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A few short months ago the price of our largest export dropped to alarming levels.  Some claimed iron ore prices would continue to fall as long as the Chinese Dragon continued to show slowing growth.  Others urged caution and predicted a rebound in the price by year end.

The rebound is here.  A recent Bloomberg report highlighted the change in the 2013 iron ore price estimate coming from the Bureau of Resources and Energy Economics (BREE).  That agency raised its earlier forecast of 2013 prices at $101 a metric tonne to $106 a metric tonne, citing anticipated infrastructure and other stimulus spending in China.  Chinese retail sales and industrial output as of 09 December are exceeding expectations and the price of iron ore has climbed to around $126 a metric tonne.  The following graph shows the good news:

 

Shares of our largest iron ore producers have responded positively to rising iron ore prices.  Here is a three month price chart showing the upward movement of BHP Billiton (BHP) and Rio Tinto (RIO) moving in sync with the rise in the price or iron ore:

 

Drastic declines in commodity prices do not impact all producers equally.  Small cap or junior miners suffer more, with those with suspect balance sheets typically feeling the most pain.  If a lasting rebound is truly on the horizon, some small cap miners could see outsized gains.  The following table lists some prospective candidates.  All have at least one metric that suggests the possibility of a brighter future.  Some have outstanding 2 Year Earnings Forecasts; others have low Forward Price to Earnings or Price to Book Ratios; and some have relatively strong balance sheets.  Here is our table:

Company

Code

Market Cap

Forward P/E (2014)

P/B

2 Year Earnings Growth Forecast

Share Price

Year over Year Share Price % Change

Gindalbie Metals

GBG

$337m

8.0

0.42

70.3%

$0.24

-50%

BC Iron

BCI

$335m

6.59

2.55

$3.23

+33%

Western Desert Resources

WDR

$235.26

6.17

3.51

206.7%

$0.74

+62%

Jupiter Mines

JMS

$228.18

0.44

127%

$0.10

-68%

Iron Ore Holdings

IOH

$125

13

1.19

12.7%

$0.78

-40%

Centaurus Metals

CTM

$51.87

13.25

1.31

51.1%

$0.27

-50%

Crusader Resources

CAS

$50.66

4.44

1.92

64.3%

$0.40

-55%

Gindalbie Metals (GBG) has seen a 50% drop in its share price year over year, yet the Forward P/E and 2 Year Earnings Growth Forecast suggest better days ahead.  In addition, the shares are currently trading below the book value per share of $0.58.  However, small cap resource companies of all types need solid balance sheets in tough times.  For many, the game is a race between the cost of exploration and actual revenue generation.  In short, these companies are at risk of running out of money before even the most attractive asset goes online.  Debt financing and capital raises are harder to come by in times like these.  The following table looks at several important balance sheet issues for our 7 prospective small cap mining investments:

Company

Code

Gearing

Total Debt

Total Cash

Current Ratio

Gindalbie Metals

GBG

0

0

$40.52m

14.38

BC Iron

BCI

12.7%

$16.7

$92.8

2.04

Western Desert Resources

WDR

.07%

$36.55k

$10.2m

3.03

Jupiter Mines

JMS

4.7%

$19.26m

$65m

13.51

Iron Ore Holdings

IOH

0

0

$109..69m

10.08

Centaurus Metals

CTM

0

0

$8.85m

2.35

Crusader Resources

CAS

0.59%

$134.26k

$5.33m

2.27

 

With no debt and solid liquidity as evidenced by a current ratio of a healthy 14.38, GBG looks like a good bet based strictly on the numbers.  However, there is more to the story.  The stock started the year strong but fell flat in the second quarter and has been dropping ever since.  Here is the one year chart:

 

Gindalbie is in the stgelopment stage with a major iron ore project underway at Karara in Western Australia.  This is a joint venture with Chinese steel producer Ansteel.  The project involves both hematite and magnetite iron ore.  Shipment of hematite has begun but there are delays and cost concerns regarding project completion and commencement of magnetite shipping.  

On 29 November Gindalbie announced a capital raise of $40 million in equity offerings to institutional and “sophisticated” investors.  An additional $22 million was placed with Ansteel to maintain its cu