Guy on Rocks: Why a recession seems to be good news for resources
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‘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”.
Obviously the first thing Guy Le Page pointed to this week was the “official” news that Australia is in recession, which he says is “no surprise”.
It might not be good for those who are out of work, or certain parts of the economy, but it has seen more money flow into resources.
“That partly explains some of the money coming out of the top end of town, out of the top 200 and into resources,” Le Page said.
Resources notched a year-on-year gain of 12.6 per cent, while banks are down 3 per cent and industrial sits at 6.4 per cent growth for the year.
“So it’s a pretty strong year for resources,” Le Page said.
On the iron ore front, Le Page sees the price remaining above $US100 ($137) a tonne for “some time to come” and the continued widening of the gap between low-grade and high-grade iron ore.
This is good news for emerging producers like Fenix (ASX:FEX), which this week announced it had signed a marketing agent for 50 per cent of its high-grade iron ore production and sales from the Iron Ridge project in Western Australia.
The company is also well advanced in talks regarding the sale of the remaining production. Fenix is aiming to make its first shipment in early 2021.
“I think the other important thing given that they’ve got a lot of lump material and high grade is that the premium for high grade has started to increase,” Le Page explained.
“We had a narrowing of that premium for the high-grade iron ore, but that’s started to blow out again. So I think they’re in particularly good shape.”
Thinks are also looking good on the copper front, with Le Page saying there is a lot of “speculative positioning at the moment”.
“There’s a lot of belief that there’s going to be a higher base for copper for the next six to 12 months, maybe up around the $US8000-a-tonne mark,” he noted.
“There’s a lot of parallels in the copper sector that we saw back in 2010-11. 2010 to 2017 we had a period of consolidation, but you’ve got shrinking stockpiles and that upcoming deficit, I think, is going to continue to drive it.
“We had a 30 per cent increase in 2010-11 and then a 20 per cent increase in 2017-2018, and I think as you see these stockpiles drift down there’s every chance we’re going to see another run on copper, which has obviously had a pretty strong performance this year — up from $US5000 to now around $US6700.”
The big news this week came from De Grey Mining (ASX:DEG), which had yet another headline-grabbing discovery at its ‘company-making’ Hemi deposit in WA’s Pilbara region.
De Grey has now uncovered a 1.8km-long and up to 80m-thick new altered intrusion 200m below surface that remains open to the south and at depth immediately south of the Aquila gold prospect at Hemi.
Le Page says the company is getting “big widths at pretty decent grades”, with initial drilling of the new Falcon prospect returning 21m at 3.4 grams per tonne (g/t) gold from 40m and 19m at 2.1g/t from 68m.
“Mineralisation is open well beyond that 1.8km strike,” he said. “I still think it’s early days up there.
“It’s looking like a very large, mineralised system that might sort of bulk out about 1.3-1.5g/t, maybe a touch higher, and certainly with high-grade pods as we’ve seen from the drilling results over the last few weeks.
“But that’s only getting bigger. Obviously De Grey haven’t published a resource and there’s a long way to go yet, but it’s certainly looking like the biggest discovery in Australia this year by a significant margin.”
Le Page also noted one of De Grey’s neighbours, Caeneus Minerals (ASX:CAD), had gone into a trading halt this week.
Caeneus has ground, known as the Yule project, north of De Grey.
“I guess part of the reason that Caeneus has gone into a trading halt is to take advantage of this fantastic news on their doorstep,” Le Page said.
“They’re raising money at the moment. I’ve noticed they’ve crept up over a cent in the last week, so a lot of interest in that company.”
WA-based Pacifico is developing the Sorby Hills lead-silver-zinc project in WA, which has a measured resource of 7.1 million tonnes at 6.1 per cent lead equivalent (4.3 per cent lead and 57 grams per tonne silver) and 0.4 per cent zinc.
The company is trading at 2.1c, giving it a market cap of about $64m, with about $3m in the bank.
Sorby Hills is a 75/25 joint venture between Pacifico and Henan Yuguang Gold Lead Co.
The company recently published an updated prefeasibility study (PFS), which Le Page says returned a “pretty impressive set of numbers”.
“Capital costs are slightly higher at just over $200m, including contingency and sustaining capital,” he noted.
“Mine life has been extended from eight to around 10 years. Project NPV (net present value) pre-tax is about $300m, a 1.6-year payback and internal rate of return about 46 per cent. So a pretty good set of numbers.”
Pacifico also has “plenty of leverage to lead”, which is trending up.
“Not a huge grade, but very good logistics and good project economics at a low strip ratio near surface.”
The company has a resource of around 44 million tonnes at 3.3 per cent lead, 38g/t silver and about 0.5 per cent zinc, with plenty of exploration upside, according to Le Page.
“I think there’s every chance they’ll push that mine life out beyond that initial 10 years,” he said.
“They’ve got a pretty good management team who’ve got experience in bringing these sort of projects into production.
“I saw a valuation out there the other day by Euroz around about 4c. I think it’ll probably get there quite comfortably. And that’s a 40 per cent discount based on risk.”
Meanwhile, Ausmex is advancing the Mt Freda gold project in Cloncurry, Queensland, and the Burra nickel-copper-platinum group elements project in South Australia.
Le Page reckons Ausmex has been a “bit unloved over the last few years”, having come back from highs above 10c to trade at around 5.2c, which gives it a market value of around $28m.
The company recently underwent a board reshuffle that saw the appointment of Aaron Day as managing director and Trevor Coombe come in as a non-executive director.
“Their goal is to get some near-term production up, do some toll treating and mine gate sales potentially,” Le Page said.
“They have a great portfolio but really haven’t been focused. They’ve had some small resources, which they want to upgrade, but I think what’s interesting is looking at some of the grades at Mt Freda — pretty high-grade, open pittable material. But they are looking to go underground.”
Ausmex are also getting some high-grade intersections at The Golden Mile project, with hits of 25m at 4.9g/t and 24m at 4.5g/t under some existing open pits.
“Some pretty serious grade and pretty big resource upside,” Le Page said.
“So they’ve got a few aggressive drilling programs planned at Mt Freda and Golden Mile with a view to getting some production up.”
Ausmex is planning to undertake resource drilling at Mt Freda and complete a scoping study at The Golden Mile in the fourth quarter this year, with the aim of moving into production in the first quarter next year.
“I think at a cap of around $28m with $3m in the bank, plenty of upside there and coming off their recent lows in June/July this year,” Le Page said.
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.
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