Is the market starting to turn?

THE CONFERENCE CALLER: Like many of the junior exploration companies in attendance at the RIU Explorers Conference, Patersons Securities senior resources analyst Simon Tonkin had a lot of ground to cover.

Of interest was his take on the performance of the different commodities over the past 12 months.

 

First up was gold, the commodity with what is probably the most watched and discussed price tag on the market.

Although it has had a tough run in recent times compared to the days when it soared over the $1800 mark, the most precious of metals has seen some strengthening in value of late.

“We believe the reason for this recent support has been the fact the US has suspended its debt ceiling negotiations until 2015,” Tonkin said.

“That means they can spend as many US dollars as they want, which adds risk to the US dollar.

“That’s why we are seeing the gold price going up.”

Tonkin claimed to be bullish for a long term rise in the price of gold saying all that was needed was something, or someone, somewhere to pull the trigger.

“We believe there must be a trigger for much higher gold prices,’ he said.

“Supporting events could include currency or bond prices – where investors lose confidence and are looking for another place to put their money.

“There has also been unrest around the globe…which could also be positive for higher gold prices.”

As far as base metals are concerned, Tonkin said it basically comes down to a situation of supply versus demand.

The price of copper could soften with the potential for additional supply to come on stream over the next three years.

While nickel remains in deficit, Tonkin identified the recent Indonesian ban on imports as being a positive for other nickel producing regions.

“Overall we think nickel should be better later in the decade,” he said.

He expressed confidence for zinc prices, pointing to the number of mine closures anticipated to come into effect globally, which should result in a limited new supply coming on stream.

In terms of tin, Tonkin said high prices were needed to justify new projects being developed, however a supply deficit is the most likely scenario to emerge over the next few years.

Looking at iron ore – it has performed a lot differently than gold and base metals.

“We expect iron ore prices to remain supported around the $120 per tonne level and we expect to see continued high demand from China,” Tonkin said.
Tonkin then turned his attention to the question all junior resource companies have been asking.

How can the industry attract investors back into the resources market?

“I think the key is providing confidence to shareholders,” he said.

“In the larger cap area investors want to see increased dividends, particularly sustainable dividends.

“As an analyst covering the mid-cap space I want to see positive free cash flow, and that is basically operating cash flow minus capex.”

Tonkin said that as commodity prices decreased, companies needed to demonstrate they were able to keep their costs in check.

There are a number of companies doing this, he said, however, more companies need to be able to show they are approaching this matter with some rationalisation.

“Many of the mid-caps have debt, which is used to fund the development of their projects,” he said.

“We want to see those levels as manageable and what we have seen…is a few companies beginning to raise capital.”

AS far as junior companies are concerned, from an analysts perspective, Tonkin indicated he prefers to see companies with good projects with maximised expenditure on those projects.

“It is also a very good sign if management actually have some ‘skin in the game’ – that means their goals are aligned with the shareholders,” he said.

“The other thing is that management are setting significant, achievable targets for exploration and development and achieving those targets.”

One surprising statistic Tonkin raised is that there are currently 297 companies listed on the ASX with less than $1 million in the bank

These companies, he said, should consider perhaps joint venturing some of their non-core assets to conserve cash, and where possible some Merger & Acquisition activity.

 

Since 2007 M&A has trended down in terms of the number of deals done, but more importantly the actual value and average size of the deals done have dropped from around $220 million in 2012 down to around $29 million in 2013.

“Whilst it would be nice to see M&A pick up in 2014 it really would be against the trend,” Tonkin said.

“So I think we will see another year of smaller deals, but marrying cash to good projects would certainly benefit the companies involved.”