Veteran mining analyst John Cornford reviews some of the more interesting plays in the junior mining sector.
Every single one of my early stage mining picks seems to be becalmed – even though the last time I looked most seemed close to getting their various go-aheads.
It’s not just the ‘sell in May’ syndrome and summer doldrums; It’s also the drawn-out exit from covid and accompanying disruptions to supply chains and transport. And maybe also the drawn-out stories in gold (down from its peak but recovering on dollar weakness) and copper (down 10% from its May peak as was to be expected for a time), not to mention a problematic dollar. In other words, a lot of reasons or excuses for delays and drift. But all picks look capable of delivering multi-bag share prices once things get moving.
In all cases, even for quite large market capitalisations, lack of news allows those, usually small, sells that all investors need to make for one reason or another, to force down share prices to an extent disproportionate to their volume. How many times do I see on the bulletin boards complaints that after a sharp rise on suddenly increased volume, it is all lost again on only a few small sells.
But such behaviour certainly doesn’t mean that the scare, conspiracy, and gloom stories it engenders in some worry-prone minds have any basis; it merely gives the level-headed the chance to buy even more cheaply.
In copper, the no-news drift syndrome certainly affected Xtract Resources (LON:XTR) until early last week when a sharp rise in volume on what looked like well-informed buying determinedly reversed the drift over two days, only for half the regain to be lost on practically no volume at all over the next two.
That presaged news that the drilling programme on Bushranger is starting this week at double the rate up to now in order to better test the wider mineralisation found by the first phase. And, more interestingly, that further interpretation of the aerial IP surveys has shown the possibility that another deposit, similar to Racecourse, appears to exist a few miles to the south-east, and will also be probed.
So, the shares have started up again on volume which includes some larger buys than has been usual so far, indicating that ‘a better class of investor’ might be taking a look.
Which all means that if I had the funds I would be plunging in more deeply, to await the news about Bushranger that will be coming over the next six months. It won’t only be from the drilling but could also be about the results of a very preliminary study for an open pit mine.
The company’s latest news release said, “The Xtract team is excited to embark on this drilling programme, to test our belief that a much larger porphyry system exists at Racecourse than currently known.” And they should know! Watch out for sudden flurries in the shares which so far have been a good indicator of official news to come.
The same has been happening at Galantas Gold (LON:GAL), where we await more detail about the ramp-up of production to a much more economic scale than was possible before the recent over-subscribed fund raise. Despite the 135% gain in the shares between April and May there has been little evidence that it was profit-taking that has caused the 15% drift since then, but merely the inevitable dribble – only going to show that those in the know are holding on – seeing the shares as still very cheap despite the fact that up-dated numbers are still awaited.
Still with gold, I hardly dare mention Kefi (LON:KEFI) which continues to insist that all is still on track to close, soon, the funding for Tulu Kepi, which when it comes could see the shares treble. And as for Solgold (LON:SOLG), (copper mostly but a lot of gold too) having been cautious for a long time now I see little reason any more for its shares to stay stuck down where they are below 30p, which is why if I had the funds I would be piling in again. As I have surmised before, however, despite the much better news starting to come along, it seems likely that potential institutional buyers of the shares think they are all sewn up between Solgold’s major shareholders, giving little chance that any bid would succeed, so they would have to wait too long to see Solgold’s value fully unlocked. But when that news (a revised and much more economic feasibility study for Alpala and a possibly much earlier start) comes along in October, together with continuing success at its other Ecuadorian exploration prospects and, possibly, partnerships to help their funding burden, private investors at least won’t want to pass the opportunity by. So, the shares have a good chance by the end of the year of seeing at least 40p again in my view.
Away from gold and copper of course, it is those commodities exposed to the fantastic growth being projected for electric vehicles and battery storage which continue to be strong.
But except for Bacanora Lithium (LON:BCN) (market cap £98m @60p) – up 40% since the early May 67.5p cash offer from its largest, Chinese, customer and partner Ganfeng – those early stage miners hoping to benefit are still waiting for funding, and therefore continue to drift.
Not before time, the lithium price (probably connected with Ganfeng) has well and truly recovered from the hiatus last year when doubts were raised about the EV growth realistically to be expected.
Up to now, however, there has been no trading exchange for lithium. But the LME has just started tracking futures for lithium hydroxide – the grade for the most efficient battery and therefore expected to see the fastest growth – at over $15/kg recently, while lithium carbonate (with China the largest player, quoted in yuan) has more than doubled at $13.3/kg since its 2020 lows. It’s still only half the 2017 peak though, and with all commentators quoting a looming supply deficit, the price seems destined to continue its rise.
Like lithium, graphite doesn’t have a forum showing market prices, which are only set for specific supply contracts. But those firms which track the industry for a fee all seem to be forecasting continued strong growth in price as well as volume.
It does mean that for companies like Armadale Capital (LON:ACP) (market cap £22m @ 4.2p) those who track its shares don’t have changes in the graphite price to stimulate trading, which might be one reason why its shares only creep slowly and erratically upwards. Management gives the impression that project funding (initial capex is a largish $40m, a lot of which might be in the form of off-take agreements) for its Tanzanian Mahenge graphite project isn’t far away, but is still waiting for a mining licence to exploit what its feasibility studies have promised will be a highly profitable mine. (Although my past blogs have questioned some of the details.)
Holding the shares back might be the recent sale and the threat of more by a key shareholder and funder. On the plus side, ACP’s cash position looks sound for the moment, with over £2m capable of being raised from warrants if converted before next year which, hopefully, provides more than enough time for the Mahenge project to be put on a firm footing.
Among other metals, nickel with a 35% gain over the last year has continued strong, while tin, often overlooked but on a very long-term growth trend and sometimes containing tantalum, has been the strongest of all at 86% higher. No wonder Cornwall is looking to reopen some of its long-established tin mines, as well as testing for the lithium to be found in the underground water left by the mine workings. A few companies have listed recently to do just that, whom I might write about later.
Next on my list is Emmerson (LON:EML) (market cap £46m @5.5p) which is also awaiting funding proposals for its Moroccan Khemisset potash mine – except that it hasn’t been drifting like many others, but merely standing still after a sharp retrace from nearly doubling in January. Before then I had blogged that if the shares broke above 5p they would be up and away. They’ve been up to 8p, but have come down again, even though still 20% ahead since December.
The attraction is that EML’s potash is likely to be cheaper to produce than competitors’, while the small doubts are that the potash market, with long-term demand for the muriat of potash (Mop) variety that Khemisset will produce backed by expanding food needs, is supplied by a number of large global producers who seem able to vary their output so as to affect prices, while other varieties of potash can supply what are changing needs among customers for their different qualities. All of which makes long-term demand and prices difficult to forecast.
In addition, with a rather vague set of economics for a variety of scenarios that EML still seems to be considering, a funding deal might be some time in coming. When it does, however, the shares will look very cheap.
Lastly, dare I mention coal without being cancelled? It’s not actually dead yet and will probably take a generation or two to become so if that. In that time China, while dropping some of its (mooted but not started) overseas coal generation projects, has reaffirmed that others will continue, just as GEC has done with regard to some of its own. The coal price agrees: the index for thermal (power generation) coal is back at a ten-year high having nearly trebled since its panic low a year ago.
Ncondezi Energy (LON:NCCL) (market Cap £10m @ 2.7p) is one who depended on both China and GEC and whose investors have been nervous accordingly. So the volume which has pushed the shares to half their January level has been somewhat (but not much) larger than in the case of the drifters. Extra nervousness stems from a delay well beyond what was expected in a response from the local power authority to NCCL’s vital tariff proposal for its almost construction-ready Tete power station in Mozambique. This could be for a variety of reasons, but is very unlikely to be because the government is dragging its feet and that the project will be dropped – which is the nervous nellies’ fear.
The fact is that other infrastructure needed to transmit Tete’s power is going ahead, and the company doesn’t seem fazed about the delay. For seasoned investors with a ‘balanced portfolio’ strategy where part is of high risk but with potentially much higher reward, NCCL’s shares offer a balance of a 4-5 fold potential profit over the coming year (albeit much later than anyone thought) in exchange for a small chance of total loss.
While it seems to me that it is gold that has the most problematic medium-term outlook, my picks aren’t dependent on its price, so much as the start of production. But for anyone exposed to the EV and battery storage industry, as well as to power generation in general, the new lithium futures exchange could increase market interest in lithium producers.