Exploration Insights by Robert Tyerman

Midwest US inventory building may have wrong-footed some short-term oil traders, but the resources markets continue to show promise, even if the timing may be lengthened in some cases

Faroe Petroleum says Norway’s offshore Fogelberg prospect has revealed gas and condensate estimated at between 105 and 530 billion cubic feet. The Aberdeen-based company is raising £69.8 million at £1 in a rights issue offered to shareholders, including Dana Petroleum. Fogelberg, 18 km from the large, producing Asgard complex, is the first of a five-well exploration-drilling programme in which AIM-quoted Faroe is participating this year.

Chief executive Graham Stewart says that the company ‘may have now unlocked considerable upside in our licence position’ in the area, known as the Halten Terrace, where Faroe holds six further licences.

Recommended by Growth Company Investor at 82p last May, Faroe shares have now reached 125p, valuing the company at £140 million. Hold on for now.

Silver service
Arian Silver says Mexico’s San Jose project should start production this quarter following encouraging high-grade drill hole assay results. Based in London and quoted on AIM, the Toronto Venture Exchange and Frankfurt, the company says the latest assays from San Jose in central Mexico’s silver-rich state of Zacatecas include 2.35 metres containing 834 grammes of silver per tonne of ore, two metres with 822 grammes a tonne and 3.05 metres with 602 grammes a tonne.

President and chief executive officer Jim Williams declares, ‘These latest results confirm management’s view that the higher-grade areas initially demarcated on the San Jose vein are even more extensive than previously outlined.’

Arian says it has agreed a contract for initial mining and expects San Jose to go into production before the end of June. Williams has foreshadowed operating costs at San Jose of $40 a tonne against a claimed in situ metal value of $100 a tonne.

He argues that the project could achieve a 160 per cent internal rate of return at a silver price of $14 an ounce, against a current price of more than $17 an ounce.

Arian shares reached 31.5p four years ago before collapsing to 2.63p and then rallying. Recommended by Growth Company Investor at 5.75p last month, they have almost doubled already to 11.25p. Caution might suggest at least partial profit taking, but bolder investors should consider buying more as prospects improve.

Iron in the fire
Anglesey Mining expects 41 per cent-owned Labrador Iron Mines (LIM) to boost annual production from an initial 650,000 tonnes to two million tonnes next year.

Fully listed Anglesey, which has put its long-standing Parys Mountain polymetallic project in North Wales on the back burner, stands to receive nearly £3 million from Toronto-quoted LIM’s recent £22.2 million placing in Canada, which cut its stake from 50 per cent.

Entrepreneur John Kearney and chief executive Bill Hooley head both Anglesey and LIM, which they hope will boost annual production from its high-grade Houston deposit near the town of Schefferville to three million tonnes in 2012 at a cost of around $48 a tonne, less than half the prices struck in recent contracts.

Hooley insists that Anglesey has no more money to raise and LIM recently increased its measured and indicated resource estimate 60 per cent to almost 14.7 million tonnes at a grade of 59.3 per cent iron ore. Anglesey says that brings its own share to 25 million tonnes plus a ‘historical resource’ of 125 million tonnes.

Seeking a joint venture partner for Parys Mountain, Hooley says Anglesey will use cash raised through LIM’s fundraising to explore zinc and other deposits around the world.

Shares in Anglesey were market dogs for years on disappointment and impatience over Parys Mountain, but have perked up of late from a 12-month low of 4.13p to 37.5p. Investors comfortable with commodity risk should consider a punt.