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TheBull canvassed brokers in search of the best stock on the ASX, expecting to find BHP Billiton, Rio Tinto and perhaps a major bank or two. Instead, brokers came up with the unexpected – a list of smaller miners and biotechnology companies. The 6 stocks listed below are regarded by these brokers as having the best long-term potential.

Some of these stocks have promising resource projects on the go, or are close to bringing a new lucrative drug to market. According to these brokers, while US and European debt issues continue to spook equity markets, investors might be better off taking calculated risks on companies with good prospects, such as companies on the verge of a medical breakthrough or a resource discovery.

So if you’re looking for ways to make gains in these volatile times, these six brokers have put forward their top picks. But don’t think the coming months will be smooth sailing – sharemarket volatility will be intense.

Africa Iron (AKI)

 

Chart: Share price over the year to 15/07/2011 versus ASX200 (XJO) 

Hamza Habib, of Patersons Securities, likes iron ore explorer and stgeloper African Iron. Its principal asset, the 80 per cent owned Mayoko Iron Ore Project, is located in the Republic of Congo, West Africa. He says the Mayoko Project has an exploration target of between 1.6 billion and 2.6 billion tonnes for between 30-to-65 per cent of iron.  The project is only about two kilometres from an under utilised heavy haulage railway terminating at a deep-water port.

Habib says close proximity to infrastructure offers the distinct possibility of project stgelopment in the short term. He says preliminary studies on the rail network indicate haulage capacity of 10 million tonnes a year can be achieved without any significant capital expenditure requirements.

Recently, neighbouring iron ore stgeloper Equatorial Resources acquired a 19.9 per cent stake in African Iron via the purchase of 95.4 million ordinary shares. “This strategic transaction is encouraging as the two company’s projects are intersected by the same large haulage railway line,” Habib says. “With near term production prospects, low capital expenditure requirements and Equatorial’s strategic shareholding, African Iron is one to watch for the next 12 months.”

Mineral Resources (MIN)

 

Chart: Share price over the year to 15/07/2011 versus ASX200 (XJO) 

Iron ore and manganese producer Mineral Resources is Michael Heffernan’s top choice. Also the operator and owner of mineral crushing facilities, Heffernan, of Austock, says Mineral Resources has been recently awarded a contract to design, construct and operate a second ore processing facility for Fortescue Metals Group. Heffernan says the operational phase of the contract starts after construction and will generate potential revenue in excess of $1 billion over ten years.

“Also, Mineral Resources’ track record of delivering in accordance with its intentions generates confidence about its future growth,” he says. “It has undemanding sharemarket fundamentals, and growth in South East Asian economies amid demand from China are positive for its medium term prospects. It’s in the right sector at the right time.”

Lynas Corporation (LYC)

 

Chart: Share price over the year to 15/07/2011 versus ASX200 (XJO) 

Also considered to be in the right sector at the right time is Lynas Corporation, a rare earths company that has excited investors as a prospective producer outside the dominant China. Demand for rare earths is constant as its used in digital technology, such as flat panel televisions and cameras, and the Lynas Mount Weld plant in Western Australia is said to be among the richest rare earths deposits in the world. The total combined resource at Mount Weld is 1.416 million tonnes of rare earths oxide.

Recently, the company’s share price took a dive after the Malaysian Government imposed stringent environmental and safety conditions regarding construction of its refinery plant at Kuantan.

Steven Hing, general manager of Zodiac Securities, says he expects a recent review by the International Atomic Energy Agency will delay Lynas Corporation’s construction plans in Malaysia for a few months. But Hing remains optimistic Lynas will be operating in Malaysia.

“The company needs to complete a number of safety upgrades and involve the local Malaysian community more in the project,” he says. Offsetting Malaysian difficulties is news that Lynas is teaming with German company Siemens to produce magnets for use at wind farms. Investors reacted positively to the planned joint venture, but Hing says Lyans still offers plenty of upside, particularly on the rare earths production front.

Prima Biomed (PRR)

 

Chart: Share price over the year to 15/07/2011 versus ASX200 (XJO) 

Biotechnology company Prima Biomed continues to generate much medical and investment interest with its ovarian cancer vaccine Cvac. Prima Biomed is about to embark on a final phase III trial in August. Success will possibly pave the way to bringing the vaccine to market by 2015. Like any trial, there’s a chance of failure – that’s the risk.

John Rawicki, of State One Stockbroking, believes an investment is well worth the risk. From a financial perspective, Rawicki says: “Ovarian cancer treatment is a huge $3 billion market, giving Prima massive upside potential for rapid growth upon commercialisation.”

Rawicki sees similarities between Cvac and biotechnology company Dendreon’s recently (US Food and Drug Administration) approved Provenge vaccine for treating prostate cancer. He says Dendreon has a market capitalisation of about US$5.6 billion, which is indicative of the potential for Prima Biomed.

Rawicki says Prima Biomed is expected to list on the NASDAQ, exposing the company to many more potential investors.

Mesoblast (MSB)

 

Chart: Share price over the year to 15/07/2011 versus ASX200 (XJO) 

Richard Batt, of Shadforth Financial Group, sees upside in Mesoblast, a stgeloper of biological products in the field of regenerative medicine using proprietary adult mesenchymal precursor cells. Batt says adult stem cells have the ability to become solid organs or tissues, such as bone, heart muscle and cartilage. Usage of these cells is vast, and the company has a range of products that could potentially treat conditions, such as diabetes, asthma, bone marrow cancers, cardiovascular and neurological conditions. “This broad range of products have the potential to deliver a strong diversified revenue stream going forward and reduces overall risk for investors,” he says.

Batt says establishing a strategic alliance with global biopharmaceutical company Cephalon will assist with commercialising Mesoblast’s products. Batt says Mesoblast recently received FDA clearance involving an accelerated review process for Phase III trials of its bone marrow transplant product, which could be the first to generate revenue.

Matrix Composites & Engineering (MCE)

 

Chart: Share price over the year to 15/07/2011 versus ASX200 (XJO) 

For James Samson, of Lincoln Indictors, Matrix Composites & Engineering is significantly under valued. Closing at $7.20 on July 13, Linclon’s price target is $9.11 for Matrix, which makes specialised engineering products to support offshore mining and subsea industries. The company’s main product is the riser buoyancy module, which provides buoyancy to subsea drilling lines. “The strength of this product lies in the intellectual property of the design, and Matrix is experiencing strong demand at present,” Samson says.

“The company has just completed construction of a new facility, enabling it to lift production and lower the cost per module. This new facility provides the company with a cost advantage over competitors in what is a globally growing market.”

COMPANY CODE SHARE PRICE CLOSE
Africa Iron (AKI) 26 cents
Mineral Resources (MIN) $11.80 
Lynas Corporation (LYC) $1.91
Prima Biomed (PRR) 27.5 cents
Mesoblast (MSB) $8.91
Matrix Composites & Engineering (MCE) $7.04 

 

>>Back to the newsletter to view other articles – July 16th 2011

Price current to market close, 15 July 2011

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.