Bottom feeders start nibbling at knocked-down explorers, developers in search of big leverage
Those being nibbled, with some success, it must be said, include Legend Mining, Bardoc Gold, Alice Queen and Strandline Resources.
There are tentative signs that bottom feeders are stepping up their activity in the junior exploration/developers space.
They are nibbling away at those stocks with smashed values (all of them) but which stand out as leveraged plays to the upside thanks to their quality projects and because they have the cash to make things happen.
The step-up goes to the idea that as explorers are explorers, and future developers are future developers, they don’t have to worry about the widespread impacts and uncertainties caused by COVID-19 like the miners do.
We haven’t had a mine closure here yet.
But it will only take a virus break out at a couple of mines for the industry’s licence to operate – one that survives in the current lockdown because of the industry’s importance to the national and state treasuries – to be pulled.
Sure, exploration activities have also be constrained by travel restrictions brought on by COVID-19. But at worst, exploration programs can be pushed into the back half of the year when we’re hopefully on the other side of bridge, as the PM puts it.
Same goes for the would-be developers. Financing their projects in the current environment is the challenge but assuming COVID-19 passes, as it surely will, they will be back in the frame, hopefully before the year is out.
In contrast, the closure of a mine for a prolonged period would have potentially disastrous implications for those companies without the balance sheet to weather the storm. An explorer/developer on the other hand simply goes into hibernation.
The notion that the bottom feeders are nibbling away at the juniors, looking to lock in the enhanced leverage to the upside that smashed equity values has delivered, is not without caveats.
Those being targeted must have quality projects on their books and they must have cash-on-hand to fund drilling programs without having to wait for the world as we knew it to return.
Central to the bottom feeders’ thinking is that there are plenty of examples of how decent exploration results can deliver strong share price responses regardless of what the broader market is doing.
Legend Mining (LEG) is an example. It doubled to 8.1c in the initial response to last December’s discovery hole at its Mawson nickel-copper prospect in WA’s Fraser Range.
It was left to drift lower to 6.7c on Monday by which time the bottom feeders had already moved in, knowing that assays from the first of the follow up holes at the discovery were about due.
They were not disappointed then when Legend reported on Tuesday that the hole had confirmed the significance of the discovery by returning three massive sulphide intersections.
Legend is now a 13.5c stock for a gain since Monday of 101%.
Bardoc Gold (BDC):
There also looks to be some nibbling underway at Bardoc (BDC), mentioned here two weeks ago on the strength of its then recently released pre-feasibility study in to the development of its namesake gold project 35km north of Kalgoorlie.
The PFS envisaged 135,000oz of annual production at an AISC of $A1,220/oz – the gold price is currently $A2,605/oz - for an initial 8-years.
In the lead up to the release of the PFS, Bardoc shares had drifted lower from 8.5c to 4.5c when the PFS yarn appeared two weeks ago.
Bardoc is now 4.8c. It doesn’t look like much but a 6.6% gain in two weeks is not to be sneezed at it in the current market. The nibblers will be looking for more.
They will have liked the slide pack lodged on the ASX this week promoting the PFS, most notably the little tweak that compares the key metrics of the PFS with its baseline gold price of $A2,100/oz against a gold price of $A2,530/oz.
Pre-tax cashflow would rise from $551m to $921m and the pre-tax NPV shoots from $332m to $600m. That should make financing the development all that much easier you would think.
Importantly, Bardoc has $14.3m in cash and investment to keep things moving along towards first production.
ALICE QUEEN (AQX):
Alice Queen (AQX) is another junior with the projects and cash that seems to have attracted the interest of the value hunters in the exploration space.
It got to 6.3c in October last year on the strength of its Boda East prospect being next door to Alkane’s (ALK) exciting Boda gold/copper discovery in NSW’s northern Molong volcanic belt (MVB).
It was let to drift though in the broader market’s great sell-off to1.3c come March 25. But it has since climbed back to 1.7c for a gain in the period of 30%.
No surprise in that as since October, Alice Queen’s story has got better, due in part to further drilling by Alkane at Boda which has confirmed it as one of the most exciting discoveries in recent times.
The rise in Aussie gold price to record levels has prompted some to have a second look at the value of its existing 500,000oz inferred gold resource at its Horn Island project in Queensland.
Then there is what could come from its separate exploration joint venture with St Barbara (SBM) which is looking for a nearby and large-scale intrusion related gold system.
Plonk the existing resource into WA, and Alice Queen’s current market cap of $15m would look decidedly skinny, even more so when the exploration joint venture with St Barbara is given a value.
St Barbara funded its $500,000 first-year commitment ahead of time and will have to decide in June if it wants to continue with a stepped up push of $3.5m over the following two years.
While St Barbara has put its own managed exploration programs on hold while the COVID-19 uncertainties continue (Horn Island is managed by Alice Queen), the two-year time line means COVID-19 will not necessarily figure in the June decision.
As Horn Island more or less covers Alice Queen’s market cap, it can be said that there is nothing in the current share price for its NSW gold-copper interests along the MVB.
The company has just been awarded a $200,000 drilling grant from the NSW government for its Mendooran project further north of Boda where previous work has matured eight large copper-gold targets in the Goonoo Goonoo conservation area.
A start to drilling remains dependent on an environmental clearance but as the drilling grant came from another arm of government, it is assumed that final clearances are on the way.
Alice Queen is also busy securing land access agreements to drill Boda East.
All that wouldn’t mean much if the company didn’t have the cash to advance its projects. The fix on that score came in February when it pulled in $3.8m at 3.2c a share.
The value nibblers are of course now buying into the same story for 1.7c.
Mineral sands developer Strandline (STA) is another junior to attract the nibblers.
It was a 12c stock at the start of the year and drifted down to 6.9c on March 24, notwithstanding a February target price on the stock from Shaws of 32c a share.
Strandline has since edged up to 8.1c, a gain since March 24 of 17%. That price target of 32c is a long way off but the point is made that juniors with quality projects are finding support.
In the case of Strandline, the flagship project is the Coburn project in WA. It is a world-scale project that would be up and away in better times.
Pending the return of better times, Strandline will be able to main the momentum thanks to its ability to raise $6.5m in February from a placement and underwritten rights issue at 12c a share.
The specialist mining private equity fund Tembo Capital increased its stake in Strandline to 37.6% under a sub-underwriting agreement which is kind of neat for the nibblers now buying the story for 8.1c.
They’re getting the due diligence judgement of one of the best in the mining private equity space that 12c a share was a good thing.
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One of Australia’s leading business journalists, Barry FitzGerald, highlights the issues, opportunities and challenges for small and mid-cap resources stocks, and most recently penned his column for The Australian newspaper.