Mining Eye Q3 2013

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Reasons to be positive

Our Mining Eye index put in another subdued performance over Q3 2013. 



A 6% net gain, closing an overall flat quarter, was helped significantly by late rallies from the index’s two largest constituents:

  • African Minerals, which announced proposed further Chinese funding for its Tonkolili iron ore project
  • Gold producer Archipelago Resources, which announced a £338m cash offer for the company by major shareholder, PT Rajawali

As we look to the final quarter of an extremely challenging year, there are reasons to take the optimistic view that sentiment is turning. A relatively flat performance by the Mining Eye represents a welcome improvement from the last four quarters of consecutive declines.

FTSE AIM sector index movements (Q3 2013)

Source: EY, Thomson Datastream

AIM’s Basic Resources index was no longer the worst performer of AIM’s sector indices (returning 12%), and a number of AIM’s miners saw astonishing price rises. Commodity prices on the whole have shown tentative growth, while globally (all sectors), equities have made steady gains, suggesting confidence is slowly returning.

Q3 saw the return of mining IPOs on AIM (albeit only two and small in scale). AIM itself appears to be making a return to growth, with new listings up 18% year-on-year and new tax breaks. From August 2013, the UK Government introduced new rules allowing AIM-listed shares to be permitted ISA (Individual Savings Accounts) investments. The measures are intended to encourage investment in small businesses.

However, we’ve been here before. The hangover of heavy post-2011 losses in junior share prices means investors remain fervidly risk averse, and history tells us that rapid rallies can just as rapidly retreat.

Furthermore, improved share price performance has yet to translate into sustained evidence of improved funding conditions. Total equity proceeds decreased a further 25% in Q3, to a new low of £46m. This may partly reflect companies’ inward focus in this climate, but with cash at critical levels, many will need to raise further funds just to keep afloat.  

While metals prices made gains this quarter, continued volatility (especially in gold) and an unfavorable near-term outlook of oversupply for many key metals is contributing to continued lack of confidence among investors.

Creating value

Winning strategies in the face of volatility are those that align with long-term value-creation goals while addressing immediate challenges, such as:

  • Sustainably reducing operating costs
  • Exploiting flexibility
  • Enhancing project financeability
  • Demonstrating improved returns potential

Metminco’s update to investors on cost saving initiatives contributed to the second highest share price rise over the quarter (235%). Cost savings should mean the company is fully funded until 2015. Optimization efforts at the Los Calatos copper and molybdenum project should result in higher resource conversion, increased production rates, extension of the open pit life and postponement of underground development. All of this, the company reports, equates to lower pre-production capital costs and significantly improved project economics.

Zanaga Iron Ore’s share price gained 113% as it announced it would advance its Zanaga joint venture on a staged development basis – reducing the upfront capital requirement and enhancing the financeability of the project.

Outlook: getting ship-shape

Q3 2013 was also a quarter of comings and goings, with a number of companies announcing new CEOs. Aside from company-specific circumstances, this is telling of the transitional period in which the industry finds itself. New leadership is being brought in to steer companies through the next period of the cycle – a period of rationalization and optimization in order to restore investor confidence and ultimately lay the foundations for sustainable growth.

Globally, confidence seems to be gathering momentum and we expect this to filter through to the mining sector in the coming months. However, equity markets remain challenging and continue to present prime opportunities for private capital and specialist finance providers, as evidenced by some stand-out financings this quarter.

With competition for capital high, juniors must demonstrate a relentless commitment to cost-management and creating shareholder value. Investors today, alongside quality of projects, will be looking for evidence of achievable project milestones to which funding can be tied, a realistic timeframe for exit or value creation, and a strong management team to deliver against those milestones.

Mining Eye performance relative to peers (last 12 months)

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Source: EY, Thomson Datastream

Mining Eye and commodity price performance (Q3 2013)

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Source: EY, Thomson Datastream

FTSE AIM sector index movements (Q3 2013)

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Source: EY, Thomson Datastream

Top 5 share price gainers (Q3 2013)

Company Price change Announcements
Rare Earth Minerals 2025% Positive drilling update from the Fleur-El Sauz Lithium project in Mexico
Metminco 235% Increase to project area and improved project economics at Los Calatos in Peru
ECR Minerals 210% Update on Mercator Gold subsidiary and repayment/redemption of all loans
Red Rock Resources 179% Update on proposed diversification into oil
African Eagle Resources 169% Completion of asset disposals and adoption of new investing policy

Source: Thomson Datastream. Share price movement over the quarter.

Top 5 share price fallers (Q3 2013)

Company Price change Announcements
Eastcoal -69% Proposed share consolidation, start of production and updated technical report on the Verticalnaya coal mine in Ukraine
Sirius Minerals -63% Significant delay to determination date of its mining application for York Potash
Forte Energy -51% Termination of discussions over proposed acquisition of Leo Mining and Exploration.
Kemin Resources -46% Board changes
Great Western Mining Corp -38% Board changes

Source: Thomson Datastream. Share price movement over the quarter

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Commodity price movements

  Q3 2013 Last 12m
Aluminium 4% -14%
Copper 8% -11%
Nickel 2% -25%
Zinc 3% -9%
Gold 9% -25%
Silver 15% -37%
Iron ore 13% 23%
Coal -5% -12%

Source: Thomson Datastream

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