WHAT THE ANALYSTS SAY: This week our team of experts run the ruler over St George Mining and Southern Gold.

Website: www.breakawayresearch.com

St George Mining (ASX: SGQ)

In the East Laverton project, St. George has a quality tenement package, considered highly prospective for komatiite-hosted nickel sulphide mineralisation, over an underexplored greenstone belt.

This prospectivity is backed up by work to date, which has demonstrated that the geology is similar to that in the Agnew-Wiluna belt, and has also intersected nickel sulphides.

East Laverton and the adjoining Lake Minigwal gold project are also considered prospective for orogenic gold mineralisation, similar to that in the Laverton district some 230km to the northwest.

The newly acquired Hawaii and Mt. Alexander North projects SW of Leinster also exhibit good potential – they are interpreted as being in a similar geological and structural setting to the high-grade Cosmos complex some 150km to the north, and limited historical exploration by BHP Billiton Nickel West has returned promising results.

Exploration is operated and managed by staff and consultants with extensive experience in Western Australian nickel and a track record of discovery.

St. George Mining is an Australia-based junior explorer focussing activities on nickel sulphide and gold in the Yilgarn Craton of Western Australia.

The key project is East Laverton, located over greenstones in the North-eastern goldfields, 230km southeast of Laverton, and hitherto relatively under-explored for komatiite hosted nickel sulphide mineralisation.

Website: www.breakawayresearch.com

Southern Gold (ASX: SAU)

Southern Gold is an ASX-listed junior gold exploration company whose main focus is the Bulong gold project 30 kilometres east of Kalgoorlie in Wester Australia, where small scale open pit mining has recently commenced at its flagship Cannon gold mine.

Southern Gold listed on the ASX in April 2005. The initial focus was on gold exploration around the Challenger mine in South Australia, nickel at Bulong South, uranium/base metals in the Gawler Craton and gold and gold/copper in the Lachlan Fold Belt.

The company later added exploration tenements in Cambodia to its asset base.

The bulk of these assets have now been disposed of, allowing the company to concentrate on the Bulong gold assets.

A PFS conducted in 2013 demonstrated the economic viability of an open pit and underground operation, toll‐treating ore at a nearby mill.

The estimated cash generation, based on a gold price of $1,500 per ounce, was approximately $14 million.

At an estimated total cost of $1,150 per ounce (including the capital on the small pit), the buffer is considerable.

An update to the PFS in 2014 further enhanced the project economics, boosting anticipated cash generation to around $18 million.

The announcement that Metals X (ASX: MLX) would finance and operate (mine, haul and process) the early stage development of the Cannon Gold Resource was a major breakthrough for Southern Gold.

Operational activities are to be charged on an open book, at‐cost basis, providing a high level of transparency.

Surplus cash will be shared on a 50/50 basis. Metals X, an Australian top ten gold producer and Australia’s largest tin producer, is well funded and has extensive expertise and experience in operational management.

This means that the normal risks associated with start‐up of small operations are significantly reduced.

Putting a value on a small resource such as Cannon can sometimes be difficult, but a recent transaction on a nearby property gives a good indication of the potential worth of the project.

In July 2015, Metals X announced the acquisition of the Georges Reward deposit on exploration tenement E25/268 for $4.5 million.

Georges Reward has a publically announced JORC Inferred Resource of 375,000 tonnes at 1.89g/t gold containing 22,800 ounces of gold.

While direct comparisons cannot effectively capture exploration upside, the Cannon project has a resource of 846,260 tonnes at 3.57g/t gold containing 97,045 ounces of gold, more than four times the amount of gold at almost twice the grade.

Disclaimer: The above is intended as a guide only. The Roadhouse accepts no responsibility for investments made from this advice, successful or otherwise.

The Roadhouse makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions.

GAVIN WENDT: Every economic and market presentation I have attended for the past six months or more has a slide showing a diminishing percentage rate of growth in the Chinese economy.

There’s no doubt that the world’s second-biggest economy is decelerating. However if one takes a step back from the conflicting daily headline numbers, a different economic reality emerges.

China is in the midst of an ambitious and risky rebalancing act – away from its old growth model of credit-fuelled, investment-led and export-powered growth – that generated 10 per cent annual average GDP gains from 1980 to 2012.

Reality Check on China’s Bad Press

Not surprisingly given the media’s predilection for sensationalism, there has been a lot of negative press written about China over recent times.

Even the US share market plunge was blamed on China, without for a moment considering that the US market was long overdue for a correction.

The performance of both the Dow Jones and NASDAQ indices over the past five years clearly justified a correction – a situation that is a necessary and healthy component of sustainable market appreciation over the medium to longer-terms.

With regard to China, there are a lot of overnight experts espousing all sorts of doom-and-gloom commentary with respect to the nation’s economic outlook and its share market travails.

Interestingly, most of these observers were oblivious to China’s astonishing share market run over the past 12 months, but have become instant experts in the wake of recent market volatility.

Sadly, negative news always captures the public’s attention, so scribes have been busy penning stories of China’s demise.

The key point here is to differentiate between the respective health of China’s share market and its economy.

China’s Economy

We all know that Chinese authorities for some time have been transitioning the nation’s economy away from construction-driven growth to an economy more focused on consumer spending and growth in services industries.

Authorities have also set out to engineer lower and more sustainable growth rates throughout the broader economy.

Between 2011 and 2014, the size of the service sector in China as a share of GDP rose by about 4 percentage points to 48 per cent, whilst at the same time the share of the industrial sector dropped to 43 per cent of GDP.

This is a marked change from a decade ago, when the industrial sector accounted for 47 per cent of the GDP and the service sector only accounted for 41 per cent of the economy.

The long game in the eyes of China’s authorities is to transform China’s $10.4 trillion economy into a more sustainable one, featuring a vibrant service sector and a more diversified finance industry that doesn’t rely so heavily on state-owned banks to allocate capital.

China’s Sharemarket

Commentary with regards to China’s stock market volatility needs to tempered by taking into account a few very important facts – China’s Shanghai composite index had risen by 152 per cent since July 2014 and 59.7 per cent since the start of this year, while the Shenzhen SME board had risen by 138 per cent since the start of this year. In such a situation, a market correction of the type we’re now witnessing is inevitable (indeed, it’s almost a necessity).

Aside from fundamental reasons such as monetary easing and market reforms, the China market rally has also been driven by new liquidity from retail investors and momentum, as well as a belief that supportive policies from the government. This led to a situation where stocks were clearly becoming overvalued.

In my view, the sharp correction in the stock market should have a limited impact on the stability of China’s overall financial system, which is dominated by the banking system.

Even though banks may have become involved in the equity market through various wealth management products and OTC channels, even the highest market estimate of potential bank exposure (up to RMB 2 trillion) is dwarfed by the RMB 180 trillion in banks’ total balance sheet.

One of the really interesting aspects of China’s current share market rally has been the participation of ordinary retail investors.

Household participation in the stock market rose sharply in recent months, with the latest official numbers suggesting there are about 175 million A-share accounts, with 29 million accounts classified as active.

The government may be concerned that large and widespread investment losses could lead to a notable negative wealth effect, which could weaken consumption.

China household wealth – June 2015

I believe the current stock market turmoil will ultimately only have a limited impact on China’s real economy.

The primary justification for this is that despite the recent surge in stock market prices and participation, equities still account for only about 20 per cent of overall household financial wealth, compared with 54 per cent in deposits.

If we throw in property, the equity share goes down to 12 to 13 per cent.

However, considering that stock prices rose by more than 150 per cent between July 2014 and mid-June 2015, the +30 per cent decline over recent weeks should have a relatively modest impact on general household wealth. Those hardest hit will (as in all bull markets) be those who joined the market late and with significant leverage.

The importance of equities in household wealth has shot up over the past three quarters by an estimated six per cent.

Moreover, only ambiguous empirical evidence can be found regarding the correlation between consumption and stock prices.

Interestingly, the correlation between Chinese consumption and equity prices is not historically strong, partly because investors have not typically depended upon equity investment returns as their primary source of income. Instead, wage growth has provided the vast bulk of incomes.

Gavin Wendt

MineLife Pty Ltd 
www.minelife.com.au

This article originally appeared in 

IN THE LOBBY: When it comes to politics an industry’s best friend is whoever is in charge.

The announcement of a new Federal Ministry after a leadership spill, or even after an innocuous reshuffle, always provides some entertainment.

Malcolm Turnbull has never really been highly placed on the Christmas card list of resource industry lobby groups, however his recent ascension to the Canberra throne has everybody slapping him on the back, and telling us all how much they look forward to working with him.

If industry lobby groups are to be believed, one thing Malcolm appears to have right is lessening the previous load Minister for Industry and Science endured by Ian McFarlane, which has resulted in Josh Frydenberg being anointed as the Minister for Resources, Energy and Northern Australia.

“The creation of a new dedicated Resources and Energy portfolio is recognition of the significant role the sectors play in the Australian State, Territory and Regional economies,” The Association of Mining and Exploration Companies (AMEC) chief executive Simon Bennison said.

“The industry would like to thank The Hon Ian Macfarlane MP, outgoing Minister for Industry and Science.

“Ian’s knowledge of the portfolio was extensive and unprecedented. We was very accessible as a Minister and responded to the concerns of industry.”

The appointment of Frydenberg elicited an immediate response from Western Australia Chamber of Minerals and Energy chief executive Reg Howard-Smith.

“Minister Frydenberg should maintain a focus on reducing the cost of doing business and increasing exploration activity in order for the Western Australian resources sector to continue to grow and operate competitively in the global marketplace,” Howard-Smith in welcoming his new man.

Howard-Smith also paid homage to the outgoing Industry and Science head, Macfarlane.

“Industry appreciated Ian’s strong understanding and knowledge of resources sector issues,” Howard-Smith said.

“Together with his consultative and measured approach, these attributes made him a true champion for the resources sector.”

As far removed from Canberra Western Australia likes to feel most of the time, both groups were happy to note the number of Sandgropers being given extra responsibilities in the new line up.

WA is to be represented by a number of new ministers in the Turnbull Government, including Senator Michaelia Cash as Minister for Employment as well as taking over her former boss’ portfolio for Women.

Christian Porter picks up as Minister for Social Services, while Ken Wyatt becomes Assistant Minister for Health.

“Together with Julie Bishop, Mathias Cormann and Michael Keenan, the level of representation in key portfolios, should ensure a strong voice for Western Australian issues – including the particular concerns of the WA resources industry – in Canberra,” Howard-Smith declared.

Taking a more internal view AMEC also congratulated the new Ministers and Assistant Ministers on their appointments adding it looked forward to improved business and investment conditions for the resources sector.

“Minerals exploration is at record lows and sourcing capital is extremely challenging for mid-tier miners and explorers. We must improve confidence and provide certainty for business investment decisions,” Bennison pointed out.

“AMEC looks forward to working with the new Prime Minister, The Hon Malcolm Turnbull MP, and his new cabinet to refine the Exploration Development Incentive and take a whole of Government approach to new infrastructure developments to unlock stranded assets.”

COMMODITY CAPERS: Folklore and legend are two essential elements to any culture as they provide the positives of the past that those living in the present, and hopefully the future, can build their aspirations and dreams on.

Slipping into the folkloric category is Western Australia-based Sirius Resources after its removal from the boards of the Australian Securities Exchange, as a result of being swallowed by Independence Group (ASX: IGO), which in turn has been responsible for the creation of S2 resources (Proposed ASX Code: S2R)

At industry events in years to come, the company will be spoken of in wistful tones, as those types who like to demonstrate they know more than the others around the table will speak of the time of the ‘Discovery of Nova’ as if it were a long lost tome of the Harry Potter boy wizard series.

Which is probably a fair thing as the company’s managing director Mark Bennet has been heralded as some type of ‘Exploration Wizard’ after the discovery of the Nova nickel deposit.

The discovery was made in the way all great discoveries should be made: using the last exploration dollar in the company coffers to drill the last drill hole of a program you can’t afford in the middle of nowhere with no mobile phone coverage as the ASX is chasing you.

“Sirius Resources has claimed the discovery of a new nickel province after striking nickel and copper sulphide mineralisation in the first reverse circulation (RC) drill holes to be conducted at the company’s 70 per cent-owned Fraser Range project in Western Australia,” The Resources Roadhouse reported back in July 2012.

“The company has named the discovery the Nova deposit.

“The Nova deposit is located in a previously unexplored and inaccessible area, beneath transported overburden.”

The Nova deposit set the ASX alight. As a magmatic nickel sulphide deposit, it was a style of deposit never before seen in Australia, the main geological feature being a structure known as the Eye.

“There is such a thing as genuine luck, but there is also made luck,” S2 Resources managing director Mark Bennett told the audience at the Western Australian Mining Club September luncheon.

“It may sound like a cliché, but it is where preparation meets opportunity, and if you are prepared you can grasp that and run with it.

“You may get lucky and find a mine, but it takes a lot more than luck to turn that into the end product.”

By March 2013 Sirius had worked up a maiden JORC-compliant mineral resource estimate at Nova of 10.2 million tonnes at 2.4 per cent nickel, 1 per cent copper and 0.08 per cent cobalt for 242,000 tonnes of nickel, 100,000 tonnes of copper and 7,700 tonnes of cobalt.

The takeover by Independence Group, or ‘Demerger’ as the two companies politely refer to it, has spun out a new company called S2 Resources, of which Bennett is to be managing director, and comes with a portfolio of early stage exploration projects and prospects.

Of note is the inclusion in S2 Resources’ portfolio of the Polar Bear project in Western Australia, besides a 67 per cent interest in a portfolio of titillating gold and base metals exploration properties in Sweden and Finland.

Polar Bear was an important exploration project for Sirius before the discovery of the Nova-Bollinger project.

It includes the Halls Knoll, Taipan and Taipan North nickel prospects, the Monsoon, Nanook and Earlobe gold prospects and the recently discovered Baloo gold deposit.

More importantly, it provides Bennet with the possibility of actually cutting the ribbon on a new mine, something which has been wrenched away from him by the Independence deal.

S2 Resources is not listed yet, however previous shareholders of Sirius will automatically become S2R shareholders at a ratio of two to one.

Although S2R is a public company, Bennett said the company anticipates being admitted to the ASX by the end of October this year.

The company is in the enviable position of beginning life on the boards of the ASX with $22 million in the bank, something Bennett admits would be difficult to achieve had the company started as a new IPO.

“We basically want to do Sirius all over again, and we believe that we can” Bennet declared quite matter of factly.

“We have a plan. We have a bunch of assets. We have a whole range of opportunities flowing towards us as a result of our Sirius experience.

“We will remain focused on the same commodities – precious and base metals – in sensible places.”

To accomplish that, Bennett indicated S2R will commence Resource drilling at the Baloo gold deposit, leading up to next year when it will turn its attention to the other deposits at Polar Bear.