Ten Bagger: Miners with fine China in their cabinet and explorers backed by cash

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 why overseas miners could stand out for their access to Chinese capital and which explorers are worth less than the cash in their bank.

Chinese investment in Australia’s junior miners has slowed to a virtual crawl thanks to a hardline stance set by the Foreign Investment Review Board in the wake of geopolitical tensions that peaked post-Covid.

John Forwood, CIO of the Lowell Resources Fund (ASX:LRT), says that’s piled extra pressure on the micro-cap resources space, which fellow fundie Hedley Widdup assessed as falling ~75% since the boom combusted in 2022.

“One thing, which has been happening over a number of years now is the difficulty for Chinese companies to invest in Australian projects,” he said.

“FIRB really has made that very, very difficult, and there’s been a relentless decline almost to zero in terms of Chinese foreign investment in Australia.

“For our biggest trading partner by far, they’re well down below the top 10 in terms of sources of foreign direct investment in Australia and in the 2000s mining boom that was a major source of capital, particularly for junior companies.”

He pointed to Mark Creasy backed CZR Resources (ASX:CZR), where Lowell has a stake, as one company where this phenomenon is playing out in real, slow-moving time.

While a deal worth over $100 million to sell its Robe Mesa iron ore project in the Pilbara to a Chinese-owned company called Miracle Iron now has Chinese foreign investment approvals, it’s spent over two-thirds of the year on FIRB’s desk having been announced in early January.

“The sort of tonnage that the total deposit is something BHP and Rio mine in a week or two,” Forwood said.

“That’s just a little indication of how tough it is for the Chinese to invest in Aussie projects.”

Money to be made overseas

ASX-listed companies tend to find fewer hurdles to access foreign investment overseas.

Most jurisdictions internationally are less attractive to investors than Australian states, with African miners often copping lower valuations for the same scale of resource as WA producers in what is often termed the ‘African discount’.

But access to Chinese capital can make companies operating in less luxurious investment destinations appear attractive, especially when it comes to exiting on a takeover premium.

Tietto Minerals’ $730 million takeover by Zhaojin Capital for its Abujar gold mine in Cote d’Ivoire is an example.

“There’s no doubt that, everything else being equal, the valuations for Aussie resources projects are higher than offshore,” Forwood said.

“But … I don’t think that could happen if that was a project in Australia.”

While Chinese gold miners like Zijin and Yuxin Holdings own gold mines in WA and Chinese steel and lithium companies hold stakes in local iron ore and lithium mines, the vast bulk of those deals were completed several years ago.

Money in the bank

Forwood is looking closely these days at companies which are effectively backed by cash.

That implies their projects are, in a sense, worth zilch to investors.

But the anomaly in the current, risk-off, investment market is a number of these explorers have strong management teams with good track records or projects worth keeping an eye on, Forwood reckons.

He’s seeing the phenomenon emerge across the sector, with examples to be found in companies including Solstice Minerals (ASX:SLS), which has early stage projects near Kalgoorlie and recently sold a small gold resource to ASX giant Northern Star Resources (ASX:NST) for $12.5m.

“Normally, when a company is at cash backing, it’s a very negative vote of confidence in the management that they’re not going to spend that money wisely,” Forwood said.

“But Solstice Minerals is one that has got an extremely successful management and board who’ve had multiple takeovers that they’ve been involved in, they’ve sold projects at significant profits.

“They’ve got a market cap at $17 million and cash backing of around $17 million, and their projects are all exploration projects in the Carosue Dam belt in WA. I think that’s just an example of how tough the market is.”

Also trading below their likely cash backing are two firms about to come into money, according to Forwood.

Indiana Resources (ASX:IDA) is trading at around $60m, but is up 33% YTD after announcing a US$90 million settlement with the government if Tanzania for the expropriation of the Ntaka Hill nickel project.

US$35m has already been paid by the African government, with US$25m due on or before October 25 and the final $30m due on or before March 30 next year.

Distributions between claimants are still being negotiated in line with costs sunk on the legal process, though all legal fees have been paid according to IDA.

Forwood described IDA’s South Australian gold projects as ‘really interesting’.

The other company that fits the description is Kalamazoo Resources (ASX:KZR), which recently pocketed $3 million from De Grey Mining (ASX:DEG) for an option over the Mt Olympus project in the Pilbara.

Luke Reinehr’s Kalamazoo can pocket two tranches of $15m from the owner of the Hemi gold deposit if it exercises the option to acquired the 1.44Moz Ashburton gold project.

It had $1.38m in the bank at June 30, with another ~$1.3m hoped to be delivered from a recent share purchase plan and placement.

De Grey is conducting due diligence at the moment. Forwood thinks it would be ‘surprising’ if cashed up De Grey didn’t pull the trigger, a key catalyst for $14.5m capped KZR.

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