Financial Mail - Investors Monthly
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
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