This week Investor Ideas spoke to Paul Adams, an analyst with the brokerage firm DJ Carmichael in Perth Australia. Given the excitement with junior mining companies in Australia lately, I thought it would be worthwhile to recount the interview here. For full interview details visit: http://www.investorideas.com/news/2014/mining/11031.asp.
In regards to the Australian mining sector, particularly when it comes to junior companies, Adams says, “Like many companies in the junior space in North America, and Canada in particular, junior miners in Australia have suffered from the downturn in commodity markets. Here in Western Australia, the fall in the iron ore prices has not only affected the large miners, it’s affected the juniors even more. Some miners have already ceased production at high-cost operations…A general gloom hangs over Western Australia, even though 2013 and 2014 have been relatively good years for the general market.”
Adams goes on to explain the downturn on the Small Resources Index which has fallen 23.6%. But, according to Adams, not all hope is lost. “There is obviously value in the market…The CBOE Volatility Index (VIX) recently rose above 30. That definitely affected the mood of fund managers and their willingness to enter this sector.”
Most important for me is the value he sees in nickel and zinc commodities and indicates that we could see rising prices in 2015-2016. With much of the demand coming from China.
Adams then singles out Poseidon Nickel Ltd as an up and coming prospect. “Poseidon had an amazingly transformative second half of 2014. It acquired two major nickel projects in Western Australia from Norilsk Nickel…First was the Black Swan project, which is near Kalgoorlie. The second one was the Lake Johnston project, which includes the Emily Ann nickel project, west of Kalgoorlie. These acquisitions were completed for A$2.5 million and included all of the surface infrastructure (power, camp facilities, offices, tailings dams, waste dumps) and underground development, and doubled Poseidon’s contained nickel resources in the group to around 400,000 tons. The acquisition reduced the company’s timeline to production by about 12 months and changed the company from a one-asset, capital-intensive developer to a three-asset company with production flexibility and one of the lowest capital intensity costs of any new nickel company. That’s really exciting.”
“Our price target for Poseidon is A$0.67 and it is currently trading at A$0.16. That’s quite a big value uplift. We’re anticipating a staged ramp-up in production from various projects. It is going to be Australia’s next nickel producer.”
When questioned about the current state of mining in Indonesia, Adams says, “Institutions have a view one way or the other on Indonesia. Some will look at it and some won’t. Indonesia has a lengthy mining history. Many companies operate there and the new government is pro-business. For us, it doesn’t represent a big risk.”
When it comes to nickel for 2015 things are looking up, “the supply/demand fundamentals for nickel suggest that nickel prices should start to rise as Chinese stockpiles of Indonesian nickel ore get depleted. That means in 2015 nickel companies should perform better than they have in recent years.”
Adams reaffirms for me my optimism in the mining sector, particularly in nickel. It has been a roller-coaster of a year for nickel including the export ban from Indonesia, sanctions on Russia and the rise of Chinese demand, but I’m with Adams on this one, it’s worth the wait.