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Companies
Unfashionable metals back in vogue
Trevor Hoey, July 30 2007
As the mining boom kicked into gear the focus was squarely on companies involved in the exploration and production of base metals, particularly nickel, copper and zinc. But as prices of metals that are generally less closely monitored took off, investors developed an appetite for a new source of riches.
Uranium, molybdenum and iron ore are a few of the prospects that have gone from unfashionable to the next big thing. The emergence of newly listed mining companies, most of which have no near term earnings visibility, have been embraced by speculative investors.
Smart money
But big investors have also been swept up in the rush. Only last week, a subsidiary of Australian Capital Equity, a company that Kerry Stokes is associated with, acquired a 19.9 per cent stake in Iron Ore Holdings.
Prior to this development, Iron Ore Holdings had a market capitalisation of $40 million; despite volatile market conditions by the end of the week Iron Ore Holdings, a company that has still to provide a proven resource estimate was worth $70 million.
Molybdenum challenges nickel
Moly Mines is another bolter that has risen from obscurity in the last six months. The company has been listed since 2004, making it old school compared with many of its chart climbing peers. Moly Mines has a molybdenum and copper resource that according to the company can sustain a 15 million tonne mining operation for more than 20 years.
The price of molybdenum has risen from about $US20 per pound to more than $US40 per pound in the last three years. The metal is used to strengthen and harden iron, steel and other alloys – in some cases it can be used as a cheaper substitute for nickel in the production of stainless steel. Moly Mines has one of the world’s largest molybdenum resources and the company should commence production in 2009.
Humble tin makes a charge
Metals X is also worth looking at. It is another company that is involved in the production of a less fashionable resource. Tin might not have the allure of uranium or nickel, but for Metal X it represents a very profitable resource in a supply constrained market where sharp increases in the price of the commodity appear to have gone unnoticed.
Since June 2006 the price of tin has nearly doubled, increasing from less than $US8000 per tonne to about $US15 500 per tonne. In the last month the price of tin has risen by more than 10 per cent, outpacing the more closely followed base metals such as nickel, copper and zinc. In fact as huge declines in overseas markets haunted investors on Friday, tin was the only bright spot. While nickel, copper, zinc, lead, aluminium, gold and silver all suffered declines, tin gained another 1.5 per cent.
P/E belies Metal X’s growth profile
Though Metals X’s share price has increased significantly in the last 6 months, it could be argued that the company remains undervalued. Metal X is forecast to deliver a net profit of $21.6 million in 2007-08, increasing by nearly 200 per cent to $63.9 million in 2008-09. This represents earnings per share of 6.1 cents, indicating that Metal X’s 2008-09 forecasts reflect a P/E ratio of 7.
These forecasts were released in June, and while it is from the most recent independent research available it was compiled prior to the recent spike in the price of tin. Furthermore, the forecasts are calculated using a long term tin price that is about 30 per cent below the current spot price.
Long-term earnings outlook
Metal X’s Renison and Mt Bischoff mines have a resource of about 6.6 million tonnes, but analysts believe that further underground mining at Renison could result in resource upgrades and potentially extend the company’s production capacity well beyond the eight years that is currently estimated.
In this regard it should be noted that Renison is the largest hard rock tin mine in the world, and based on current production estimates for 2009 Metal X is ranked the sixth largest tin producer in the world. Metal X also owns the Collingwood tin mine in North Queensland that has a smaller resource and a mine life of three to five years.
Nickel assets offer diversification
Metal X’s other assets include interests in nickel operations at Mt Keith, Kambalda and Kingston. These assets produce revenue in the form of royalties – related earnings are expected to be in the vicinity of $8 million for the six months to June 2007. But in terms of Metal X’s nickel interests, its Wingellina resource that has 2 million tonnes of contained nickel is where the blue sky lies.
In May 2007 China’s largest nickel producer, Jinchuan Group made an investment of nearly $33 million in Metal X, making it the largest shareholder with a stake of about 13 per cent. The funds will be used to assist in progressing the Wingellina project and Jinchuan has the right to negotiate an offtake arrangement. Analysts estimate that the Wingellina resource could support a strong level of production over a period of 25 years.
For those looking for other companies that have perhaps been overlooked in a hot mining market, tune in next week when we identify some players that are making their mark by developing large resources outside of Australia.
More articles from this week's newsletter:
International investing: Chinese whispers
Resident trader: Learn from your losing trades
Commodities: Which is the most popular to trade?
US plunge: Markets around the world are marching in lock step
Super: Young savers need to rethink super
Shares: Why technical analysis matters
Stock of the week: ADO
Warrants: Instalment pricing explained
Shares: Chief ratios for stock hunters
Shares: Earnings yield an omen of doom?
Super: The Y2K of super in 2007
Whatever your views, you can discuss this article - or any of Trevor's articles - on our message board Your 2 Cents.
Trevor Hoey is one of Australia's leading finance journalists, having written for Shares, Personal Investor and BRW magazines. Trevor's broad contact base enables him to find out - and report on - the real story behind what's happening at Australian listed companies. Trevor writes for the Australian Financial Review and AFR Smart Investor magazine.
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