Veteran mining analyst John Cornford reviews some of the more interesting plays in the junior mining sector…
Significant news recently has spotlighted Kefi Minerals, Oracle Power, and Solgold, but with no change to my stance on any of them. If anything, Oracle is even less attractive, now that a ‘financing’ facility has been arranged for up to three times its current market cap. Its terms make it look intended to fund on-going development costs, rather than the large contribution to Oracle’s projects’ equity that will be needed eventually.
So it looks as though the scale of share dilution before anything is earned from ORCP’s power projects (not before at least seven years from now) will be even worse than I estimated in April. Stay well away.
At Solgold (LON:SOLG), Cornerstone Capital‘s (TSXV:CGP) 7.6% shareholding has joined Newcrest’s 13.6%, to establish a clearly hostile platform should any other player wish to join it in trying to oust Solgold’s board, whom they accuse of all sorts of (relatively trivial) mismanagement. CGP is convening an EGM for the purpose, having rejected Solgold’s latest bid to wrest from it the 15% of Cascabel (21% counting Cornerstone’s own share stake in Solgold) that it doesn’t already own. That stake has always been considered a millstone by investors, as complicating Solg’s attempts to raise finance to build the mine. Most observers think CGP is trying to delay things until BHP is free, in October, to use its 13.6% stake for some corporate move that might unblock the logjam I mentioned two weeks ago.
At Kefi Minerals (LON:KEFI), while the final, relatively small, financing keystone is still awaited before its Ethiopian Tulu Kapi gold mine can be built, it has encouraged investors with a pre-view of the maiden resource that it plans to announce next month for its Saudi Arabian Hawiah copper-zinc prospect. This looks like containing copper with a current ‘in-ground’ value of $2.5bn, which at the very lowest price per tonne ($119) that RFC Ambrian in 2018 found had been paid to buy such assets (when the copper price was around the same as now) would be valued by a buyer at $47m (1.9% of the ‘in-ground’ value) while still un-mined.
That compares with Kefi’s £25m current market cap, which itself is only 15% of Tulu Kapi’s NPV at a $1,700/oz gold price. Even allowing for the fact that a share’s value never approaches its project’s NPV, the margin below it is so large, and the scope, now that copper is recovering, for Hawiah to be valued higher than I assume, shows how cheap Kefi must be. That is provided those start-up funds for Tulu Kapi are forthcoming. Some fear the delay masks an underlying liquidity problem in the Ethiopian economy which, if confirmed, would see Kefi’s shares once again on the downward leg of their roller-coaster.
Moving on – some of my ideas are for miners still in a relatively early stage, because one never knows when development or financing news, or a commodities spurt, will spring their shares to life.
Such a commodity recovery (although modest) is being seen in nickel, where my review of Horizonte Minerals (LON:HZM) last October described its potential after its royalty financing deal with Orion Mine Finance kick-started the main funding for its two promising Brazilian projects.
Together these will take HZM into the top five global nickel producers – the follow-on Vermelho project producing nickel particularly suitable for batteries. Coinciding with my October review, Vermelho reported even better economics than HZM’s first project, Araguaia, although its initial $652m cost seemed to frighten investors into selling the shares down to 3p, compared with the 4.7p at which I advised not to chase.
I also said investors were expecting an equity raise this year to finance Araguaia, which some speculated could be made at 10p, although I doubted that.
In any event, having plummeted below 2p on the corono virus panic, encouraging news on progress has seen the shares back above 3p, although still waiting for news of the full project financing for Araguaia, whose construction has already started, funded by last year’s $25m up-front royalty deal with Orion Finance.
While I don’t expect the project financing terms will warrant 10p for the shares just yet, the fact that both projects have a combined $2.5bn NPV is far enough above HZM’s current £50m market value to make it well worthwhile buying on any dips, especially once the e-vehicle battery outlook becomes clearer.
While nickel’s use for batteries might be behind its recovery, the same can’t be said for lithium, whose price continues to fall to less than half its peak two years ago.
Among miners who were hoping to benefit significantly from a long-term increase in lithium demand is Bacanora Lithium (LON:BCN), which is developing a large, low-cost mine at Sonora in Mexico, for which it has secured substantial financial backing and promised off-takes from major Chinese customers.
But, with no sign of recovery in the lithium price, the remaining funds to start construction have been delayed – probably until next year – and BCN is understandably out of favour, having withdrawn from its website the economic report which had shown Sonora to be highly profitable at lithium prices higher than now.
However, long term projections are still for substantial growth in demand for the battery grade lithium that Sonora is gearing up for (there are other grades produced by South American producers who will not be competing with BCN) and only recently China has announced plans for its post Covid-19 recovery that depend heavily on stimulating its auto and e-vehicle industries back into life.
Whether that will be enough to reverse the lithium price slide has yet to be seen, but signs of it might well spur BCN itself back into a recovery.
Talking of the exaggerated share prices promoted by analysts using NPV calculations (refer back to the related shenanigans at Sirius Minerals in 2016) I haven’t yet commented on the extraordinary goings-on at Eurasia Mining (LON:EUA), whose shares were suspended (with no explanation) for six months, until restored two weeks ago.
The suspension was after the shares had suddenly doubled from around 3p and after its broker had resigned (again no explanation) and after the publication (now apparently withdrawn) by a paid-for ‘research’ firm of a report adducing a £1.5bn ‘value’ (57p per share) to Eurasia’s palladium and platinum projects in Russia. That followed another paid-for report along the same lines a few months before. Both implied a value (the NPV, of course) many times that published by the company’s professional broker the year before, and both rely overwhelmingly on guesses about the value of a very large addition to the exploration area at EUA’s developing palladium resource at Monchetundra in the Kola peninsular.
The company has now announced that expressions of interest in those assets from interested buyers or partners have warranted it entering into formal sale or joint venture negotiations, stimulating yet another spurt in the shares when dealings were restored the same day.
What can one say? There is no published professional mining consultants’ or ‘competent person’s report on the Monchetundra ‘flanks’ (as the extensions are called) and, as far as we know, no drilling or scientific analysis to show how they can be mined and processed let alone the cost of doing so and the amount of palladium there. The paid-for researcher (who does not appear to have any formal mining or investment qualifications) seems to have put his thumb in the air to ‘estimate’ these key factors.
I leave it there. It’ll be fascinating to see the outcome.