Juniors face Crunch Time

THE CONFERENCE CALLER: Opening the second day of the Sydney RIU Resources Roundup Breakaway Research senior research analyst Mark Gordon explained that we are currently experiencing a market characterised by flat commodity prices, which he expects may continue for some time.

This, he intimated, is only going to make things tougher, especially for the junior resources company, many of which are counting down the seconds to ‘crunch time’.

“I think, over the next three to six months, we are going to see a number of these companies falling by the wayside,” Gordon said.

“These will be the companies that don’t currently have quality projects and are unable to raise sufficient funding.”

“An increase in supply generated during the boom should be able to largely handle expected demand increases for major commodities for the next few years.

“However there is the potential for some minor and strategic commodities to experience significant demand increases/supply contractions.”

 

Gordon said these are important factors, which will need to be taken into consideration when anybody may be considering any investment in the sector.

Another important element to take into consideration is that capital for project development will become much harder for juniors to raise with only those companies with quality projects the ones likely to receive a share of the funding pie.

There are many outside factors which Gordon believes will need to kick in to help shape any upcoming market run.

These will include consistent recoveries in the both United States and European economies, a demonstrated, sustained growth from China, and identified growth in other under-developed economies.

“These include countries in Latin and South America, south east Asia,” he said.

“Increases in demand and growth in those regions should drive prices.”

This doesn’t means, he said, there aren’t any good opportunities currently sitting on the boards of the ASX.

To the contrary Gordon considers there to be a number of good opportunities.

Finding them, however, requires more due diligence than was needed by even the savviest of investors than before, especially with the euphoria and speculation of the boom days being well and truly behind us.

“Only projects with a reasonable chance of discovery or eventual exploitation are getting market attention,” Gordon said.

“There have been a number of good stories over the last few years, particularly new discoveries.”

Gordon highlighted the recent discoveries that have lit au the boards, including Sirius Resources’ Nova-Bollinger discover, Sandfire Resources’ DeGrussa find, Peel Resources’ Mallee Bull deposit, and the Thunderbird rare earths find of Sheffield Resources.

According to Gordon the best capital returns are generally from the exploration stage when a discovery is made and everybody becomes excited about the prospects of the company making the discovery.

These rises continue in proportion to the moments in time where funding is approved or offtake agreements (especially for non-openly traded commodities) are secured.

“Particularly in this climate, getting that funding is a very, very important part of any company’s story,” he said.

Gordon emphasised a good investment strategy is to take a portfolio approach as this mitigates risk.

“If you take a basket ten quality junior exploration stocks, there are a number of those that won’t make it,” he said.

“The gains from the ones that do make it, however, can make up for those losses.”

Although new discoveries can set off a bushfire of investment, Gordon said it is important for investors to do their homework about the companies that make them.

Gordon brought out the old guns of invest in exploration companies with good technical teams and whether your appetite for risk draws you to companies conducting their exploration on greenfield or brownfield tenements.

He also identified resource expansion as being an integral part of the initial upward trajectory as companies continue to drill, achieving getting results that will add to the current resource.

“However just adding resources for the sake of it when a critical mass has been reached (particularly in bulk commodities) potentially doesn’t add significant value,” he said.

“I have seen companies where they have continued to drill out to a very good quality resource, but this has not been reflected in its share price.”

“Funding and offtake agreements are good options, while for companies dealing with bulk commodities, infrastructure agreements and solutions are very important.

“Bulk commodities projects are often driven by the infrastructure.”

One final aspect Gordon suggested to consider is how a company and its project compares with peers.

“How do potential revenues and costs stand up when compared to similar projects?” he asked.

“It is a competitive world out there, particularly at the moment.”