On 8 July, 33 ASX listed stocks reached rolling 52-week highs. Only one stock was a junior miner – Asaplus Resources (AJY) trading at $0.24. On the same day, 24 stocks hit rolling 52-week lows and exactly 13 were junior miners with market caps from $68m to $1.5m; one was mining services Austin Engineering (ANG) with a market cap of $238 million.
Asaplus Resources is a Singapore-based company that initiated trading on the ASX in November 2012 at $0.20 per share. The company has exploration rights to iron ore deposits in China through its “Silverstone” Project. Its compelling story for investors involves four areas with defined iron ore resources initially estimated at 1.52 million tonnes in close proximity to existing infrastructure and a steel mill.
On 13 May the company announced an increase in resource estimates to 3,480,700 tonnes, more than doubling its earlier numbers. And despite a choppy trading market, AJY’s share price rose on the news. Here is its one year price chart:
Asaplus has a modest market cap of $21.2m and is thinly traded with an average daily volume of only 6,000 shares.
Not all junior miners with compelling stories can win the favour of the crowd in this environment, however. Below is the ten-year chart for Alcyone Resources (AYN), a pure play silver miner with operations in Queensland.
The current flat lines represent trading halts initiated by the company. In late 2008 the company was called Macmin Silver and entered voluntary administration, to later emerge as Alcyone Resources. The 2008 announcement stated: ‘The delay in supply and commissioning of additional crushing capacity, and the slower than predicted leaching rate have meant that the mine consumed more working capital than anticipated. The recent decrease in metal prices and the current unrest in financial markets have prevented the raising of additional capital or debt required at this time for the project.’
The capital raising was not enough to sustain operations and the stock went into a trading halt again in 2010. It was reinstated in a matter of days following the announcement of another capital raising of $10 million.
Alcyone began producing silver in July 2011 but by November the company needed cash and entered into a $3 million dollar debt facility. In June 2012 the company raised $1.6 million through a share purchase plan. In February and March this year Alcyone went into trading halts followed by funding updates, first a convertible securities agreement followed by the announcement of bridge financing to cancel out the prior securities agreement. The company’s managing director resigned on 15 March and in early April Alcyone’s shares went into a trading halt again from which they have yet to emerge.
With a successful negotiation of a $10 million debt facility with a US investment firm and a capital raise in progress, the acting chairman is now confident the company is ready to move ahead. Investors have heard that story before and the reinstatement of share trading for AYN will tell the tale of whether or not investors are willing to buy into the latest reincarnation of the compelling story. However, note that the rationale given in 2008 for the company’s troubles is equally true in 2013.
In defense of the company it is true flooding in Queensland in successive years had its impact. However, the pattern this junior miner followed is typical of many of these story stocks. The companies in essence engage in a race to generate revenue before the development cash runs out and few win that race without additional funding along the way. With solid prospects and investors large and small looking for opportunity, capital raises and debt financing are usually achievable. But we live in unusual and uncertain times when commodity prices are in retreat across the board and the end of the mining boom is no longer in question.
Despite repeated warnings of late about the number of junior miners facing extinction due to funding issues, it is hard for investors to ignore the juniors. The warnings are coming from all sides. In its 2013 report entitled Business Risks Facing Mining and Metals 2013-14 Ernst & Young cites access to finance and capital allocation as the biggest risks miners face. Numerous experts and analysts are filling the web with cries of worry about the fate of junior miners.
The evidence of financing difficulty has been building for some time yet in the midst of all this along comes a junior miner like copper and nickel explorer Sirius Resources (SIR), trading at about $0.05 in July of 2012. Here is the company’s year over year share price performance:
The company had been struggling along with multiple exploration sites in Western Australia when a large scale discovery of both copper and nickel at its Nova project site sent the share price rising to reach a top of $4.99 per share on 15 March; all in about eight months. Sirius reached the “ten-bagger” status made famous by US investor Peter Lynch in less than a week. This is the stuff of which investor dreams are made and why junior miners, despite their tremendous risk, are beloved around the world.
Sirius also serves as an example that if the market believes in a stock, the cash will follow. In December of 2012 the company raised $44 million in funding for Nova and other promising prospects through a share issue to all types of investors, retail, institutional, and high net worth. The share price has been dropping since reaching its high but got another upward bounce on the announcement of another high grade find at its Bollinger project site. UBS is the only major analyst firm covering the stock with a BUY rating, citing significant additional upside potential pending reserve estimates.
An article appeared in the Australian Financial Review on 03 July of 2013 that should remind riverboat gambler investors of the risks inherent in all junior miners. The title of the article was Sirius: A Good Luck Story and in it we learn the company was down to less than $500k in cash available for exploration. The company decided to roll the dice with its money and undertook drilling at a place called Nova.
There are plenty of skeptics who advise against punting on companies like Sirius citing the odds of failure. Yet before there was Sirius there was another junior miner that went big time with a major discovery. That company is copper and gold miner Sandfire Resources (SFR) and the discovery came at a project called Degrussa.
The find was announced on 18 May 2009 when the stock price was at $0.26. Within three days it had more than doubled, reaching $0.55 per share. Although the stock price has softened a bit in 2013 a 5 year price chart shows its remarkable performance:
Sandfire has graduated from junior miner status with a current market cap of $910 million. Major analysts now cover the company with BUY or OUTPERFORM recommendations on SFR from UBS, Deutsche Bank, Citi, and CIMB Securities. BA-Merrill Lynch initiated its coverage 0n 27 June 2013 with a NEUTRAL rating and a $5.70 price target, far below the highest target price from CIMB Securities at $8.20.
The success of companies like Sirius and Sandfire are dwarfed by the failures of many junior miners. While hot prospects and deposit discoveries can drive up a stock price, not all positive news is equal. In this sector one bit of positive news is never enough. Both Sandfire and Sirius have repeated announcements of positive findings, increased estimates, and upgrades on mineral quality. A find deep in the ground in the middle of nowhere will be difficult to deliver to market in a cost effective manner. In addition, finds of lower grade minerals fetch lower prices.
In short, considering both your finances and the future of the planet, it may be best to steer clear of miners.
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