Guy on Rocks: The base metals player coming into its own

Guy on Rocks’ is a 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 stocks to watch”.

Market ructions

Iron ore and nickel are the big beneficiaries this week of strong steel production and consumption numbers out of China.

China’s steel production is hitting record levels, Guy Le Page says.

“Steel output for January through to July is up about 3.7 per cent year on year, with July recording 93 million tonnes, which is a 9.5 per cent year-on-year increase,” he says.

“That’s all infrastructure and property related.”

“What we’re also seeing is a recovery in other markets, such as Japan and Korea, starting to emerge.”

“So it’s no surprise that a lot of commentary coming out on the iron ore market is that it’s going to be stronger for longer, which is a complete turnaround from 12 months ago.”

The seaborne steel market has gone from a glut to a deficit.

“So Chinese steel exports have been declining, which is obviously a big reversal since 2009,” Le Page says.

“We’re at a 10-year low on those exports, which were under 1.4 million tonnes in August. That’s all pretty positive for iron ore.”

Nickel, meanwhile, is a key component of stainless steel.

“The nickel market, while it looks like it’s in surplus, a lot of it’s being fed by nickel laterite production,” Le Page explained.

“But with increasing use in batteries, which require sulphide-derived nickel rather than laterite-derived nickel, I think a lot of the forecasters have got it wrong — looking at gross nickel production rather than a breakdown of where that nickel is actually being sourced from.”

“The LME stockpiles and the warehouse inventories are important, but that’s only part of the nickel market.”

Le Page says Chinese smelters are also looking for nickel sulphide offtake and are really struggling to find it.

“I think that’s evidence that the nickel market’s a lot tighter than what the numbers tell us,” he says.

“Look at the performance of Blackstone (ASX:BSX) over the last couple of months, continuing to grow their resource, that’s exactly the sort of play that, as a house, we’re looking to follow.”

Movers and shakers

Le Page reckons emerging iron ore producer Fenix (ASX:FEX) has more room to move after making big strides towards production.

The company recently signed a marketing agent for 50 per cent of its high-grade iron ore from the Iron Ridge project in Western Australia, and this week gave the project the green light.

Fenix’s goal is to produce a high-grade product approaching 65 per cent iron content from the mine, which hosts a total resource of 10.5 million tonnes at 64.2 per cent and a reserve of 7.8 million tonnes at 63.9 per cent.

The company is aiming to make its first shipment in early 2021.

“Fenix I think are slightly ahead of schedule, looking to break dirt in November,” Le Page noted.

“They’ve just done a deal on 50 per cent of their offtake. Importantly for Fenix, the premiums on lump are increasing again, so I think you’ll see them move into the high 20s/30s when we get confirmation that production is underway.”

Fenix is currently trading around 14.5c and has a market cap of $50.5m.

Fenix Resources (ASX:FEX) share price chart

Another explorer making moves is Caeneus Minerals (ASX:CAD), which has ground to the north of De Grey Mining’s (ASX:DEG) company making Hemi discovery, which has propelled its market value to +$1bn.

“I think CAD are gearing up to do some geophysical surveys,” Le Page says.

“Clearly having ground bounding Hemi to the northwest puts it in a pretty interesting position, with almost no exploration done. It will be interesting to see what happens.”

“They’ve moved from 0.1/0.2c since we first mentioned them to 1.2c last week, so it’s been an incredible move, but I think if you look at the cap of De Grey there could be more to come.”

Caeneus Minerals (ASX:CAD) share price chart

Le Page says there’s also still plenty more upside in American Pacific Borates (ASX:ABR), which is advancing its Fort Cady borate mine in southern California.

“Phase-two of their borate operation, which will roll out in about 18 months, should see NPV (net present value) approaching $1bn and the current (market) cap is around $300m,” Le Page said.

“So there is still plenty of room for that to move up in the next 18 months.”

American Pacific Borates (ASX:ABR) share price chart

The capital is flowing

The recurring theme seems to be increased capital flows into the junior space. And Le Page says there’s plenty more to come.

De Grey not that long ago raised cash, while Caeneus this week announced firm commitments from sophisticated and professional investors to raise $2m. And iron ore and base metals hopeful Venture Minerals (ASX:VMS) banked $2.5m from a “heavily oversubscribed” share purchase plan. This was on top of the $4m raised from a private placement in August.

“A huge amount of capital is going to be raised in the next six months by juniors,” Le Page says. “So it’s going to be a very active time on the capital market front.”

Hot stocks to watch

New to Le Page’s list is Red Metal (ASX:RDM), which has several projects in hot exploration jurisdictions.

The company has ground near Chalice Gold Mines (ASX:CHN) headline making nickel-copper-PGE discovery in WA’s Julimar region, ground in the Pilbara near De Grey as well as ground around Victoria’s big Fosterville gold mine.

But Le Page says the most interesting thing in Red Metal’s portfolio is its highly prospective patch of ground in Queensland.

Red Metal could be onto another Cannington – a 3-million-tonne-per-annum lead-zinc-silver mine discovered by BHP (ASX:BHP) in 1990.

“Red metal have a lookalike target at Mount Skipper, which they’re going to drill third quarter this year,” Le Page says.

“They’ve got some bullseye magnetic targets. It’s about 90km south of Cannington. They have drilled it before. It looked like they got exactly the same rocks.”

Red Metal also has a partnership with +$4bn copper producer OZ Minerals (ASX:OZL) on a number of its Queensland projects, including the Three Ways zinc-lead-silver and copper-cobalt project, near the Dugald River zinc-lead-silver mine in northern Queensland.

“I think that’s a pretty interesting tie-up,” Le Page says.

“I think these base metal plays will probably come into their own sort of the next 12/18 months. Not many of them have got these high-impact projects in base metals, but obviously the ones that have, we’ve seen some of them move recently.

“I think having a partner with deep pockets is a huge boost. So I think that’s going be one to watch.”

Red Metal has a market cap of around $27m at a share price of 11c.

Red Metal (ASX:RDM) share price chart

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.

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.