A week in which a lack of action smacked of calm before the storm

22nd June 2018
Tim Treadgold

One deal does not a rush make. But when South 32 this week lobbed a spectacularly generous bid for a promising US zinc explorer, the keenly awaited outbreak of takeover season in the mining sector came a step closer.

Another clue that deal-time is near came in the three-way tussle for financially-stretched Atlas Iron, with Australia’s richest woman, Gina Rinehart, delivering what looks like a knock-out cash bid of 4.2c a share, too high for a counter-punch from the original Atlas suitor, Mineral Resources.

Rinehart’s deep pockets means she can easily afford the $390 million for ownership of Atlas, but whether she gets 100% is an interesting question given the latest on-market price of the stock is 4.4c, which indicates that some speculators believe there could be another bid, perhaps from Fortescue Metals.

Interesting as the Atlas situation might be, the South 32 cash splash is undoubtedly the more significant because the $1.3 billion offered for shares it doesn’t already own in Arizona Mining represents a 50% premium to Arizona’s price before the bid.

What South 32 has done is put a spotlight on the huge amount of spare cash which is obviously starting to burn a hole in the company’s accounts.

But, whether paying $1.3 billion for a zinc asset as the world slides towards a full-blown trade war will turn out to be a wise use of shareholders’ funds is an interesting question.

Some South 32 shareholders will be appalled given that the corporate slogan of big miners for the past three years has been discipline, and a promise of no more wasteful mergers and over-priced project developments. Other shareholders will be pleased that the “no-deal dam” has broken.

More interesting, however, is whether South32’s acquisition will spur other cash-rich companies to bid for asset-rich (but cash-poor) explorers and potential mine-developers, because if it does, an unloved section of the mining sector could arc-up.

While investors consider the value of pursuing a policy of buying potential targets with assets in the ground, which can be quite profitable if a rush develops, the reality is that picking takeover targets is devilishly tricky.

A more reliable strategy in the current market where uncertainty runs deep is to keep close to the gold sector, where currency moves are having a significant effect, and the most basic mineral commodities such as copper, as well as coal, which continues to elbow its way onto investor radar screens – whether welcome or not.

Among the gold stocks, a theory explored in this column last week, that prices are rising because of the “cash and currency” factor, was demonstrated again in the latest period of share trading with a number of gold stocks reaching 12-month share-price highs even as the underlying US dollar gold price fell quite sharply.

Rises during the week included Saracen, which hit a new peak of $2.30 (up 8c) before easing to $2.24. Regis reached $5.23 (up 13c) before easing to $5.10, and St Barbara traded as high as $5.08 (up 20c) before easing to $4.94.

While the local gold leaders were going up, the international gold price was going down, shedding $US42 an ounce to $US1265/oz – with the local price offset by a plunge in the Australian dollar to less than US74c which helped the Australian gold price hold steady at $A1718/oz.

If the currency factor isn’t enough to kindle a bit of fresh interest in gold as a hedge against a continued fall in the value of the Australian dollar, there is always the dividend-paying power of the gold miners, which should be confirmed in the next few weeks when June 30 results (and dividend payouts) are reported.

Coal continued its upward march as electricity demand rose in the emerging economies of Asia, Africa and South America, lifting the coal price and the share prices of producers such as Stanmore, which added 8c to a fresh 12-month high of 82c.

The coal sector also welcomed a new coal float in Bounty Mining, which traded at a modest premium to its 35c issue price, with latest sales at 37.5c.

Despite the burst of corporate activity and local gold stocks defying a downward price trend, there weren’t many significant price moves up, or down, perhaps a reflection of the imminent end of the financial year.

Events, and price moves which did catch the eye, included:

  • Nzuri Copper, up 2c to 26c after reporting high-grade cobalt assays from a satellite resource along strike from its Kalongwe project in Congo, with a best hit of 5.4 metres grading 0.45% cobalt from a depth of 37m.
  • Havilah Resources also moved up by 2c to 24c after reporting strong cobalt recoveries from test work on ore recovered from its Mutooroo project using a process developed by Cobalt Blue.
  • Todd River Resources added 1c to 11c, after reporting high-grade copper and zinc intersections at its Mount Hardy project in the Northern Territory, including 25.15m at 2.4% copper, 4% zinc and 3.1% lead from a depth of 184m.
  • Northern Star added 6c to $6.51 after announcing that it would hit its gold production target of 600,000oz a year, beating earlier guidance of annual output being between 540,000oa-and-560,000oz.
  • Kalamazoo Resources put on 1c to 10c after announcing that it had secured an exploration permit in Victoria that covers all of the historic Wattle Gully gold project and the surrounding Castlemaine goldfield.
  • West African resources edged up by 1c to 32c ahead of the release today (Friday) of a definitive feasibility study into the Sanbrado gold project in Burkina Faso. The rise offset the fact that on Wednesday the stock slipped to a 12-month low of 29c.
  • Legend Mining added 0.3c to 4.3c after reporting the discovery of a third geologically attractive structure at its Rockford nickel, copper and cobalt project in WA.
  • Pioneer Resources add 0.3c to 2.3c after the delivery of an upbeat report at a mining conference in Queensland where interest was generated in its plans to produce caesium, a metal used in oil exploration equipment, and
  • Ardea Resources lost 3c to 89c despite announcing the start of pilot plant trials at the Goongarrie nickel and cobalt project in WA.

Image via Mining Technology

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