Pic: Alena Axenova/EyeEm via Getty Images
Mining
Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Shaw and Partners State Manager WA and Director Corporate Finance Davide Bosio.
Heading into a potential recession the mood around the listed equity space should be less bullish than it is.
But the ASX is a special case in the global equity world, given its high penetration and domination by resources stocks.
Prices for commodities remain high, and the long term outlook for metals tied to the energy transition thematic, expecting big kicks in demand from electric vehicles and renewable energy, appears to be enduringly positive.
At the same time, the supply of these metals is limited and big and medium players are bound to be keen to get their hands on more.
With its $9.6 billion cash bid for OZ Minerals (ASX:OZL), BHP (ASX:BHP) delivered a big signal that miners who have been stingy in recent years, returning cash to shareholders in penance for years of poor decisions during the last mining boom, were back on the look out for major acquisitions.
While others have not been so keen to engage in major deals, like Rio Tinto (ASX:RIO) boss Jakob Stausholm who said it would be “sad” if its internal growth strategy were to be diverted by major M & A, there are plenty of hints more is on the way.
6Mozpa gold giant Newmont’s unsuccessful $24.5b bid for Aussie peer Newcrest (ASX:NCM) was a hint more consolidation will come in the gold space.
At the same time inflation and general market uncertainty mean lots of mid-tier and junior miners are looking rather cheap right now. Could we see more dealmaking at the junior end of the market?
Shaw and Partners director of corporate finance Davide Bosio says yes, noting those strong commodity prices in recent years have left miners with substantial war chests to spend on M & A.
“There’s still an abundance of cash out there,” he said.
“If you look at, say, the battery metals plays or some of the lithium producers, for example, they’re sitting on enormous amounts of capital, and someone like a Pilbara Minerals, they’re paying a divvie … they’re just building up this immense war chest of cash.
“We’ve seen that across various sectors, but I think that’s the underlying theme where the quality producers, and this is sector agnostic, have built a serious war chest.
“And if they are to continue their aspirational targets for growth, I think we might see them putting some of that capital to work and the easiest way for them to obviously grow their size is through takeover activity.”
Most of those big companies aren’t laboured by debt right now, with broader inflationary and global economic pressures two factors pointing against M & A right now.
But facing strong demand for commodities and a lack of discovery, juniors with commercial deposits could be of interest.
Even relatively small players are currently commanding interest, especially in the battery space, with Essential Metals (ASX:ESS) accepting a $136 million cash bid from majors IGO (ASX:IGO) and Tianqi to acquire the company and its small Dome North lithium project in January this year.
“I think you’ve got so much demand for some of those metals it’s just this tailwind where we’ve seen a lot of explorers trying to find something, and spending a lot of money to really try and identify new deposits that are commercial,” Bosio said.
“So for the companies that have been able to successfully make discoveries, and really hook into a commercial scale deposit, it becomes very, very attractive for a large company to come in and take control of that.”
M & A is tough to do well when the market is on a roll and valuations are strong. But in sectors like gold, lithium and base metals, many companies are well off their highs right now.
So which small caps do Shaw and Partners think are trading for less than the sum of their parts?
Black Cat recently announced two of the highest grade gold resources in Australia at its Paulsens and Coyote Central deposits, the latter part of the Western Tanami gold project.
With its lower grade but larger scale 1.3Moz Kalgoorlie East gold project also in the Black Cat portfolio, the explorer-cum-developer has over 2Moz of gold in resource as well as two unused processing plants.
One, Paulsens, is in such good nick the company could make a decision to restart the mine, which contains a high grade underground resource of 258,000oz at 10.8g/t, by the middle of this year.
Black Cat has a market cap of around $102 million and at a share price of 38c yesterday was trading at around half of Shaw’s price target of 77c.
“They’re sitting on north of 2 million ounces of gold and they have a significant amount of upside if you believe in the strategy of trying to turn those mines back on in the near term,” Bosio said.
“They’ve got very high grade deposits which is a very good start so they’ve got enormous upside in the event that the gold market actually does turn it on.
“It’s been threatening to do it for a while but it hasn’t really been able to push through these current levels. I think we just need that change in sentiment to really kick the gold market along.”
Also interesting Shaw and Partners in the gold space is Saturn Metals, which is investigating a low-cost bulk tonnage and heap leach processing operation at its Apollo Hill project in the Leonora gold district.
Saturn has added almost 1Moz of resources at Apollo Hill since listing in 2018 as a spin-off of base metals play Peel Mining (ASX:PEX), taking its total resource to 76Mt at 0.6g/t for 1.469Moz of gold.
That could be highly relevant to a company like Genesis Minerals (ASX:GMD), where gold legend and former Saracen boss Raleigh Finlayson is trying to consolidate Leonora’s gold mines via the “Hoover House” merger with Gwalia gold mine owner St Barbara (ASX:SBM).
“It’s one of those companies where if you look at the Genesis theme, so if you’re familiar with Raleigh Finlayson … and his strategy around their operations at Genesis, obviously we’ve got the St Barbara discussion, but they’ve essentially said all resources within, call it a 100km radius, of our operations are on our radar,” Bosio said.
“So it’s an interesting one and Saturn is developing a resource with some size, it’s growing … so slowly they continue building on that and that’s one I think that could play into that Genesis strategy.”
Shaw and Partners head of research Andrew Hines put a 97c price target on 14c, $20m capped Saturn in December last year.
Heading over to lithium and Global Lithium stands out not just for the size of its Manna and Marble Bar resources, but also because major Mineral Resources (ASX:MIN) and Chinese battery maker Suzhou TA & A are already sitting with significant stakes on its register.
Having hit a record price of almost $3 in September last year, Global Lithium, which has over 50Mt of hard rock lithium resource in WA at around 1% Li2O, was trading at just $1.62 yesterday on account of broader sentiment in the lithium market.
“They’ve actually come off a fair amount but that’s a really interesting one. They’ve had some great success since the IPO which was under two years ago and they’ve made some real headway,” Bosio said.
“So you’ve got MinRes, which has a serious lithium business now contributing to their success (and they’re) now the largest shareholder in Global Lithium.
“So if you kind of look at it objectively and say well, why are they there, they’ve clearly got a foot in the door in terms of owning that asset in the future. MinRes are there at just under 10% so it’s a substantial position to sit there in, call it a junior that’s pre production, and they’re building resources particularly around this Manna depost.
“So that’s one that I think if they have further success, it makes sense if MinRes are sitting there and it’s probably something that you think between MinRes and the Chinese shareholders who have taken early positions there if they can build something quite special, I think they probably will be a very strong takeover target.”
Bosio noted the last ebb in lithium stock values, when Goldman Sachs came out with a bearish note on prices in May last year, was short lived.
“The whole move to battery it’s taken a long time to heat up and … I just don’t think it’s going away,” he said.
“It’ll change, it’ll mature of course, but there’s still such a strong underlying theme there to meet the demand side that I think it comes down to quality deposits, and again market sentiment et cetera.
“So some of these valuations probably have got ahead of themselves. But all in all, I think these aren’t sectors that are just going to disappear.”
Bosio’s last small cap of interest is copper miner AIC Mines (ASX:A1M), which was an acquirer itself last year, merging with fellow Queensland copper co. Demetallica to expand its Eloise mine near Mt Isa.
It is one of only a handful of copper producers on the ASX, planning to hit a 12,500t Cu, 6000oz run rate this year before expanding to 20,000tpa and 10,000ozpa in 2025 with the underground development of Demetallica’s Jericho deposit.
“We’ve raised some money for AIC mines, which is Aaron Colleran’s copper play, and Aaron came from Evolution,” Bosio said.
“People almost gloss over the significance of copper in the battery thematic as well and sadly, it just seems very hard to find commercial grade deposits.
“New discoveries are proving difficult and Aaron’s got (a) good track record. He’s got a pretty clear plan of what he’s trying to do with it and they recently made the Demetallica acquisition which was strategic for the Eloise mine to give them more size and mine life as well.
“I think they’re doing some pretty interesting things, I think that’s also one to watch and obviously a good copper deposit certainly plays into that batteries thematic as well.”
At Stockhead, we tell it like it is. While Black Cat Syndicate is a Stockhead advertiser, it did not sponsor this article.
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
Mining
Mining
Mining
Mining
Mining
Mining
Get the latest Stockhead news delivered free to your inbox.
