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In the first week of July, 33 ASX listed stocks reached rolling 52-week highs and only one of them was a junior miner, Asaplus Resources (AJY), trading at $0.24. On the same day 24 stocks hit rolling 52 week lows, and 13 were junior miners with market caps ranging from $68m to $1.5m, plus mining services stock Austin Engineering (ANG) with a market cap of $238 million.

Asaplus Resources is a Singapore-based company that started trading on the ASX in November 2012 at $0.20.  The company has exploration rights to iron ore deposits in China through its “Silverstone” Project.  As is always the case with junior miners, the company has a compelling story to tell, notably four areas with defined iron ore resources initially estimated at 1.52 million tonnes in close proximity to existing infrastructure and even a steel mill.  

On 13 May the company announced an increase in resource estimates to 3,480,700 tonnes, more than doubling its earlier estimates.  Despite the rocky trading environment for junior miners, AJY’s share price rose on the news.  Here is a 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. 

A successful junior miner needs plenty more than a compelling story in this environment however.  Alcyone Resources (AYN) is a good example of the typical cycle of a junior miner. Let’s look at its ten-year chart:

The current flat lines on the chart represent trading halts initiated by the company, which was formally named Macmin Silver before it entered voluntary administration (to later emerge as Alycone Resources); higher than anticipated capex costs, a decline in the price of metals, and the challenge of finding financing in difficult market conditions contributed to its prior difficulties.

Alcyone is a pure play silver miner with operations in Queensland.  The capital raising that allowed the company to continue operating was not enough to sustain operations, and additional capital raises followed.  Since the company began producing silver in July 2011, Alcyone has required additional capital raisings and a $3 million debt facility. The company’s managing director resigned on 15 March 2013 and in early April Alcyone’s shares  went into a trading halt from which they have yet to emerge.  

Now that the company has succeeded in obtaining a $10 million debt facility with a US investment firm, and a capital raise in progress, Alcyone’s acting chairman is confident Alcyone is ready to move ahead.  Clearly, it’s difficult to gauge market reaction when the shares are still not trading. 

Ernst & Young’s Business Risks Facing Mining and Metals 2013-14 report cites access to finance and capital allocation as the biggest risks for miners. 

Yet, some companies, like copper and nickel explorer Sirius Resources (SIR), trading at about $0.05 in July 2012, have bucked trend.  Here’s the company’s year over year chart:

Sirius has multiple exploration sites in Western Australia; a large scale discovery of copper and nickel at its Nova project site sent the share price racing to $4.99 on 15 March.  Sirius reached the “ten-bagger” status made famous by US investor Peter Lynch in less than a week.  And this is why junior miners, despite their risk, are still keenly followed by investors.  

Sirius serves as an example that if the market believes in a company, the cash will follow.  In December 2012 the company raised $44 million.  The share price recently got an 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.

Another junior miner that went big time with a major discovery is copper and gold miner Sandfire Resources (SFR); the discovery came at a project called Degrussa.

The find was announced on 18 May 2009 when the share price was $0.26.  Within three days it had more than doubled, reaching $0.55 per share.  Although the share price has softened a bit lately a 5-year chart shows its remarkable performance:

Sandfire has graduated from junior miner status with a current market cap of over $900 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 on 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 share prices, not all positive news is equal.  In this sector one piece 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, remember that financing – while crucial for junior miners – is an obstacle that can be overcome if the prospects warrant (such as high grade ore recoverable in a cost effective manner with infrastructure in place to bring the product to the market).

For the juniors in the penny dreadful category you can obtain numbers on balance sheet strength to assess investment risk, but without significant analyst coverage you are on your own when it comes to assessing the miner’s prospects. 

Despite the warnings about junior miners, there are some juniors and mid-caps with favorable views from major analysts.  The following table shows some balance sheet metrics for Sandfire and Sirius along with two additional miners:

Company

Code

Market Cap

Total Debt

Total Cash on Hand

Gearing

Current Ratio

Sandfire Resources

SFR

$903m

$378.5m

$114.8m

189%

0.87

Sirius Resources

SIR

$455m

0

$63.4m

0

14.35

Perilya Limited

PEM

$104m

$147.6

$38.2m

38.9%

0.71

Kingsgate Consolidated

KCN

$249m

$173.2m

$41.5m

22.2%

2.77

Sandfire no longer qualifies as a junior, however its debt of more than three times its cash on hand, its very high gearing, and low current ratio are areas of concern.  Yet its prospects merit some bullish sentiment from analysts.  Sandfire has a forward (2014) P/E of 5.99, a 5 year expected P/EG of 0.39, and a 2 year earnings forecast of an astonishing 192%!

Sirius has no debt and a solid cash and liquidity position.  Its prospects are still in the resource estimation stage.

Perilya Limited (PEM) is a mining and exploration company focusing on zinc, lead, silver, and gold in Australia and the Dominican Republic.  UBS has a BUY recommendation despite lowering its target price from $0.38 to $0.35 due to declining commodity prices.  Although Perilya’s debt to cash position and liquidity is less than pristine, this company has solid forward growth estimates.  The forward P/E is 2.42, the 5 year P/EG is 0.68, and 2 year earnings growth estimates of 7.6%.  

Kingsgate Consolidated (KCN) is a gold mining and exploration company with mines in Australia, Thailand, and exploration prospects in Chile.  The company’s future lies in the gold fields in Thailand where its existing mine at Chatree is operating at high anticipated cost, according to BA-Merrill Lynch analysts who have a NEUTRAL rating on the stock.  Citi analysts recently downgraded the stock from BUY to NEUTRAL after reviewing its price targets for the entire gold sector.  

Kingsgate has low growth prospects, with a current P/EG of 3.98 and a 2 year earnings forecast of 1.5%.  However, the current P/E of 6.08 is lower than the sector average of 8.75 and its P/B ratio of 0.30 and P/S ratio of 0.61 suggests there may be some value for high risk investors with patience.  The book value per share for KCN is $5.14 while the share price is hovering around $1.63.  KCN’s share price has dropped 68% year over year.  Perilya Limited has seen its share price fall 40% year over year.  Here is a five year price chart comparing the two junior miners:

In short, considering both your finances and the future of the planet, it may be best to steer clear of miners.

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.