Barry FitzGerald: Gold! Big discoveries! Going cheap! Come and get your gold!

Grand Sale! Grand Sale! Companies that have made three of the best discoveries in recent years are on sale at big discounts.

Garimpeiro is talking about De Grey (ASX:DEG) and its Hemi gold discovery in the Pilbara, Chalice (ASX:CHN) and its Julimar nickel-copper-PGE discovery on Perth’s doorstep, and Rumble (ASX:RTR) and its Earaheedy zinc-lead-silver discovery north of Wiluna.

All three are quality discoveries with world-class credentials. And before the broader market and commodity markets became weak at the knees in response to interest rate rises/recession fears, the average Joe had to pay up to have a slice of the action.

Taking April 21 as the start of the broad market decline, De Grey was trading at $1.35. It’s now around $1. Chalice was trading at $7.25. It’s now $4.85. Rumble was 39c, and is now 27c. What’s more, share price targets from brokers following the stocks are massively ahead of the current market prices.

Macquarie recently had a 60% higher than market price target on De Grey of $1.60, and a 55% higher than market target on Chalice of $7.50. It is a bit long in the tooth now, but when Bell Potter initiated coverage of Rumble on April 29, it valued the stock at 60c which is 122% higher than its current price.

The three stocks have been in recovery mode of late. Because of the quality of their discoveries, they are in fact leading the recent recovery for explorers within the broader market. But it has been modest to date.

As the broker share price targets suggest, there could well be upside for the three stocks, assuming both equity and commodity markets work through the current fears around inflation and economic growth.

As far as the resources markets goes, there was a big confidence boost during the week from BHP’s unsolicited $25 a share takeover bid for copper/gold producer OZ Minerals, which is also planning to develop the West Musgrave nickel-copper project.

BHP’s tilt was at a 31% premium to the market price and was clearly opportunistic in that like the stocks above, OZ’s market performance has suffered from the broader market sell-off and commodity price weakness.

BHP’s $8.4 billion bid is not for the here and now though. It is to position itself to have more copper and nickel under its belt come 2025 when the world’s consumption of metals key to the decarbonisation push tests supply channels to the limit.

A mid-decade metals shortage dovetails neatly for advanced explorers with quality projects like three mentioned above.

Their projects will either be in production or will be under development, positioning them to capture the upside for the battery and electrification metals, as well as continued strong pricing for gold, given the eroded value of fiat currencies, and every likelihood of ongoing geopolitical tensions.

Ahead of getting into production, the projects will have continued to grow in scale. And given the strategic nature of all three, there could well be some corporate action as the big players in the industry look to acquire large scale, long-lived and low-cost operations.

In light of BHP’s move on OZ, and the yet to fully recover share prices of the three mentioned above, it is a wonder that there hasn’t been some takeover action already.

Quality discoveries always get rewarded in the long run. So the sluggish recovery to date for the today’s three might be seen as an opportunity for investors with an investment horizon that extends beyond next week, or the week after.

Having said that, there are some legitimate reasons why there is Grand Sale! underway. The market is worried about rising capital costs to build a new mine, and the ability for the companies to raise funding on favourable terms and with minimal dilution.

But given there is still plenty of time before the three companies turn the first sod, the capex concerns are looking overdone. The capex cycle in the mining industry is like all other cycles, it cycles up and down.

COVID disruptions and supply chain challenges are a big factor in the current capex pressure and it has got to be expected (hoped) that they fade as issues before the three discoveries begin the journey to become multi-decade mines.

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