Monsters of Rock: The mining clock is ‘After Midnight’ as major small caps investors pile into gold juniors
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You may be familiar with the mining clock, an invention of listed small cap investors Lion Selection Group (ASX:LSX) associated with geologist and investment doyen Hedley Widdup.
What the clock does is assess how close we are to the peak of the boom and the start of a new resources cycle, which is – like an analog clock – a circular object.
When did we hit midnight, the peak of the cycle? It’s hard to know, but Lion is confident that time has passed.
Hedley Widdup has already warned of a liquidity crunch seen earlier this year as small cap resources stocks fell off a cliff, bringing previously boundless valuations for pre-resource or pre-development players back to Earth.
Now that we’re back to the low value end of the cycle, Lion thinks it’s time to stock up.
Its newest play is a $3 million investment in Saturn Metals (ASX:STN) owner of the large (1.84Moz) but low grade Apollo Hill gold project near Leonora in WA’s Goldfields.
That will take its ownership stake to 11.45% worth a total of $6m after the $6m Saturn Metals placement, priced to clear at 12.5c a pop (a 21.9% discount to the trading price of 16c on Thursday).
Major shareholder Dundee Corporation will also re-up its stake to maintain a 19.99% share, though Lion’s holding will dilute slightly after a planned $2m share purchase plan for existing holders.
Lion also tipped a modest $250,000 into Queensland gold explorer Sunshine Metals (ASX:SHN) a few weeks ago.
But it’s boss Robin Widdup’s comments on the broader market that will make investors sit up and take notice.
“Lion closely watches the mining cycle,” he said.
“We haven’t updated the Lion clock time, but are certain that it is now after midnight, and we are seeing widespread examples of funding pressure which is generating attractively priced opportunities.
“Saturn and Sunshine both have established Resources and strong management teams with conviction in their projects, and they both fit the pattern of investments Lion likes to make”.
When things are looking down and out it could be the best or the worst time to be investing in mining stocks.
Uncut gems are trading at substantial discounts, but there are equally bad picks you could make simply by getting fooled by the allure of the counter-cycle play.
If you piled into Pilbara Minerals (ASX:PLS) when lithium was getting hammered in 2019 you could well be a millionaire by now. Punt on their next door neighbour Altura and you would have seen your investment head for administration (and eventually lowball purchase by PLS).
Get into Liontown Resources (ASX:LTR) a few years ago and your penny would have turned into $3 in the Albemarle bid. Oh wait, that’s not happening now. Still, you’re sitting on a healthy gain and have Australia’s richest woman in your corner.
Lion, which had $76.1m of cash in the bank at September 30, says it might not be the bottom of the market right now, but is “confident to be making investments at these levels.”
“Lion continuously monitors liquidity trends, as they shape the mining boom / bust cycle and liquidity is crucial to micro-capitalisation resources companies. Inflation and increasing interest rates introduced a period of uncertainty, resulting in volatility for equity markets and reduced liquidity to micro-capitalisation companies,” it said today.
“This has been compounded for mining and exploration companies by weakening of many
commodity prices aligned with the changing pattern of Chinese economic growth and commodity consumption.
“There are clear themes where investor sentiment is still buoyant for certain commodities, but in general these factors have resulted in a very weak market for micro-capitalisation resources companies.
“Many companies with defined projects are experiencing funding stress, and whilst liquidity is absent from the sector this is expected to continue. Whilst it is highly uncertain how long these conditions will persist these circumstances have generated opportunities that meet Lion’s criteria of risk versus price and contained
Lion says it sees the likelihood to add more cornerstone investments at attractive prices as “excellent”.
Renowned resources name Ed Eshuys has already traded his 1.66% stake in Dacian Gold (ASX:DCN) into a new bid from Genesis Minerals (ASX:GMD), the first investor to benefit from the obstinance of holdouts who wouldn’t play ball over a year ago.
Genesis made an opportunistic offer to mop up the Leonora gold producer last year as it hit turbulence, a move which gave the then pre-mining Genesis and its boss Raleigh Finlayson immediate access to a then-operating gold plant.
As it transpired, Finlayson was able to secure a greater prize in St Barbara’s Gwalia gold mine, but has ever since been keen to tie up loose ends by taking out the rest of Dacian’s register.
Its new offer of 0.1685 Genesis shares for ever Dacian share comes in at an effective value of 23.5c, 165% higher than the 10.2c per share all-scrip offer rejected by the naysayers last year.
Well known German resources investor Delphi Group and its associate Kin Mining (ASX:KIN) played blockers on the last bid.
Genesis’ offer is conditional on hitting the 90% threshold it needs to compulsorily acquire what it does not yet own.
If before the end of the offer period it hits an ownership level of 95.1%, the consideration will rise even higher to 27c or 0.1935 Genesis shares for every 1 unit of Dacian stock.
Will those minorities finally blink?