Guy on Rocks: Economic impacts, supply disruptions could send metals’ prices into volatile waters
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‘Guy on Rocks’ is a new Stockhead series looking at the significant happenings of the resources market each week.
Former geologist and experienced stockbroker Guy Le Page, director and responsible executive at Perth-based financial services provider RM Corporate Finance, shares his high conviction views on the market and his “hot stock to watch”.
Extreme economic indicators this week such as the 18 per cent dip in non-residential construction, 20 per cent slide in consumer spending and business conditions being the weakest since the GFC will inject some volatility in metals prices, according to Le Page.
On top of that supply disruptions and falling demand are starting to bite.
“Already we’re seeing the platinum supply side possibly off over 40 per cent, palladium off over 27 per cent, copper off 10 per cent. Copper production in Latin America could be off 75 per cent,” Le Page explained.
“So while this is only temporary, I think that combined with a drop in demand is going to make for some fairly volatile markets and what we’re seeing with the leading economic indicators — things like the VIX index*, which has gone above the GFC levels — I think we’re going to start to see that reflected in metals’ prices.”
*The VIX, also often referred to as the ASX fear index, is a measure of implied volatility that provides a gauge of expectations of near-term volatility in the Australian sharemarket.
Right now, it’s not so much about which sectors Le Page is bullish or bearish on, but which stocks.
While he is still very bullish about gold, with the ramp-up in talk surrounding the potential for the price to punch through the $US2000 mark, he thinks nickel, platinum and palladium may have their day in the sun thanks to some recent hot discoveries.
“I think the nickel-platinum-palladium space is going to get very interesting,” Le Page said.
“Obviously, Chalice combined with the Legend discoveries are going to provide the momentum. I think it’s probably a bit stock specific at the moment.”
Since that ran earlier this week, Chalice has made another big announcement and shares rocketed. The company is now trading at nearly double what it was at the start of April with its share price sitting at around a $1.
First up, Mithril is gearing up to complete the acquisition of a collection of prospective gold and silver concessions in the Sierra Madre Occidental zone in Durango State in Western Mexico.
“What’s interesting from a junior’s point of view is they’re likely to redrill a lot of historic non-JORC results,” Le Page said.
The historic results included very high-grade hits of 18m at 45 grams per tonne (g/t) gold and 100g/t.
To put that into perspective, anything over 5g/t gold and 50g/t silver is generally considered high-grade.
“There’s a lot of these high-grade hits,” Le Page said.
Interestingly, Mithril also reduced the price of its current capital raising from 1c to 0.5c.
“So, it’s got an enterprise value (EV) of around $5.5m post this rights issue,” Le Page said.
“I think 0.5c represents pretty good value and I can see that trading well above a cent when exploration gets moving and they complete this acquisition in early May.
“I think there’s pretty good broker support behind it.”
Meanwhile, Le Page thinks American Pacific Borates is also one to watch given its recent release of a revised definitive feasibility study (DFS) that shows a “remarkable set of financial metrics”.
The DFS is for the Fort Cady borate mine in southern California.
“They’re already down to the last phase of the permitting process, they just need the environmental permit, which I’m reasonably confident they’ll get,” Le Page said.
“But what I think was impressive was the financial metrics on the BFS.”
For the entire three-phase project, American Pacific Borates has estimated a net present value of $US1.97bn ($2.2bn) and an internal rate of return of 39.4 per cent on a capex of $US737.9m.
IRR and NPV are used to estimate the profitability of a potential operation – the higher they are above zero, the better they are.
And given the project has been proposed in phases, Le Page reckons the company could get a very good return in the initial year of operation, which could fund the expansion of the project through the other phases.
“[American Pacific Borates] is able to start the project with a very modest capital expenditure of under $US50m for phase one, of which the NPV would give it about $US224m and EBITDA of about $US20m in year one,” he said.
“I think they could do it with offtake, some equity and a modest amount of debt.”
That would give the company an EV of around $55-$60m, according to Le Page.
“I think that’s a pretty interesting story.”
Although American Pacific Borates’ share price has edged back from its recent high of 50c, Le Page is confident it will go back up.
“I think the selldown was purely a move of money out of risk assets into US dollars and other safe havens,” he explained.
“But I think you’ll see this recover. Probably by mid-year I think we’ll see it trading well above that high of 50c it reached not long ago.”
At RM Corporate Finance, Guy Le Page is involved in a range of corporate initiatives from mergers and acquisitions, initial public offerings to valuations, consulting and corporate advisory roles.
He was head of research at Morgan Stockbroking Limited (Perth) prior to joining Tolhurst Noall as a Corporate Advisor in July 1998. Prior to entering the stockbroking industry, he spent 10 years as an exploration and mining geologist in Australia, Canada and the United States.