‘Guy on Rocks’ is a Stockhead series looking at the significant happenings of the resources market each week. Former geologist and experienced stockbroker Guy Le Page, director, and responsible executive at Perth-based financial services provider RM Corporate Finance, shares his high conviction views on the market and his “hot stocks to watch”.
Market Ructions: Risk on returns
Looks like it was a “risk on” week with a strong performance from the Dow Jones up 5.4% to close at 32,861.80 with a weaker US dollar index (110.67), lower volatility (VIX falling from 30 to 25) and US 10-year treasuries off 22 basis points to 4.01%.
A big week coming up with consensus around a 75-basis point hike by the Fed on Wednesday, however any effects this may have are likely to be offset by further quantitative easing.
It appears we are unlikely to see positive real interest rates any time soon which doesn’t bode well for the inflationary outlook.
Even things on the TSX-V seemed to pick up with a modest 3.3 point (0.5%) rise to 596 however volumes were significantly higher (figure 1) than the 20-year lows we saw earlier this month.
Precious metals were mixed with platinum up US$11 to close at US$942/ounce, palladium fell 5.5% to US$1,834/ounce and gold closed at US$1,645/ounce down US$11 for the week.
On the base metals front Macquarie had their annual love-in where they shared some interesting sentiments on the outlook for base metals. It appears the mood was a little more sombre this year however copper, aluminium and zinc seem to be the most favoured long positions (figure 2) with the majority of those surveyed believing copper will be trading between US$6,500 and US$7,500/tonne in 12 months’ time (figure 3). Not surprisingly the biggest driver of copper next year was thought to be a rebound in Chinese demand with a surge in new mine supply the least likely (figure 4).
I might put these questions to my fellow thought criminals (people that think the carbon debate as it relates to global warming is crap) at Cigar Social and see what numbers they come up with. One of those thought criminals also compared forecasting the climate to his success with dating while at University. You can’t apply the same parameters looking forward (or backwards) as there is significant volatility and variance with inputs such as quality control, performance, output, reliability, redundancy, and other key performance indicators. All makes perfect sense to me.
One thing we can all agree on is that costs are on the march as we observed with Teck Resources’ (TSX:TECK.B, TSX:TECK.A, NYSE:TECK) Quebrada Blanca Phase 2 copper mine in northern Chile with an initial mine life of 28 years producing 316,000 tonnes of copper per annum (first five years) and scheduled to come online later this year. The initial US$4.7 billion in CAPEX looks like coming in at closer to US$7.4 billion.
One of the big movers late last week was the iron ore price with futures in Singapore off 2.2% to $US79.95 a tonne on the November contract on Friday, a fresh two-year low in response to softening global demand. Macro headwinds in China saw sluggish property sales with the freight index having stalled late last week according to Macquarie (27/10/2022). At the same time shipments from Australian ports have fallen approximately 5% week-on-week.
Reports from within China indicate that activity has failed to recover with iron ore imports from January-September 2.3% lower compared to the same time last year.
New Ideas: Planets aligning
Venus Metals Corporation (ASX: VMC) has been dragged down with the rest of the gold sector over recent years, however developments around Mangaroon may be about to change things.
I think the share price can almost be underpinned in its entirety (depending on how you do your numbers) by its 30% interest in the Youanmi Gold Mine (VMC 30%, Rox Resources 70% and operator) which contains JORC Inferred and Indicated resources of 27.9Mt at 3.57g/t Au for 3.2Moz Au contained gold.
The recently published Scoping Study (VMC ASX Announcement 19/10/2022) contemplated a 71koz per annum @ 5.0g/t Au over an eight-year mine life producing 569koz of gold at an all in sustaining cost of $1,546/ounce. The pre-tax NPV came in at just over $300 million with an internal rate of return of 45% assuming a gold price of $2,450/oz.
I am not a big fan of Scoping Studies given the high levels of uncertainty (+/- 30-50%) and would have preferred a pre-feasibility study (PFS) instead. Not surprisingly Rox (ASX:RXL) were sold down from 22 cents to 17.5 cents shortly thereafter. I think the actual PFS NPV, after converting more inferred to indicated, could be significantly higher. Figure 8 does show the unmined potential that was not incorporated into the financial model so in my view the study published by RXL didn’t do the project any favours. Anyway, what would I know?
Well, I do know one thing – the market didn’t like it.
Putting the financials aside, based on the enterprise value of RXL, VMC’s 30% interest in Youanmi is worth around $14 million or 8 cents per share to VMC. If you look at the attributable NPV of $300 million, that would equate to $90 million or around 50 cents per share. The after tax NPV would be closer to 35 cents per share.
VMC’s 100% owned Mangaroon North project (figure 9) might be about to spice things up given its proximity to Hastings Rare Metals (ASX: HAS) (Yangibana: 16.7Mt Ore Reserve; 15-year mine life producing 15,000tpa of high grade Mixed Rare Earth Carbonate and boasting a post-tax NPV8 of $1 billion) and rare earth explorer Dreadnought Resources (ASX: DRE) which boasts a market capitalisation of over $300 million on the back of recent drilling success.
VMC believes that the host lithologies found at Yin and Yangibana are also present on the Mangaroon tenements along a regional northwest strike.
Aside from multiple favourable structural traps identified through mapping and geophysics on the tenement, VMC has identified a number of potassium, thorium, and uranium anomalies. The company is awaiting results from surface sampling and will hopefully be drilling in early CY 2023.
The eclectic board is headed by former paper shuffler Matthew Hogan and there is even an Adelaide component in the form of veteran geologist Barry Fehlberg. Barry is an Honours geology graduate from my alma mater Adelaide University who apparently went to lectures, paid attention to his studies and drank in moderation. I can’t say I have a lot of respect for this sort of behaviour but company directors as we all know are in short supply.
Given VMC’s modest enterprise value of $14 million after the recent $2.1 million placement undertaken by our great company RM Corporate Finance, I am thinking the share price could go all the way to Venus, or 256 million kilometres into space, on any reasonable exploration success at Mangaroon.
I’ll drink (and smoke) to that…
At RM Corporate Finance, Guy Le Page is involved in a range of corporate initiatives from mergers and acquisitions, initial public offerings to valuations, consulting, and corporate advisory roles.
He was head of research at Morgan Stockbroking Limited (Perth) prior to joining Tolhurst Noall as a Corporate Advisor in July 1998. Prior to entering the stockbroking industry, he spent 10 years as an exploration and mining geologist in Australia, Canada, and the United States.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed, or otherwise assumed responsibility for any financial product advice contained in this article.