Why you should buy stocks that cashed-up miners are investing in
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Investors who followed Sandfire into Adriatic’s IPO — or directly after listing — have more than doubled their money in the space of two months, writes Barry Fitzgerald in his weekly Garimpeiro column
There has been a noticeable increase in cashed up miners investing in junior explorers to fill their pipeline of future potential development projects.
This is good news for investors without the time and experience to sort through the hundreds of junior explorers on the ASX to find a couple of spec stocks to provide some interest and leverage in an otherwise well-balanced but dull portfolio.
Think of it as a kind of coat-tailing strategy.
If mining company X has made a significant investment in exploration company Y after some intense review by its highly-paid (and skilled) geology and corporate development teams, then it might just pay to follow suit.
Take a newbie on the lists, the UK-based but ASX-listed Adriatic Metals (ASX:ADT).
Adriatic joined the lists in April after raising $10 million from the issue of 20c CDIs (a ratio of 1-1) to get cracking at its Vares base and precious metals project in Bosnia and Herzegovina.
(CDIs or CHESS depository interests are used as a proxy for trading foreign shares on the ASX.)
WA copper and gold producer Sandfire participated in the IPO, emerging with 10m shares or 7.65 per cent of the company.
In the scheme of things, the $2m investment was nothing for Sandfire (SFR) with its $1.4 billion market value.
But Sandfire needs to find a long-term replacement for its DeGrussa mine in WA and its $2m investment in Adriatic signalled that its brain trust had figured that along with a long list of other “strategic’’ investments, Vares might just shape up as something it could be interested in.
That was reflected in Sandfire’s investment coming with anti-dilution rights and the ability to nominate a director should its equity position be increased to more than 10 per cent.
The point today though is that investors who followed Sandfire in at the IPO, or in the immediate aftermarket at the same IPO price of 20c, will have more than doubled their money in the space of two months as Adriatic shares have run to 49c, valuing the company at $64m.
Adriatic’s market cap tells you it is not the average junior looking to find something in the back blocks of WA. Its Vares project area, about 50km from Sarajevo, comes with an established resource at the Veovaca deposit (4.4mt at 2% zinc, 1,1% lead and 20% barite — used in drilling muds to control oil and gas exploration wells).
Veovaca was mined between 1983-1987 and delivered zinc, lead and barite concentrates to European smelters before its parent company fell on hard times, and as Bosnia’s inter-ethnic war that ended in 1995 was brewing.
Mineralisation remains exposed on the floor of the open-pit and it is considered a likely development candidate, due in part to available infrastructure which includes hydroelectric power on site, sealed road access to Sarajevo, and a rail link to an export port in Croatia.
What’s responsible for the excitement
While the upside at Veovaca is interesting in itself, it is the Rupice project area which has been responsible for the excitement in the stock.
A 15,000m drilling started there in May and has the broad aim of proving Adriatic’s assessment that it could be on to a potentially big sedimentary-hosted system.
A high grade hit at the northern Rupice zone that got the stock moving on June 12 and was followed up by a precious metals rich hit on June 22.
A 36m intersection assayed 4.4g/t gold, 463 g/t silver, 0.5% copper, 4.3% lead, 5.7% zinc and 55% barite from a depth of 196m.
Results from the program will be keenly watched in the months ahead by Sandfire as much as anyone else.
But back to the coat-tailing strategy. As mentioned, Sandfire has a long list of similar strategic investments aimed up serving up future potential development options. It is not alone either.
Other miners particularly active in the junior space of late include Newcrest, St Barbara, Independence and even the mighty Rio Tinto. It’s just a matter of scanning the daily announcements to see what the big boys reckon might be worth a punt amongst the juniors.