By Our Man in Oz
Some people might think it insulting to describe the Kambalda nickel assets of Mincor Resources as “The Magic Pudding” of mining, but that’s because they don’t know the Australian children’s story about a magic pudding which always re-forms after every spoonful and can be eaten again and again.
Kambalda orebodies obviously can’t be re-mined but the region is certainly amenable to fresh discoveries, which is a way of “re-forming” and a trick performed consistently since nickel was discovered there almost 50 years ago. And Mincor has just done it again.
The latest news from Kambalda is not about a single new discovery it’s about three new discoveries which could lead to Mincor soon becoming the operator of five mines in the region, a dramatic expansion on the two currently in production.
Discovery news, plus steady profit and dividend flows, has re-kindled interest in Mincor at a time when small-to-medium miners are being discounted by investors. Even before this latest news, Mincor has one or two things going for it – cash in the hand today and the near certainty of growth tomorrow.
More about cash later because the most important recent developments at Mincor are geological. They are discoveries which have caused the company to accelerate an already busy drilling programme to the point where there are six rigs operating, three on the surface and three underground.
Nickel-rich structures called Cassini, Voyce and Durkin North are the latest additions to Mincor’s inventory at Kambalda, with all having the potential for development as mines. IN addition, a fourth discovery called Burnett is expected to extend the life of the Miitel mine.
For David Moore, Mincor’s long-term chief executive, the discovery news means the potential for organic growth rather than a need to deploy the company’s cash on acquisitions.
“Our intention is to drill aggressively for the remainder of the financial year [to June 30], with a view to finalising resource numbers in the first quarter of financial 2016 and, if warranted completing initial feasibility studies on up to three potential new mines by about the end of this calendar year”, he says.
There are number of reasons underpinning David’s optimism. The most important is that Kambalda orebodies are invariably high grade, such is the nature of mineralised “komatiite” structures, lava flows from ancient volcanoes active in the region some 2.7 billion years ago.
Not only can the structures flow for tens, if not hundreds of kilometres, but once detected they can be tracked, though the twin keys to a komatiite are first to find it and to then follow the sometimes erratic trail of the lava flow while looking for the richest pools of deposited mineralisation.
At Burnett, which is a northerly extension of the Miitel mine, Mincor has reported drill hits of up to 3.62% nickel over a 10.97 metre intersection. It is a mine-extending discovery.
Durkin North is a new discovery with a best recent drill hit of 4.81% cent nickel over 6.73 metres and which has been pencilled in as Mincor’s third mine.
Voyce, which is described as an emerging high-grade discovery, has revealed thick pods of ore-grade material including five metres at 6.13 per cent nickel and 7.62 metres at 7.72 per cent. It could become the company’s fourth mine.
Cassini is potentially the best of all because it is a totally new, near-surface, discovery which has the hallmarks for being mine No.5. Best drill hits, so far at Cassini include 6.41 metres at 7.25 per cent nickel and 5.16 metres at 6.45 per cent nickel.
“Intersections of this quality are rare,” David said, adding that “in Kambalda they almost always result ultimately in the development of a mine.”
“Obviously there is still a long way to go before we can be sure of that at Cassini, but we are increasingly confident that we have made a significant new greenfields discovery, the first in Kambalda for many years.”
More opportunities for discovery have been identified in the region, David said. “We literally have dozens of exploration targets to test.”
It’s the flow of fresh results from an old mineral field which lies behind the Magic Pudding comparison drawn by Minesite’s Man in Oz, based on book written and illustrated by Norman Lindsay as far back as 1918. It is recommended reading (even for geologists and other science-oriented types looking for an artistic escape).
Discovery aside there are the financial reasons for investors taking a fresh look at Mincor, a rock-solid business which is paying for its expanded search effort through cash flow while also maintaining a remarkably consistent dividend policy.
Mincor’s latest financial result, for the half-year to December 31, shows a mining business in robust health despite historically low metal prices, with underlying pre-tax earnings of A$14.87 million, from A$52 million in sales generated from the production of 4986 tonne of nickel at a cash cost of A$5 a pound – comfortably below the nickel price in Australian dollars thanks to its decline against the U.S. dollar.
The accelerated drilling programme at the company’s latest discoveries bit into the final result which, after write-offs for depreciation and amortisation, ended with an accounting loss of A$1.89 million.
Despite the loss Mincor maintained its interim dividend of A2 cents a share, and was able to close out the half-year with cash in the bank totalling A$53.6 million.
Investment banks which follow Mincor love the story, both from a cash-generating (and dividend paying) perspective and from the blue-sky growth potential revealed in the latest round of discovery results.
“Drilling results are re-setting the clock” is how UBS described Mincor in its latest analysis of the stock which included a buy tip and a 12-month share-price target of A90 cents, which is roughly 33 per cent above latest on-market sales of the stock at A67 cents.
Like other banks, UBS is concerned about the relatively short life expectancy of Mincor’s current mining operations (two-to-three years) but also notes that the track record of replacing reserves has been impressive since it started mining nickel in 2002.
“We believe it is likely that the current drilling programme could lift reserves back to beyond five years,” UBS said.
Macquarie Bank echoes UBS but has a neutral view of the stock and a 12-month price target of just A73 cents because the half-year profit result was weaker than it expected.
The low nickel price worries Macquarie which suggests that if the price stays down Mincor might have to dip into its cash reserves to fund the aggressive drilling campaign which, given the quality of the drill results so far is a price shareholders should be willing to pay.