Argonaut has completed a review of the best undeveloped metals and mining projects held by ASX listed companies and identified 11 compelling project opportunities. In addition we review a further 10 earlier stage projects that are likely to meet Argonaut’s key selection criteria within the next 12 months for special mention.
High margin, low risk: Fundamental to our selection criteria is high margin, tolerable risk projects with expected near term development and the capability to provide strong financial returns to the companies that own them. The quality of these projects enhances financing options, expedites development and increases M&A appeal.
Price volatility exposes quality: Recent weakness in commodity markets has exposed the vulnerability of many development and operating assets both in Australia and abroad. For example, the fall in iron ore and gold prices in 2014 has rendered many projects uneconomic due to high cost structures. This reinforces the importance of investing in companies with sound underlying assets that provide the best buffer against commodity price fluctuation. Whilst good management can add incremental value; project size, grade, low-complexity and margins are the key value drivers for each asset.
Broad mining sector underinvestment: Many of the projects reviewed in this paper will play an important role in future mineral supply chains. Maturing mines require ore reserves to be replenished, however the broad under-investment has led to fewer discoveries and mine life erosion of existing producing assets.
Positioned to fill new demand: This places uncertainty around future supply, at a time when the demand for many commodities is forecast to increase. Our selection of undeveloped projects are positioned to replace ageing assets and also fill new demand growth in commodities such as graphite, niobium and rare earth elements.
Equities at historic lows: Despite the positive outlook for our chosen undeveloped projects, many of the companies that own the projects are trading near historical lows following the indiscriminate sell-off in resource equities during H2 2014.
Able to endure commodity price cycles: These companies are delivering feasibility studies that demonstrate profitability despite the low commodity price environment. As market sentiment and commodity prices improve, these projects are positioned to gain first mover advantage status and deliver strong financial returns for stakeholders.
Selection criteria: Our selection criteria have been determined to ensure that key technical risks are considered and that each project has the ability to remain profitable through future commodity price cycles.
Each project must pass four key criteria:
1. Scoping study completed as a minimum development stage
2. Internal Rate of Return (IRR) must exceed 25%
3. Profitable through all market/commodity price cycles (cycle based on seven years)
4. High likelihood of achieving a $100m valuation within 24 months
Please contact your advisor if you would like more information on this publication or if you are an existing client please log into the Argonaut website to view the Book.
