rec­om­men­da­tion be­cause the com­pany was gen­er­at­ing both prof­its and cash and should ben­e­fit from the con­tin­u­ing cur­rency weak­ness.

In plat­inum, At­latsa and Bauba have is­sues rang­ing from li­cence dis­putes to mil­i­tant labour which still seem far from res­o­lu­tion. But We­sizwe and Ju­bilee are mak­ing progress with their plans.

We­sizwe, which is backed by Chi­nese in­vestors, is on tar­get with the con­struc­tion of the Bakubung Plat­inum Mine, though it will need more funds as it moves into the pro­duc­tion phase. The mine will reach full steady state only in 2021, so at this stage the shares are largely an op­tion on the plat­inum price with po­ten­tial down­side if there are

In plat­inum, At­latsa and Bauba have is­sues rang­ing from li­cence dis­putes to mil­i­tant labour. But We­sizwe and Ju­bilee are mak­ing progress

hic­cups in con­struc­tion.

Ju­bilee has sold its Mid­del­burg smelt­ing oper­a­tions, which were gen­er­at­ing cash, to fo­cus on plat­inum and chrome tail­ings. Its shares are less sen­si­tive to the plat­inum price than We­sizwe’s. In the past two months the share price has fallen while plat­inum has risen, as Ju­bilee has been rais­ing debt and eq­uity to in­vest in tail­ings pro­cess­ing. Tail­ings is a low-cost, low-labour-in­ten­sity busi­ness, so it should be prof­itable. How­ever, Ju­bilee has over the years tended to be stronger on deal mak­ing than on de­liv­ery.

Di­a­monds, like other com­modi­ties, are faced with above-ground sur­pluses, as Chi­nese con­sumer de­mand has not ma­te­ri­alised as ex­pected. Prices firmed in the first quar­ter but that may be just post-Christ­mas re­stock­ing.

Di­a­mondCorp re­cently sold its first di­a­monds from the Lace un­der­ground mine, where it is com­plet­ing con­struc­tion, while Trans Hex and Rock­well have fo­cused on adding more re­sources, since vol­ume helps to off­set the er­ratic na­ture of al­lu­vial di­a­mond min­ing.

De­liv­ery and di­a­mond prices are crit­i­cal for all th­ese ju­niors. If Di­a­mondCorp can com­plete Lace with­out any fur­ther fund­ing calls it is the most at­trac­tive of the three and the shares, at 174c, are rel­a­tively well priced.

SA coal com­pa­nies may be some of the re­sources world’s least at­trac­tive in­vest­ments. De­spite the shout­ing by en­vi­ron­men­tal­ists, de­vel­op­ing coun­tries will still de­mand coal when their growth rates pick up, and ex­port prices will re­cover. But in SA, Eskom CEO Brian Molefe’s ag­gres­sive stance is cut­ting out the steady low-mar­gin re­turns from power sup­ply con­tracts and if Eskom runs short of coal, a clam­p­down on ex­ports un­der the strate­gic min­er­als clauses is a real pos­si­bil­ity.

Keaton and Wescoal — if Wescoal can meet em­pow­er­ment own­er­ship re­quire­ments with­out di­lut­ing the num­ber of shares in is­sue — are both Eskom sup­pli­ers, with few or no ex­ports, mak­ing de­cent re­turns from well-man­aged mines. Pet­min ben­e­fits from a higher-priced an­thracite prod­uct at Somkhele mine and has a niche iron ore project in Canada. It also has very ex­pe­ri­enced man­age­ment.

Pet­min’s and Keaton’s shares are at five-year lows, while Wescoal has re­cov­ered quite well this year from last year’s ham­mer­ing. There’s more up­side in Pet­min be­cause of its di­ver­si­fi­ca­tion, but for coal devo­tees, Keaton is a good op­tion, bar­ring un­fore­seen events.

Though there have been some ca­su­al­ties in the min­ing ser­vices

Somkhele mine, where Pet­min ben­e­fits from a higher-priced an­thracite prod­uct. Be­low: Keaton, an Eskom sup­plier, is a good op­tion for coal devo­tees, bar­ring un­fore­seen events.

Pic­ture: FI­NAN­CIAL MAIL

Min­ers at the Cen­tral Rand Gold mine in Robertville, Jo­han­nes­burg.

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