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For this article, nabtrade engaged Switzer Report to provide commentary on the broker’s top traded stocks over the month of June.
One interesting trend when reviewing the data was that investors were buying up shares of relatively small beaten down resources companies.
Resources has always been an area of inherent volatility on the market, but there are also situations where stock-specific (or project-specific) news unnerves investors, and the stock gets crushed. But many investors are alert to these situations, and are more than prepared to buy into stocks where they feel that the bad news is all in the price.
Here are four such situations of contrarian plays from the resources lists, including one where the presence of a fully franked dividend adds to investors’ confidence.
But remember that these are high risk-high reward plays at the end of the day, and the fact that nabtrade investors are buying into them does not guarantee upside. It’s important to do your research and consider these ideas in the context of a diversified portfolio.
Lithium miner Pilbara Minerals brought the world-class Pilgangoora lithium-tantalum project in Western Australia into production last year, shipping its first load of spodumene (lithium ore) concentrate to its offtake partners in north Asia in October – less than four years after its first drill hole on the deposit.
But Pilbara Minerals’ ambition to vault to being one of the top-three lithium raw materials producers in the world by 2020 – supplying into the coming electric-vehicle revolution – has come under pressure lately, as it has had to slow production at Pilgangoora because of delays in the commissioning of chemical conversion capacity by two of its Chinese customers. These processing issues in China have flowed through to weaker lithium prices. Pilbara Minerals has given two of its customers, General Lithium Corporation and Ganfeng Lithium, some relief for their off-take agreements while they work on processing facilities.
This comes at a time when Pilbara Minerals is exploring the possibility of selling up to a 49% stake in Pilgangoora. The Pilgangoora operation could, based on reserves, and similar deals in the lithium space, be worth somewhere in the range of $1.78 billion–$2.79 billion, according to broker Credit Suisse.
By the end of the current quarter, Pilbara will make a final investment decision on its joint-venture option with steelmaker POSCO to build a lithium plant in South Korea, with capacity to produce the equivalent of 40,000 tonnes a year of lithium carbonate using spodumene concentrate from Pilgangoora.
From $1.18 in January 2018, PLS has declined to 54.5 cents, and brokers report punters buying-in at these levels. With profitability expected in FY20, these investors are using the lithium market difficulties to buy what they see as a cheap situation.
Pilbara Minerals: one-year price performance chart
With the Australian-dollar gold price pushing to record highs above $2,000 an ounce – it is sitting at $2,006.12 an ounce – local gold producers should be in clover, given that they incur nearly all of their costs in Australian dollars, before selling their product in US dollars.
But that is not much help if a miner has torched its credibility with two awful production guidance downgrades in just three months. Unfortunately, that has been the experience of shareholders in Dacian Gold, on the back of continuing problems at the company’s flagship Mt Morgans operation near Laverton.
Earlier in the year, Dacian was cruising along at $2.78, having declared commercial production at Mt. Morgans. In March, the first cracks in the picture appeared, when Dacian reported lower-than-expected March quarter production, stemming mainly from reduced availability of underground equipment. Full-year FY19 production guidance was lowered from 180,000 ounces, to 150,000 ounces–160,000 ounces.
The share price trembled, losing about 8%, but investors weren’t greatly concerned – until June, when Dacian shocked the market with another production guidance downgrade, as the problems continued. The company now said that production would come in at less than 140,000 ounces, as underground performance issues prove difficult to overcome, and worse, that output at Mt. Morgans would be lower than the market had expected for the next five years.
As if that were not enough bad news, the miner’s all-in sustaining cost (AISC) jumped from a range of $1050 an ounce–$1150 an ounce, to $1500 an ounce–$1600 an ounce. All up, the June update caused an appalling 67% plunge in the share price.
Since then, in a ray of light amid the bleak news, the company reported later in June that it had made some extremely high-grade drilling hits in the Westralia ore system at Mt Morgans, including an intercept of 1.7 metres at 127 grams of gold a tonne. Dacian told the market that the new drilling results confirmed its view that Westralia is “a very significant ore system.”
Dacian’s credibility is in tatters, both in terms of production expectations and cost control. The company says that it is getting Mt Morgans under control, but investors have to decide whether or not the project is fatally flawed: if it is not, the revised outlook could actually be a value situation at current prices. Again, brokers report that there are plenty of retail shareholders taking this view.
Dacian Gold: one-year price performance chart
Graphite producer Syrah Resources – which is also tapping into the potential of electric vehicles, with graphite a crucial battery mineral – had a diabolical FY19, as its flagship Balama operation in Mozambique continued to be affected by delays afflicting the concentrate processing plant.
The market had expected Balama to reach positive cash flow well and truly by now, but it has not produced enough natural graphite to do so – and the other major concern is that the prices Syrah is getting for Balama concentrates is, at an expected weighted average of $US466 a tonne in the June quarter, less than half what shareholders were told it would be in the May 2015 feasibility study, which projected US$1,000 a tonne.
Now, there is another capital raising – the company’s seventh, and fifth in almost four years.
The Balama mine is considered by analysts to be the world's largest and most prospective graphite deposit. The operation came online in late 2017 and produced its first un-purified spherical graphite product in December 2018. Syrah has also developed its Battery Anode Material (BAM) strategy, under which its graphite processing plant in Louisiana will use natural graphite from Balama to supply battery-grade spherical graphite to electric vehicle manufacturers and battery producers in the US. The Louisiana plant is pilot stage, with 5,000 tonnes a year, but the company ultimately wants to develop it to commercial scale would allow it to produce up to 60,000 tonnes a year, which could cost up to US$160 million.
At the moment, the vast majority of natural graphite into the battery supply chain comes from China at a time when battery manufacturing capacity is growing in both Europe and the US – those producers would love a non-China supply source of BAM. The company’s goal is to be the world’s major supplier of flake graphite, out of Balama (it will also produce vanadium), and also the first integrated BAM producer outside China.
But graphite prices, like lithium prices, are not heading in the direction that investors had expected – because of weaker Chinese demand. Syrah’s dilemma has been that if it accelerates production at Balama, it could hurt graphite prices further. The Syrah share price has tumbled from $3 a year ago to a seven-year low at 86 cents. Syrah has come under heavy short-selling pressure, becoming the most shorted stock on the ASX, with 19.3% of its equity short-sold as of mid-June.
However, Syrah certainly has backers with clout: the country’s largest superannuation fund, Australian Super, is the largest shareholder, owning 15% of Syrah, and is poised to take that to 19.9% if it converts debt it takes on in the current raising of $111.6 million, into shares. Australian Super is acting as one of Credit Suisse's sub-underwriters on the raising, showing an uncommon degree of faith in the company.
Analysts expect Syrah to break through to profit in FY20 – investors buying it now are looking to use the negative news cloud around the stock to pick it up cheaply.
Syrah Resources: one-year price performance chart
South 32 was spun out of BHP in 2015 as a result of the parent company deciding to focus on its four commodity “pillars” of iron ore, oil, copper, and coal. The commodities outside this core portfolio (mainly aluminium, manganese, nickel, silver and lead) were spun off into South32, which generates about two-thirds of its earnings from aluminium (including alumina) and manganese. South 32 is also involved in coking (steelmaking) coal in Australia (Illawarra) and thermal (electricity) coal in South Africa, but the latter business is up for sale.
Being a diversified miner, it is rare that all commodities in the portfolio are going well, and the March quarterly production report disappointed: S32 cut FY19 production guidance by 4-5% for alumina and 6% for thermal coal. On the plus side, the manganese assets are performing strongly – and the company’s silver exposure is also punching above its weight.
Analysts expect S32 to show earnings per share (EPS) falls in FY19 and FY20 (the company reports in US$), but the fall from above $4.20 in October to current levels around $3.20 has opened up value that retail investors appear to be picking up on, with the added attraction of a prospective dividend yield in the range of 4.4%–4.6%, fully franked.
South 32: one-year price performance chart