What does it take for ASX juniors to become giants?

BDO’s Adam Myers takes a deep dive into the success factors of ASX giants
Why has FMG’s share price surged 4,820% since 2005?

The transition from explorer to producer is really difficult.

It takes different skills sets, years and years of hard work, a lot of capital, and risk.

But there are some success stories.

Since the first RIU Conference in 2005 companies like Fortescue Metals Group (ASX:FMG), Mincor (ASX:MCR), Neometals (ASX:NMT) and IGO (ASX:IGO) have seen their share price rise some 4,820%, 93%, 250% and 1,070% respectively.

These are impressive numbers, especially considering most explores never make a single dollar of profit due to the speculative nature of this end of the market.

As BDO corporate finance partner Adam Myers pointed out at the RIU Explorers Conference in Fremantle yesterday, there are opportunities for companies to get in at that junior level, but it is an interesting exercise seeing why certain companies make it – and others don’t.

Market opportunity

Firstly, he said, there is an expected change in value of a project as it moves from an exploration target through development to start-up and then depletion.

And one of the biggest entry points of substantial value change is at the exploration stage.

This was the case for FMG, which started life as a back door listing (reverse take-over) in 2003 after acquiring the Cloudbreak and Christmas tenements.

The company started constructing port facilities at Port Hedland in February 2006, raised $3.2 billion six months later, and began construction on the mine itself later that year.

“For FMG the deposit was just the start, the key was the market opportunity,” Myers explained.

“For example, an iron ore deposit requires huge capex on port and rail and at the time FMG was emerging, BHP and RIO were also substantial players, but they had the inability to ramp up quickly to meet rising demand.

“That gave FMG the window to get into the market.”

Share price may drop but value is not lost

Interestingly, FMG’s share price dropped significantly from 2008 peak levels of $10.80 in June 2009 to $2.95 in October 2008 due to the challenges they faced around the volatility of the iron ore price, which added pressure to the company’s cost structure.

“They had taken out a lot of debt to service the port and rail infrastructure and without that massive focus on cost, there could have been some real challenges in survival, but they met that challenge head on and managed to get that cost to a fantastic level,” he said.

“Having those costs low today means they really benefited in the ramp up of the iron ore price.”

From Myers’ point of view, this is a key lesson to remember – “even if you miss out on the first opportunity, the overall value realisation isn’t necessarily lost.”

He said a few ASX companies showing progression from discovery through to development include Chalice (ASX:CHN) with their Julimar discovery, Bellevue Gold (ASX:BGL) targeting first production in second half of 2023, Stavely Minerals (ASX:SVY) who are testing a porphyry drilling target, and De Grey (ASX:DEG) who are advancing towards a final investment decision.