Exploration Insights by Robert Tyerman

The natural resources sector has been proving itself still a fertile field for big corporate deals, with the value of mergers and acquisitions doubling internationally in the first half-year to $96.3 billion (£60 billion), though the number of deals fell, suggesting smaller companies are still finding the going somewhat tougher.

Chris Halliday, head of mining and resources at City law firm Eversheds, says he is ‘still seeing enthusiasm for further investment in this sector’, but at the smaller end it pays to be particularly selective.

Guinea key to Avocet    
Avocet Mining has lifted second-quarter pre-tax profits ninefold to $97 million (£60 million), helped by $82 million profits on Asian asset sales. The AIM-quoted company, which is now focused on its Inata gold mine in Burkina Faso and another West African project at Koulekon in Guinea, is starting dividend payments after nearly doubling continuing profits to $14.9 million in the three months to June.

London-based Avocet, which ended June with $179 million cash after selling its Asian assets for $170 million, says group production fell 12.5 per cent to 62,803 oz, with cash costs up 18 per cent to $802 an ounce, against recent prices of $1,626. Inata’s production slipped 19 per cent to 39,423 oz, with cash costs up 27 per cent to $677 an ounce.

Avocet, which says it hopes to receive another $30 million on selling Asian assets later this year, subject to Indonesian authorisation, is set to increase production at Inata ‘significantly’ by 2013 and hopes to have a feasibility study on Koulekon by Christmas. Recommended by Growth Company Investor at 73.75p in 2009 and later at 190.75p, the shares have now reached 227.5p and are worth holding.

Blue yonder
Tanzanite One says sales rose 57 per cent to $6.2 million (£3.9 million) between the first and second quarters on rising production. The Johannesburg-based company benefited from price increases as it upped its output of violet blue tanzanite gemstones by 5.25 per cent to 641,615 carats.

For the first half of this year, AIM-quoted TNZ, which operates almost the only significant tanzanite mine in the world at Merelani in Tanzania, lifted sales 18 per cent to $10.2 million on production up 25 per cent to 1.25 million carats. TNZ has taken steps to diversify its activities, having recently paid A$120,000 (£80,000) for an option to buy a sapphire project in Australia.

Floated at 42p in 2004, TNZ shares soared to 265p within two years. A series of setbacks later burst that bubble and the price collapsed to 6.5p, before bouncing to 9.88p, at which they offer speculative possibilities.

Iron in the soul
Spare a thought for Baobab Resources, which boasts an inferred resource of 477 million tonnes at its Tete iron ore, vanadium and titanium project in mining-friendly Mozambique. The company has set a 400 to 700 million tonne exploration target for one zone, Massamba, and hopes soon to define a target of more than 300 million tones at Tenge/Ruoniri.

Baobab is spending $625,000 (£390,000) to earn 60 per cent of the Monte Muande project, where it hopes for an initial 200 to 250 million tonnes of iron ore and phosphate, and has copper and other projects as well as a manganese joint venture at Changara with fellow AIM counter Ferrex (3.80p).

Chairman Jeremy Dowler suggests that there is potential to improve likely recovery rates at Tete, and argues that the company’s projects are reasonably well placed for access to crucial infrastructure.

World Bank-linked International Finance Corporation has 15 per cent of the Tete project and 5 per cent of Baobab itself. At 29.5p, down from a 55.75p year’s high, the shares could repay a bold punt.