Mining stocks have taken the brunt of the walloping on the sharemarket but the selling is largely indiscriminate, prompting many people to ask whether some resource stocks are oversold.
There are reasons to be wary though, as 334 miners have a weak cash balance, below $2 million – a level which usually rings alarm bells.
While E.I.M. Capital Managers director Tony Wiggins believes the sector is littered with value traps, he says “special situation” resource companies have potential.
These are miners that face corporate activity (such as those involved in takeovers) or close to achieving a significant milestone (such as making the transition from explorer to producer or reaching full-production capacity).
Experts speaking to The Australian Financial Review this week nominated the following 10 mining stocks as best placed to rebound in the coming months.
Sundance Resources (SDL)
The Africa-focused iron ore hopeful is one that fits the “special situations” bill well, Wiggins says. It’s been on a wild ride since Chinese shareholder Hanlong Mining Group made a takeover bid last year. But doubts about Hanlong’s ability to finance the takeover have cast a long shadow over Sundance Resources.
While Hanlong eventually secured financier commitment letters from two banks, the market is sceptical and the stock is trading well under the offer price of 45¢ a share.
“There’s a very low chance of the deal falling over now,” Tony Wiggins says. “People won’t believe it until the deal is consummated.” By then, however, the opportunity would have been lost.
Pluton Resources (PLV)
Scepticism is also dragging heavily on fellow iron ore miner Pluton Resources. Investors lost faith due to lengthy delays in securing finance for its acquisition of the Cockatoo Island project.
When Pluton completes its first iron ore shipment from Cockatoo, Wiggins says, it will convert the disbelievers. The project has no infrastructure issues and has a free-on-board cost of just $51 a tonne of iron ore before state royalties.
Kalnorth Gold Mines (KGM)
Set to transition from an explorer to a producer by February, this is another resource stock that will probably get a re-rating as its risk profile decreases.
Kalnorth has managed the transition well, having struck a deal with St Barbara to use its ore-processing mill rather than funding its own.
“What investors are getting is positive cash flow from early next year and no more dilution [from capital raisings],” says Wiggins.
Saracen Mineral Holdings (SAR)
The gold sector is a good place to be hunting for oversold bargains as economic conditions support the precious metal, Phillip Resources Fund’s chief investment officer, Chris Bain, says.
Gold producers with the biggest rebound potential, however, are likely to be those that can rein in ballooning costs in the December quarter.
“Saracen’s costs did blow out substantially but they’ve now got the credit facility in place for their expansion, their [ore] grades are improving and they seem to have costs under control,” Bain says.
If Saracen can control rising costs over the next two quarters, the stock is likely to find a 30 per cent or so upside, he predicts.
Saracen’s cash cost in the past quarter was about $900 an ounce of gold compared to $700-plus an ounce only a year ago.
Perseus Mining (PRU)
Having lost more than 20 per cent of its share price value over the past six weeks, Perseus Mining could rebound if the Sissingué gold project gets going in the Ivory Coast, Bain says. Political issues have dogged the project but the sell-off doesn’t seem to be justified given management’s delivery on promises and quality assets.
Silver Lake Resources (SLR)
Another goldminer whose stock has fallen about 20 per cent, Silver Lake Resources, is very much in the same category as Perseus.
A weaker than expected September quarter production result was one of the key drivers of its poor performance, says Troy Irvin, director of investment house Argonaut.
But, he says, its Mt Monger mine is “operationally sound with substantial productivity gains leading to higher volumes”.
Irvin favours Silver Lake’s acquisition of Integra Mining as it instantly makes the miner a producer of 250,000 ounces of gold a year, with the Murchison development project giving it potential to grow production to 400,000 ounces.
Argonaut has a “buy” recommendation on the stock and a price target of $4.40.
Troy Resources (TRY)
The South American-focused gold and copper producer is another of Irvin’s picks. Persistent sovereign risk concerns and cost inflation in Argentina had sparked a 14 per cent sell-off in the stock since early October.
News of a cost blowout at Barrick’s nearby Pascua Lama project in Chile is adding to anxiety. While Troy clearly has its challenges, the miner’s project is a high ore grade and high-margin proposition.
Further, Troy has a frugal capital structure with only 91 million shares on issue, and an enviable 13-year track record of paying dividends. Argonaut is urging investors to “buy” the stock with a $5.80 price target.
Tiger Resources (TGS)
It’s not only gold that is glittering. LimeStreet Capital believes the outlook for copper is also promising due to the lack of any significant new copper projects.
Tiger Resources could be an inviting takeover target by the big copper producers, according to LimeStreet.
Tiger has plunged 26 per cent this year, which seems excessive given strong cash flow and big earnings growth potential for 2012-13.
Rex Minerals (REX)
The junior copper-gold explorer is a riskier proposition, but Chris Bain thinks that it’s worth the punt following the 44 per cent collapse in its share price since January.
While Rex’s South Australian prospects look promising, it will need around $700 million to fund development work.
That’s a tough ask for a junior with a market capitalisation of about $150 million.
“They have a lot of hard work to do, but the asset is there, it’s valuable and it will become a mine,” Bain says.
“It’s a matter of whether the market is kind enough to let them raise the capital or someone says ‘I’ll have that thanks’.”
Rex did a capital raising not too long ago at $1.20 and the stock is trading around 80¢. Many investors are still hurting.
Mirabela Nickel (MBN)
While it seems counter intuitive for anyone to bat for Mirabela Nickel given the challenging outlook for nickel, Troy Irvin thinks that the risk has been more than factored into the miner’s share price after the stock shed two-thirds of its value in 12 months.
While nickel prices are hovering around a three-year low on concerns that the market is oversupplied, Mirabela’s operations are improving.
Its Santa Rita mine in Brazil, for example, has recorded consecutive improvement in its quarterly performance.
The miner has also completed a recent expansion and cost-cutting is starting to deliver results.
Mirabela is still profitable at current nickel prices and Irvin believes that it offers “unrivalled leverage” to any rebound in nickel prices.