In the May of 1979 we saw Margaret Thatcher’s Conservative government gain power from Labour. July saw the new government announce £4billion worth of public spending cuts (back then £4billion was actually quite a lot of money!) and inflation for the year was running at 13.6%. 1979 also saw the largest number of days lost through strike action since 1926……….and in July gold hit a record $303 an ounce!
Any obvious parallels here?
Fast forward 33 years and the markets kicked off the year with a discernible wave of what we could call “guarded optimism”, certainly giving investors some tentative reasons to be cheerful!
One broker we spoke to last week (and we do speak to a fair few brokers) suggested that people had simply got fed up of feeling miserable and decided to start the new year in a different frame of mind. We think there may be some merit to this.
Of course our good friends at Standard & Poors were lurking in the wings to give us all something to think about over the weekend. A swathe of European nations had their credit ratings downgraded with France and Austria amongst the most prominent casualties. And as the Greek negotiations with creditors broke off for a “reflective pause” (well, that’s one name for it!), the week ahead is likely to present the first significant test of the year for investor's resolve.
As contrarians, of course we will be watching the markets closely to see how things develop over the week. If the toys start getting chucked out of the pram at the first sign of any downdraft, then we will no doubt get another crack at increasing our positions in some of our favourite plays!
To follow is the second instalment of our Common Sense Picks for 2012, taken from the selected group of companies we follow on MiningMaven and giving you the reasons why we follow them and where we believe the upside in the share price will come.
As we said previously, our objective here is purely to provide our readers with a starting point from where to conduct one’s own research with links provided to sources of further information. As you will no doubt appreciate, there is absolutely no substitute for your own detailed and thorough research. MiningMaven is not in the business of providing investment advice or stock recommendations and nothing contained herein should be considered as such!
So, quoting no lesser wisdom than that of The Buddha himself: “Believe nothing, no matter where you read it, or who said it - even if I have said it - unless it agrees with your own reason and your own common sense.” Wise words, obviously!
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As promised, here is the pre-release of Part II of our Common Sense Picks, ahead of publication on our website.
Eurasia Mining (LON:EUA mid 0.725p) Common Sense:
The frustration felt by many of us during the market’s recent malaise was the realisation that any good news, more often than not, was falling on deaf ears. And with Eurasia Mining we sort of got the answer a couple of weeks ago when rumours, excitement or whatever drove the price up from a lowly 0.65p to 0.9p and then back down to 0.75p in a the space of couple of hours, with the company announcing they were not aware of any reason for the rise.
For us, two things are relevant here. Firstly in our view the company still remains well placed to create value if and when they receive a production licence on their West Kytlim project in Russia. Take a look our Special Report detailing the Value Proposition released in 2011 for further detail. Secondly, judging by events this week, it seems quite apparent that there are now plenty of investors following the Eurasia story and, as seen in the price move, are also ready to jump in should the news we are all waiting for arrive.
Horizonte Minerals (LON:HZM TSX:HZM mid 12.25p) Common Sense:
We talk at length about our desire to identify stock which offers investors ‘Security and Blue Sky Potential’. There are many opportunities out there, but few are well placed to meet this criterion. Horizonte however is a company that does; with assets in the nickel and gold space in Brazil.
On the nickel front they have the Araguaia project, a large land holding with a current JORC of 100m tonnes at around 1.3% nickel. The updated JORC was only released on the 10th January, so it still has to show up on the wider investor radar screens. But for sure, reaching the 100m tonne level mark is material and will make Araguaia a much more significant proposition in the eyes of many.
The markets remain stultified by misery and under expectation but, as rational valuations return, we believe that the significance of recent Araguaia JORC upgrade news should start to have an impact.
Whatever metric you choose; be it price per lb. of nickel, peer tonnes v market value comparisons, or potential future development options, Horizonte appears very lowly valued on the Nickel alone. You may want to view the Company’s latest investor presentation to judge for yourself (Page 22 gives some very compelling peer valuations!).
It’s worth noting that Teck Resources holds 44% of share capital after vending their assets into the company in August 2010.
And it’s not just about Nickel, with the company also making excellent progress on their Falcao project and generally in their working partnership with Anglogold.
The gold operations are a big enough operation to justify a standalone exploration company and with the nickel side seeming undervalued, the gold business is thrown in for free.
Kryso Resources (LON:KYS mid 28.38p) Common Sense:
The wonderful thing about natural resource investing is that, right now, so few investors are engaged in the markets and confident about the future. But those who are can identify some great opportunities at lowly valuations. Kryso Resources sits on over 3.5m ounces of gold resource at their Pakrut gold project in Tajikistan, and is moving forward with plans to produce significant amounts of gold there in 2013 (82,000 ounces per annum in the first four years of mine life, if one takes the 2010 Bankable Feasibility Study as a guide).
The company has an active exploration programme so the resource seems destined to increase. The company has an interesting valuation; although the share price is well off the lows of 2011, given the sheer scale of the project, whether you adopt a valuation perspective based on ounces in the ground, or look to the production and earnings potential in the near future, the current share price looks hardly challenging. You can find out more in our Value Proposition released last year.
The potential here is something that the largest shareholder, China Non-Ferrous Metal International Mining clearly sees, holding 27.44% of the company as they do.
Potential is one thing, but without a mining licence, you wont be able to mine! Fortunately, after some considerable delay, this finally arrived in November 2011 ratifying investor confidence in the company’s ability to engage the support of the authorities and deliver in its stated objectives.
The company is now at the green light stage in terms of their plans to move towards mine development. As the milestones are reached on the plan and build side, and operations continue to de-risk, we expect traction to continue in the share price in concurrence with positive newsflow.
Regency Mines (LON:RGM mid 1.79p) Common Sense:
It was not so long ago that you could buy Regency Mines for 0.5p per share. At the time the markets were pretty devastated (2008) as we all remember. The price rose, as many contrarians would have expected, and more recently (2010), you could have sold shares at 9p. Now at 1.79p, the shares have retraced much of the gain, partly due to the reducing cash value of their holding in Red Rock Resources and partly due to the ongoing market malaise. But, adopting our usual contrarian perspective, it’s worth taking a look at the assets, and then consideringwhether the current market capitalisation (around £11m) is really a fair reflection of the value on offer.
Red Rock Resources, in which RGM hold 140m shares, is covered below. The Regency Mines’ Mambare Nickel joint venture is progressing both in terms of field exploration, initial JORC calculation and technology development & pilot plant construction (with Direct Nickel Ltd).
Diversification is important and the company is also progressing its Australian copper/gold assets with VTEM flown over four areas in 2011. Moreover, recognising the importance of coal in the global energy complex, Regency also has a strategic investment in Oracle Coalfields (LON:ORCP) who are steadily moving towards the development of a significant coal mining operation at their Sindh Province coal project in Pakistan.
Of course, despite the assets, markets don’t get excited until share prices leap, so we prefer to try to identify value before the market latches on, and buy shares when they are potentially very cheap.
Red Rock Resources (LON:RRR mid 2.96p) Common Sense:
For those chartists out there we salute you. We are not chartists at MiningMaven, but you don’t really need to be one to be able to read from Red Rock’s price chart, that in the last year things haven’t entirely gone to plan.
Of course during 2011, whilst the markets were in chaos, it’s fair to say Red Rock encountered its own operational challenges. Optimism about output levels from Colombia was not matched with delivery. Progress in Kenya on the work at the Migori gold project was not as rapid as some would have liked.
But perhaps the biggest hit came from the value of Jupiter Mines (ASX:JMS) which now stands at around 27c from the 85c high at the start of 2011.
For those invested at the time, the Jupiter shareholding offered a significant “backstop” in valuation terms, with 74.2m shares worth around £42m then (5.6p per current share). The same shareholding now equates to just £13.4m (1.8p per share).
The significance of a higher Jupiter share price is not lost on investors and the Red Rock price chart does tend to track that of Jupiter.
So, where to now?
Again this is a thorny subject and one where dissenters will likely crow doom and gloom. Therein lies a contrarian advantage perhaps? Colombia has been cash flow positive since August 2011 and, judging from AGM discussions, appears to have in place the management and systems to start to move towards the initial target of 150 tonnes per day of high grade processing.
Significant progress is also being made in the field in Kenya, learning more about the geology and producing a JORC compliant resource on their one million plus ounce gold project.
Jupiter Mines, with serious backers and mega projects, continues to make material progress and we expect 2012 to be a year of value creation for the company that should see more buoyancy in the share price.
And with a 1.5% gross production royalty held by Red Rock on Jupiter’s Mount Ida project, perhaps 2012 may see investors becoming more confident in the value attaching to a royalty agreement that upon commencement of production, would bring many millions of pounds of annual cash flow into the company.
Red Emperor Resources (LON:RMP, ASX:RMP mid 20p) Common Sense:
Here’s a thing. How do you try to value a 20% holding in one of the most exciting oil licence packages probably ever created? Particularly when, in one of those licences, you are on the cusp of drilling the first well that has been drilled for the best part of 20 years?
We know there are technical analysts out there that can peg figures to anything and we doff our caps to you! Alongside the chartists, you occupy a disciplined technical position we could not even begin to emulate.
But charts and technical analysis will always find the assessment of pure’ risk-v-reward’ emotion difficult to model in advance, and there is plenty of emotion relating to this company and its activities.
Red Emperor has a 20% interest in oil and gas licences in Georgia and Puntland. Drilling first started in Georgia last year, and the first well didn’t go, err, well! But it’s not a dead duck entirely and the company and drill partners will revisit this well once their second well has been undertaken in Georgia. This second well is about to get underway.
More significantly, and on the cusp as it were, is the commencement of drilling in Puntland.
If Georgia is looking at oil in the hundreds of millions of barrels, with Puntland it’s billions. It is elephant country from an oil and gas perspective. The first Puntland target is 300m barrels. If they strike that level of resource, assuming $5 per barrel value, that would equate to 60m barrels for Red Emperor and $300m of value. Of course success on the first drill would encourage extrapolation theory, with the positive result bolstering the reliability of the geological model, and leading investors to build in additional value for other targets not yet drilled.
Cost-wise, Red Emperor are capped on the first two Georgian drills and now, after a recent fund raise, have sufficient cash to cover the budgeted costs for two wells in Puntland, (the second of which they can opt into, should they so wish). This is indeed high risk exploration, but with the current risk v reward balance, we think it’s worth a look!
Sefton Resources (LON:SER mid 2.25p) Common Sense:
For us, there is something quite anomalous about a junior oil & gas exploration company that actually generates revenues and makes a profit! Perhaps we are more accustomed to the pure exploration plays which consume significant levels of cash on their quest to generate substantial capital gains from that discovery down-the-road.
With Sefton however there is a different model in play, as they seriously go about the job of building a business model based on solid growth and incremental value addition.
We first came across Sefton Resources in the summer and, as we met with Chairman Jim Ellerton, we recognised a drive to build a secure and attractive business for shareholders.
The company also had its share of wild excitement in 2011 with a competent persons report in May showing PV10 oil and gas resources in Kansas worth $100m, driving the share price much higher very quickly (it has since come back a long way).
Of course building in Californian reserves as well, you get to around £150m or so of value; which compares favourably with the current £9m market cap!
Sefton already produces, and has been drilling in the Californian Tapia field to increase production to over 200 barrels oil per day. The company is also engaged in a review of continuous steam technology that could materially increase recognisable recoverable oil reserves and increase production rates. And, alongside its exploration assets in Kansas, the company has used lower infrastructure prices to secure control over pipelines covering in excess of 200 sqkm of territory, enabling the company to carry their own gas and that of others, for suitable recompense.
From a macro perspective, right now, with specific reference to oil prices, the times they are a changin’ and we don’t see companies like Sefton lowly valued for ever. True to our criteria of security and blue sky, this is one company to be reviewed. This video of the company’s latest investor presentation would be a good place to kick off your research.
Various studies are underway but the Chairman, Mick Billing, has visited China recently and the company has confirmed in its recent quarterly update that it has various interested parties and finance optionsfor Molyhil.
So there you have it, a few of our reasons to be cheerful in 2012! If you can think of 50 (or even 5!) good reasons to be cheerful in 2012, please send them to us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) We will publish the best (meaning the most amusing or entertaining!) on the MiningMaven website in next week’s update….and if you can get them to rhyme even better!
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Disclosure: From time to time the authors may hold shares in the companies featured.
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