Ten-Bagger: How do you pick a winner like Azure?
Welcome to Ten Bagger, where Lowell Resources Fund chief investment officer John Forwood gives us his take on a sector of the ASX resources market full of value.
This month, John tells us about picking a 10-bagger and then some in hot lithium explorer and Hancock Prospecting takeover target Azure Minerals.
Ten-Bagger expert John Forwood has had plenty of success over the past year.
But one stands out like no other.
Over the past 12 months, according to an investor presentation, the Lowell Resources Fund (ASX:LRT) where Forwood is the chief investment officer has seen a 16.9% rise in net asset value per unit (after distributions) against just a 1.5% gain for the ASX 200 and 9.3% drop in the ASX small resources index.
That dramatic outperformance is in no small part due to a well-timed punt on nickel turned lithium explorer Azure Minerals (ASX:AZS).
You may have heard about them. They found the Andover lithium deposit in the Pilbara, held in a 60-40 joint venture with the project’s vendor — prospector extraordinaire and WA mining deity Mark Creasy.
Before the bones of a massive pegmatite that could hold over 100 million tonnes of spodumene lithium ore — world class if it comes to fruition in a maiden resource next year — had been fleshed out in a major hit of 105m at 1.26% Li2O in June, Chile’s SQM had spent $20 million to acquire a 19.99% stake.
Forwood had already liked the look, putting ~$1 million into Azure at 27c for 4 million shares.
The rest is, as they say, history still being written.
SQM eventually made bids at $2.31 and $3.52 a share after the magnitude of the Andover discovery became apparent at the same time as the lithium market became frothy for M&A.
Gina Rinehart’s Hancock Prospecting entered the fray paying shareholders above the offer price to claim a more than 18% stake. Buying from Mineral Resources (ASX:MIN), whose boss Chris Ellison has spoken of his intention to grab stakes in as many WA lithium deposits as he can, helped push Azure shares beyond $4 to a high of $4.11 at one point.
A new $3.70 scheme bid shared 50-50 between SQM and Hancock and valuing Azure at $1.7 billion could see investors leave on a near 17x gain if they’d bought at end-2022 levels. Extraordinary.
For Forwood and Lowell those 4 million Azure shares had a cost base of 27.2c each at the start of the financial year.
By the end of November, it had sold 3.3 million at $3.58, netting around $11.8 million cash. Sell the remaining 700,000 in SQM and Hancock’s new — crucially Creasy backed — bid, and another $2.5 million could be coming Lowell’s way.
“To go from that share price to somewhere between $3.50 and $4 — that’s obviously well north of a mythical 10-bagger, which is what we look for,” Forwood told Stockhead.
“And I think you’ve got to look for returns of that order of magnitude because it’s such a high risk area to invest in.”
While the stock was already one of the ASX’s big winners, the SQM bid and subsequent manoeuvring from the industry’s big names was what tipped Azure into stratospheric territory for a pre-resource small cap.
While the timing may have raised eyebrows, there’s little doubt it was brewing with the quality of Azure’s discovery and the extreme level of interest across the world in locking up lithium supply for the electric vehicle supply chain.
“Even though the lithium price has been in almost freefall this year, at the same time the lithium industry players — SQM being one of the big ones but also Albemarle bid for Liontown etc. — there was that massive level of interest from offtakers and industry players in trying to get access to lithium projects,” Forwood said.
“There’s a company called Atlantic Lithium (ASX:A11) in Ghana, where I’ve just been, and they said they had well over 100 expressions of interest in terms of the offtake for their lithium production, and they’ve just basically finished their feasibility study.
“That’s a huge number. If you get half a dozen groups interested in offtake for a mining project, that’s good, but to have over 100, that’s unheard of.
“So when when the bid came, we were pleasantly surprised. I think we were surprised in terms of timing, but not surprised in terms of the bid being made.”
The lithium discovery at Andover was only telegraphed for around nine months before the breakthrough came.
But Azure has been around since 2003, when it was founded by veteran geologist Tony Rovira, then three years on from the receipt of the Association of Mining and Exploration Companies’ Prospector of the Year Award for the Cosmos nickel discovery that eventually powered Jubilee Mines to a $3.1 billion takeover at the height of the 2007 nickel boom.
For years it explored for copper, silver and gold in Mexico before the decision was made to return to exploration in WA amid the Covid lockdowns of 2020.
Even the Andover project picked up from the stable of Creasy — previous known for the mammoth Bronzewing gold and Nova nickel finds — was originally a nickel play, where Azure drilled out a tidy resource containing 51,700t of nickel metal in sulphide with some nice copper and cobalt credits.
“The nickel project still looks really nice, but it’s been absolutely dwarfed by the lithium potential. And in fact can say with tongue in cheek if you want to find a good lithium project in Western Australia, go drill for gold or nickel,” Forwood, a geologist and lawyer by background, said.
“Delta Lithium (ASX:DLI), for example at Mount Ida, that’s a classic. They bought that project for gold and then all of a sudden, look at all this spodumene in the drill trays.
“That seems to have happened a number of times. Kidman at Mt Holland for example, that was a gold project and it turned into one of the world’s great spodumene lithium projects.”
Forwood said he first got a sense of the mega lithium potential at the RIU Explorers Conference in Fremantle in February, when he was able to inspect lithium rich pegmatite rock chips in person at the company’s booth.
It would have taken a lot of patience to stick with Azure, especially with little foresight that it would become a boom lithium stock. What was it about Azure that made it attractive once it pivoted back to WA?
Rovira’s history as a winner of the Prospector of the Year award and association with a major WA nickel discovery was one factor.
“That’s easy, something that the man in the street can can look up — who’s won this award and where are they now and what are they doing?” Forwood noted.
Creasy’s involvement was another tell, while Forwood has had previous success picking Pilbara explorers.
“The Pilbara has been a very happy hunting ground for the Lowell Resources Fund. We did really well out of De Grey (ASX:DEG) — another world class discovery (the Hemi gold project) made while we were holders there,” Forwood said.
Knowing that explorers are willing to move on from projects that don’t move the dial and hunt for the real deal is another positive attribute, Forwood said.
“I think also about Paul Roberts at Predictive Discovery (ASX:PDI). It took that company 10 years, he was down to his last few dollars in terms of plugging away working in West Africa, moving from project to project. And then he made the big discovery of Bankan in Guinea.
“You’ve got to find people who are completely committed to their company and really want to protect or enhance their reputation and are prepared to turn over ground.
“You don’t want these geos to fall in love with a particular project. That’s been said a lot.”
It’s always difficult to know who will make a discovery and when they will do it, a fact of life that makes investing in the small cap space both lucrative and fraught with risk.
But Forwood is keeping a watchful eye over companies who could have potential to do an Azure.
That is being hampered a little bit by the mining investment cycle. Explorers are struggling to get IPOs off the ground and Forwood sees many companies that may have listed over the past 12-18 months continuing to tread water until risk appetite hopefully improves next year.
Pre-IPO Ghanaian lithium explorer CAA Mining is on Forwood’s watchlist, while he says some of the cash from the Azure share sales have been rolled into uranium explorers, one area of the market where commodity prices now sit at a 15-year high.
You can check out a couple of his uranium picks below:
Among the ASX plays he’s looking at currently is Cooper Metals (ASX:CPM), which has run hard in recent weeks on a new copper discovery in the famed Mt Isa region of central Queensland. Lowell is the major shareholder of the explorer, which has gained more than 200% since the end of October.
“All of the companies in our portfolio we obviously think have got lots of upside, but one that’s made a new discovery is Cooper Metals. It’s in the Mt Isa Inlier in Queensland, which is obviously massive elephant country,” Forwood said.
“They just drilled an intersection on a new discovery called Brumby — 71m at 2.8% copper, which is a fantastic result. It’s only got a $20 million market cap. We think there’s huge upside there.”
At Stockhead we tell it like it is. While Azure Minerals was a Stockhead advertiser at the time of writing, it did not sponsor this article.