Signs of life below ground

While mining indices remain off their 2008 highs, some observers suggest investors should start to position themselves for an upturn.

Resource shares are stirring. Once among the stock market stars of the mid-2000s, mining, oil and gas and exploration company shares took a savage pasting when the international recession clipped the mineral boom and oil plunged from last year’s surreal peaks above $140 a barrel to below $50.

Now, there are signs of life. Some deals at least are being done again and many share prices have bounced. Underlying raw material prices are crucial to the ratings of the companies. There is now a feeling that several base metals are past their worst, with some key economies starting to show more vigour than of late.

China is crucial to this and is showing more strength than had been feared, having recently agreed to fund a £3.2 billion Australian coal project in Queensland. Marius Kloppers, head of the world’s largest mining group, BHP Billiton, sounded a note of caution recently about China’s ability to sustain a sharp commodity rebound on its own, but most observers at least see trends moving, however unsteadily, in the right direction.

Gold, at more than $950 an ounce, has been fairly resilient, as a possible hedge against ‘quantitatively eased’ currencies, although hardly an old-fashioned inflation hedge in a
time of recession. With oil lately above $60 a barrel, analysts suggest that the medium-
term prospects are fair.

John Meyer, resources analyst at broker Fairfax, argues that ‘investors are coming back. Canny ones have seen market cycles before and are positioning themselves for the next upturn.’

In contrast to the peak of the boom, when glamorous exploration prospects were all the rage, he suggests that most interest, even among the junior companies, is in enterprises with existing production, though some buyers are looking at imminent production. The quality of projects and people bringing projects to the market is better than in the boom, because in today’s cautious climate it has to be.

Analysts at Fox-Davies Capital share a sense of medium-term optimism. They suggest that some share price rallies may have run ahead of themselves, but argue that they are justifiable when accompanied by positive specific developments.

The FTSE Mining Share Index has gained 65 per cent to 14,418 since November, though it remains less than half its level of May last year. The Oil and Gas Producers Index is 17 per cent up from its low last November, but more than 20 per cent off its high 13 months ago.

Oil giants Royal Dutch Shell and BP may be undergoing upheavals and worrying about future sources of supply, and the normally sure-footed mineral colossus Rio Tinto may be coping with hefty iron ore price cuts and aluminium concerns. But even Shell has rallied by a third from last October’s lows and Rio Tinto has more than doubled.

Showing some bounce

Several of the smaller fry have done much better. Heritage Oil has risen nearly fourfold to 515p – more than twice Growth Company Investor’s recommendation at 231p – on discovering ‘substantial commercial oil volumes’ in Uganda’s Albert Basin and the prospect of oil deliveries starting before the end of the year from the Miran field in the Kurdistan Region of Iraq.

Limerick-based Circle Oil, of which state-controlled Libya Oil Holdings owns 29.9 per cent, has trebled to return almost all the way to its 2008 high of 34.5p, thanks to encouraging initial oil and gas production at North West Gemsa in Egypt and hopes of new developments in Morocco. Entrepreneurially run Northern Petroleum has virtually trebled since October to 126p on drilling progress in Holland and impressive potential prospects offshore Italy.

After plunging from 846p to 144.75p between April 2008 and last January, India-focused
Hardy Oil & Gas has rallied to 337.75p on surprisingly good independent revaluation of
its reserves in the Krishna Godavari Basin in the Bay of Bengal. Onshore US oil hopes have brought some support back to speculative Nighthawk Energy at 54p.

Among the miners, Kalahari Minerals has almost trebled so far this year to 119.75p, after previous substantial rises, on the strength of its indirect 38 per cent stake in the potentially impressive Rossing South uranium project in Namibia. This has led to a corporate stand-off, involving Rio Tinto itself, Aussie-quoted Extract Resources (which owns the project) and AIM juniors Polo Resources, Niger Uranium and Emerging Metals.

West African uranium prospects in Mauritania and Guinea and copper-cobalt projects in Australia have similarly helped Forte Energy bounce nearly threefold to 5.75p. AIM-quoted Australian gold producer Medusa Mining, highlighted by GCI at 27p three years ago and again at 48p in January, has surged fourfold to 94p since November on prospects for rapid expansion of output and resources at its Co-O mine in the Philippines.

Shares in fully listed Randgold Resources, which is increasing production and resources at Loulo and elsewhere in Mali and with other African projects as well, have risen from £12.06 when GCI first recommended them three years ago to £42.57. After falling last year from £17 to 169p, Russia-focused Peter Hambro Mining has bounced to 638.5p on a 72 per cent leap in quarterly gold production, while West African prospects have helped Cluff Gold rally, after a 90 per cent fall, from 10.5p to 49.25p.  

Projects and deals  

Another sign of life is that companies are managing to raise money for projects that look sensible and corporate deals are being struck. Heavily depressed platinum group metals play Platmin, headed by the entrepreneurial Keith Liddell, has raised £39 million at 52p to restructure debt and develop projects in South Africa’s Bushveld, where the company claims attributable resources of 20 million oz.

AIM counter Churchill Mining has raised £5 million at 50p to develop its East Kutai thermal coal project in Kalimantan, Indonesia, after doubling estimated resources there to 3.18 billion tonnes. Even bombed-out Aussie copper, cobalt and nickel explorer Regency Mines has managed to tap the market for £2 million at 0.75p to pursue prospects in Western Australia, Queensland and Papua New Guinea.

Fully listed Aquarius Platinum says all pre-conditions for its £96 million paper bid for fellow South African platinum group metals concern Ridge Mining have been satisfied. After collapsing from an original 225p float price to 21.5p, Ridge shares have rebounded to £1.

All junior resource shares are risky and some have rallied almost to previous peaks. But several could show more life yet.