If you thought separating winners from losers at the small end of the resources sector over the past year was a tough job, take a look at what’s coming – a flood of fresh IPOs that might well signal the high water mark in this phase of the boom.
At the end of last week the listing queue at the Australian Securities Exchange contained 77 names. Just under half, 38 in all, were classified as mining or energy offerings.
The challenge of sifting through the promises in each prospectus is daunting enough, but there are other reasons for being very cautious about what your friendly stockbroker might be recommending.
Care should be taken because:
- Most floats at this stage of a boom are rubbish.
- Most of the floats surfacing now were priced before the mid-November correction in base metal prices.
- Many stocks floated over the past six months are underwater.
In other words, you have long-term history and short-term history as a guide to the performance you might reasonably expect – if, in fact, many of the companies applying to list actually clear the first hurdle and raise the cash they’re seeking.
On short-term history, and float pricing, let’s use base metals as an illustration. A month ago, roughly the time when a prospectus hitting the market today was being prepared, copper was trading for about $US3.50 a pound. Today it is about $US3, a 14% fall which has taken the gloss off any copper float you might consider.
It’s a similar story with nickel, which has fallen from $US15.50 a pound to $US13.40. Zinc is down from $US1.30 a pound to $US1, and lead has fallen from $US1.70 a pound to $US1.33 – with all the damage done in less than a month.
There’s no need to look too far for the reason behind the sharp metal price falls. It’s all about fear of a collapse in the US housing market killing base metal demand, and possibly even dimming demand in China for construction materials because the US might be sliding into recession. Add to that worries in Europe that it is being hurt by the falling US dollar, which would make US exports more competitive, and you have a grim end to the year.
Whatever the outlook, and whether Australia’s has a place in the “Chinese lifeboat”, the simple fact is that any base metals prospectus drafted in the past month is likely to have been mispriced because the market for those commodities has turned.
A measure of the declining market is the performance of the 53 mining and energy floats that have reached the ASX over the past six months. Of those, some are doing very well, such as RMA Energy, which is up from the float price of 25¢ to recent trades at $1.75, a 600% gain. But, at the other end of the spectrum, 23 new floats are either trading below their issue price or at break-even after six months – a 43% failure rate.
The market hasn’t turned for every commodity, however, and there’s no doubt that in the long term demand for commodities in Asia will continue to expand, and Australia remains in the box seat to satisfy that demand.
That’s why a gem hunt will reveal floats like:
- Top End Uranium
- Emmerson Resources, and
- Spitfire Resources
These stand out among the junk because they are in the right commodity, in the right location, at the right time – and also because in a class of 38 there must always be a few stars.
Here’s why I selected these three IPO prospects:
Top End Uranium, says it all in the name. It is obviously a uranium float, and it is obviously focused on the Northern Territory. Right commodity. Right location. Uranium has risen from $US75 to $US93 a pound over the past two months, including a $US1 lift last week when other metals were falling.
Unlike some other uranium hopefuls, Top End does not have a deposit close to production, and it cannot claim high-quality parentage, like Toro with its Oxiana connections. But, what Top End has is what every real estate agent tells you when buying an investment property; location, location, location.
The plum asset in Top End is 37,000 square kilometres of tenement, much of it in Arnhem Land, an Aboriginal reserve which was, until uranium, and Aboriginal issues became no-go in the 1970s, one of the world’s hottest addresses for uranium explorers.
Times change. Today, the traditional owners are talking to the miners, and uranium has become a commodity to save the world from global warming. As well as its Arnhem Land areas, which are no longer bogged down in land rights disputes, Top End has negotiated a farm-in with Rio Tinto on a second block of territory called Yambarra, a patch of ground that contains the once famous Rum Jungle uranium mine from which Britain extracted the material to fuel its first nuclear reactors and make its first nuclear weapons.
On parentage, Top End is technically a spin-off from the struggling diamond explorer, North Australian Diamonds, a business that once traded as Striker Resources. North Australian shareholders are getting priority entitlement to the float, which is raising a minimum of $6 million, and a maximum of $9 million at 20¢ a share. It expects to list early this week, so it’s too late to apply for shares but will be worth watching both for itself and as a test of the uranium sector after the weekend election.
Float day price tipping is always a risky business, but it’s not stretching the point too far to say that it should only be a matter of weeks on the ASX before the Top End “tail” is wagging the North Australian “dog”.
Emmerson Resources is a pure gold float, also in the Northern Territory. More specifically, it is revisiting the once prolific Tennant Creek gold field at a time when gold is trading above $US800 an ounce, and widely tipped to crack the $US1000 mark, even if that rise effectively represents the collapse of the US dollar.
The theory behind Emmerson is new in part, but not entirely. Essentially, the company is the latest to own a swag of gold-rich ground and old mine workings previously controlled by companies such as Peko Wallsend, Normandy and Giants Reef.
What is new is Emmerson’s management team led by former Lafayette Mining managing director, Andrew McIlwain, and former BHP Billiton and WMC executive, Rob Bills. McIlwain and Bills reckon that the application of modern exploration tools, and a search for bigger and deeper ore bodies such as the iron oxide copper gold (IOCG) style material found at South Australia’s giant Olympic Dam mine, will bring fresh life to Tennant Creek.
Emmerson is raising a minimum of $15 million and a maximum of $20 million via an issue of 20¢ shares with Bell Potter lead manager. December 17 is set as the listing date.
Spitfire Resources is also in a good commodity, manganese, which is an essential steel additive and therefore riding the iron ore boom. In addition, it’s a good location, and there’s a third reason to take an interest: Spitfire’s primary asset is so good that this is actually the second time the same asset has been floated by the same management team.
The company’s focus is an exploration target in WA called South Woodie Woodie. As the name implies, it is close to the Woodie Woodie manganese mine (50km south) owned by Consolidated Minerals, over which a year-long takeover battle has been fought with the price rising from around $1.70 at the start of the year to around $4.85 now.
Two years ago, South Woodie Woodie formed the backbone of a float called Churchill Mining. However, Churchill was only listed on the secondary market of the London Stock Exchange, the Alternative Investment Market (AIM).
Not much exploring was done at South Woodie Woodie in 2006, and the manganese price collapsed. Churchill also found something better to do with a coal discovery in Indonesia, which is now the driver behind that business.
Why, it might be reasonable to ask why anyone would want a British reject?
Well, first it’s because the manganese price has more than doubled. Second, because the ConsMin takeover battle has repriced all manganese stocks. (ConsMin rose from $2.50 at the time of the first Territory Mining bid to close at $4.96 yesterday).
Third, because ConsMin has pegged all the ground around South Woodie Woodie just in case a big new discovery is made; and fourth, because Spitfire is trying a few new exploration techniques, and will drill before Christmas, something Churchill never got around to doing.
Spitfire is raising a minimum of $4 million and a maximum of $6 million at 20¢ a share. The prospectus closes on November 30, with December 14 pencilled in as listing day.
This story first appeared in Eureka Report.