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Jun 2016 - Gold and Lithium

2016 - The year of Gold and Lithium

The theme of the conferences and behaviour of the stocks so far this year has clearly been focused on gold and lithium. While it was still doom and gloom in January, the revival of the gold price and its reluctance to fall below US$1050/oz (as predicted at the Tianjin conference in October 2015) caused many speculators to realise that no, gold was not going to meet many expectations of a fall through US$1000/oz to US$800/oz.

The theme of the conferences and behaviour of the stocks so far this year has clearly been focused on gold and lithium. While it was still doom and gloom in January, the revival of the gold price and its reluctance to fall below US$1050/oz (as predicted at the Tianjin conference in October 2015) caused many speculators to realise that no, gold was not going to meet many expectations of a fall through US$1000/oz to US$800/oz.

I had written those comments in a Paydirt column (also available on www.eagleres.com.au), but many refused to believe it. China had stated that the expected gold price in the coming year was a range of US$1100/oz to US$1400/oz, however, US$1050 was also viewed as US$1100/oz. I firmly think China put their foot in the door at US$1050/oz, because they want the gold, and as they stated in Tianjin, at a gold price of US$1100/oz, ~30% of its gold mines are uneconomic, and at US$1000/oz, ~50% are uneconomic. It is simply economics.

China had also banned shorting gold in 2015, but the shorting of other commodities was allowed because it benefits the construction industry and China's economy, and still facilitates the acquisition of resources throughout the world. That 2015 October China Mining conference (in Tianjin) is still holding true in its broad expectations for iron ore prices, (dip at year end and shallow recovery), with the base metals flat during 2016. Are base metal prices going to pick up in 2017 as Europe and the US recover as expected, but then realise China controls the stockpiles and many of the worlds' resources - we shall have to see. And whether that results in two markets, a China priced market (mined by China and treated by China), and the ROW that need product.

Quite surprisingly one reads or sees very little (if anything) presented at conferences on OBOR (one belt one road) despite its US$8trn infrastructure requirement or China's rebuild of Russia's infrastructure, road and rail laterals and verticals (same as China) and oil pipelines. I suppose we will have to wait for what may come out at the next China Mining conference (in September this year - and still in Tianjin).

But returning to February 2016, the Explorers RIU conference in February was feeling the green shoots, as gold share prices began to improve, and a session on Lithium had the makings of a bubble, when a new IPO (since listed) stated in their presentation that they had flown aeromag and identified an ~12km of strike length of greenstone near Pilgangoora. Because of that and its location, the greenstone had to contain pegmatites and because it contains pegmatites near Pilgangoora they had to contain lithium so they obviously have a lithium resource already. The lithium bubble was forming and has continued almost unabated since then, with reputedly over 60 listed Australian lithium exposed stocks (and was still reputedly growing at ~2 stocks per week in mid-June 2016).

And the money was already flowing, Beadell (BDR) raised $50m on 22 February 2016. At the time it was commented that the sponsoring broker had received offers of 3 x that ($150m) in the first hour !. This was followed soon after on 7 April by Pilbara (PLS) raising $100m and an SPP raising up to another $15m (at 38c - currently 13 June, it is ~68c and post the raise peaked at ~87c on 11 May). At 87c, PLS (with 1.14bn shares) almost achieved a market cap of A$1bn and that's without even completing the DFS, yet alone producing anything.

Having paid ostensibly by 6 May, the SPP applicants ($50.7m for the $15m available) had to wait until 26 May for their allocation, only to discover that if they had reduced their holdings to less than 5,000 shares as at 20 May, their SPP application had been cancelled due to disloyalty, with the other applicants receiving almost 40% of their application. It is the first time I have seen a disloyalty provision, but perhaps it could become the norm. After all, often there is share price weakness due SPP applicants selling their shares, especially if they can replace the shares at lower prices or score a quick potential or actual profit.

The raise was to accelerate drilling, complete the DFS by August 2016 and order long-lead items. The PFS in March 2016 delineated a 2mtpa plant producing 330ktpa of 6% Lithium concentrate for capex of ~A$184m (+/- 25% and including a 15% contingency). Pegmatites are hard and hence often require 3 to 4 stage crushing or HPGR (which appears to be the PLS plan). Once lithium concentrate has been produced, it is shipped to say China for conversion in another plant into lithium carbonate or LCE from which it can be used in batteries.

The conversion process is HPAL (high pressure acid leach with an autoclave) and a typical plant may cost up to ~A$150m in China or possibly up to ~A$300m in Australia. Hence treatment from cons to carbs is expected to be outside of Australia. To get from lithium carbs to cons is apparently an 8x conversion (or divide the cons by 8 to get to LCE), although some companies expect that a 7x conversion can be achieved. The HPAL process does not appear to be so straightforward as Galaxy (GXY) can attest when it was commissioning its Jiangsu conversion plant (now owned by another company) in China in November 2012, there was an explosion, injuries and loss of life.

The fact that PLS had commissioned a Tantalum mine and plant at (relatively nearby) Tabba Tabba and it wasn't working was ignored, reputedly because it has nothing to do with the lithium project. PLS' Pilgangoora orebody is clearly world class and apparently received a number of injections of spodumene-rich pegamatite during its geological history, based on the different colours on show at the RRS conference on the Gold Coast as shown inset in the Figure. Although it has been commented that it is possible to get different colours within the same pegmatite vein.

The growth projections for lithium demand are impressive and have fanned the flames, somewhat resembling those historical ones of the uranium demand boom and higher uranium prices that are still coming.

As money continued to be raised, Gold Road easily raised $74m in a placement on 27 April and 1-for-10 equity raising at 44c (currently 62c on 13 June), to complete its DFS by the end of 2016, and order long lead items. Gold Road are well advanced, having achieved their Native Title Agreement with the Yilka People at Cosmo Newberry on 3 May, followed by its mining leases for Yamarna being granted, as announced on 9 May 2016.

At the Sydney RIU conference on 11 May, Stewart MacDonald of Vertical Events prophetically quipped in his opening remarks that the lithium-battery powered train is leaving the station, and some of the instant stock movements based on presentations during the conference were simply astounding.

Such as Pioneer (PIO) giving a mostly lithium based presentation on prospect potential in Australia and Canada on its lithium prospects before lunch on 12 May, then seeing its share price soar from 4.5c to 10.5c and back to 6.9c within 2 hours, such that the ASX suspended trading in it at 3pm, and issued a "speeding ticket" PIO has since fallen back to 3.5c and rebounded back to 5c in the past couple of days.

Silver City (SCI) stated that they were going to explore for pegmatites that could potentially contain lithium near Broken Hill. That caused the SCI share price to soar from 2.6c up more than 5 x to 13c on 11 May before closing at 7.6c (ie almost trebled), but yet didn't cause a speeding ticket. Whether it was the presentation slide of 100sq km of outcropping pegmatite in the announcement on 11 May and subsequent presentation on 12 May with known lithium minerals (discovered in the area) that provoked the frenzy is not clear. However, SCI was able to raise $1.3m on 30 May in a placement and SPP at 4.5c (it is currently ~6c) plus a free 1-for-2 option at 6.7c within 3 years, and start exploration on 3 June amongst SCI's 100sqkm of tenements that are expected to contain extensive zones of outcropping pegmatites that may contain spodumene and hence lithium, amongst the tin prospect areas.

A new entrant to the conference scene in May was Nicholas Read's RRS (Resource Rising Stars) at the Gold Coast. Previously held in October, the conference has switched to May due to clashes for some of its presenters (such as NST and SAR) with the Denver Gold Show (a well-known annual conference that restricts attendance to mostly instos).

The free RRS Conference is regarded as one of the premier retail investor conferences and this year attracted ~630 delegates with many HNW's. As some of the presenters such as Bill Beament of Northern Star (NST) and Raleigh Finlayson of Saracen (SAR) remark it is one of the conferences that you have to attend. At this conference, the delegates are keen to invest, unlike Diggers where the booth tends to be full of service providers looking for a contract. Also during the RRS conference you can see delegates actively trading on their laptops or other devices.

It was commented that one of the draw-backs of Diggers is that it does not provide one-on-one break out rooms for investors to speak individually with the presenting companies.

The presentations by NST and SAR contained their growth aspirations and quite an amount of technical detail, with NST keeping up with the train theme seen at RIU Sydney, except they had a "golden train" as shown inset in the Figure. Bill Beament also showed the impact of what has happened to the NST share price whenever he presents at RRS and then 1 month later and its rising trajectory.

As some of the presenters commented, the knowledge base of the audience is very high, and no one worries about asking questions in the open packed out forum. And in booth, some questions that have raised eyebrows were of a ~70 year old lady grilling Sandfire over her NPV model, or another buying stock in one of Tony James' past companies because they were impressed by the way of how he had handled dilution underground.

The lithium fever also continued, with one presenter stating that they expected to be granted some prospects in the Andes above 4km high where the lithium brines had already been mined, but the lithium brine keeps bubbling up and forming. The prospects were later granted, and yes that company's share price instantly almost doubled. As for the new IPO (LPI) it had reputedly received $40m in applications within the first 2 days for the $7m available from 24 May, but has since issued a supplementary prospectus dated 14 June extending the closing date now to 14 June and has received applications for only $8m - hmm?!. Listing was expected on 24 June 2016.

In a sign of things to come, the RRS conference was held at the RACV venue on the Gold Coast and outside the hotel entrance, it had a battery powered unit plugged into a hybrid car as shown inset in the Figure. There was also a rack of bicycles - not yet lithium battery powered though.

Apart from an interesting spread of presentations covering economic and commodity price expectations and panels, RRS had a pre-conference presentation for its Premium Club members by Hedley Widdup (of Lion Selection Group - LSX.ax) along with their Lion clock spot on 6 o'clock - BOOM time !) on practical investing in junior mining stocks from a fund manager's viewpoint.

Hedley remarked that when he makes recommendations of stocks or positions that may be purchased, he also has to state what is going to cause him to sell/review (eg particular price level).

As Hedley highlighted the difference between gambling and investing is that "gamblers know only one horse can win. They gamble hoping they have backed the winner, yet know from bitter experience that they probably haven't. (whereas) Investors buy junior miners thinking that every horse will win one day. It's up to you to decide when the race is over - letting a horse run longer, (usually) won't make it a winner".

Hedley cited two definitions of success, in that building a project should make it become more valuable, but that share price appreciation was often completely unrelated to it. Investing in stocks requires a .long-term view but you cannot set and forget. Take Woolies (WOW) great company until Aldi came with its ~1.5% profit margin, or the banks, and as for the miners - they especially have no control over the commodity prices that they receive.

Hedley identified 5 key areas for considering investment in junior mining stocks:

The first key was definitely people / management. Go to the AGM and see how they answer the questions - see how they behave in an AGM - are they arrogant?. Try phoning their offices, can you get hold of anyone or are they disinterested or always too busy. Does the MD and board have skin in the game and how much skin. And how much money does the board and management reap in salaries. Who is backing the project, because you want to be in the trench with the people who continue to fight adversity. Poor management can seriously damage good projects and a good company.

Hedley's second key was you need a portfolio. Hedley showed a slide of LSG's past investments in which every single investment had been bought based on good people and the potential to be a 10-bagger as in make 10 x the investment, and the results ranged from -0.5 (as in up to a ~$10m loss) through to >10x for a >$90m profit. LSG's best investment (for an ~$100m profit) had been Michael Kiernan's Cons Min and simply because Michael knew all aspects of the business from the start through to the finish. What do you do if you run out of money, because things go wrong, don't have all your eggs in one basket of listed investments. The good has to make more than the bad.

The third key was valuation. Any analyst can manipulate a valuation to result in a higher target price, or justify the current share price. You need to ask the question why and focus more on market cap levels than share price levels. Also what discount is being applied and why, gold has worked on 5%NPV for many years. How is the financing and debt being handled, and are there any $ estimates for unquantifiable upside that seems to be highly variable and highly uncertain.

The fourth key was speculation, as in what are you speculating on: commodity prices, a major discovery, funding or a "tip from a mate, cab driver or whatever".

And lastly identify the risk and hence when to exit. Risk is key as in what could go wrong, politics in Africa, the ability to sell the product (eg the numerous (15?) types of lengths of graphite), can the product be transported to the market. So when it hits your sell target - decide stay or go. When you read the latest quarterly - that may also be the time to decide - stay or go.

Either way the RRS conference on the Gold Coast has become a must attend for many people.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd (AFSL 247083).

Figure. The RRS Gold Coast Conference, NST's Golden Train, Pilgangoora Spodumene & Hybrid Car

  • Written by: Keith Goode
  • Wednesday, 12 October 2016