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Minefield: Small miners with big friends

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Trade war fears have rocked the resources sector, for good reason. A contraction in global trade could mean a fall in demand for basic raw materials such as copper, zinc, aluminium and nickel.

But deep down, at the end of the corporate food chain, there are signs of a new type of value-creating deal emerging which sees small explorers with bright ideas teaming up with a cash-rich big brother.

Grubstaking is the name of the game and it’s as old as mining itself and dates back to an era when a benefactor would provide the food and equipment for a prospector to “kick the rocks” in a remote location with the reward being a share in any discovery.

Three examples of “corporate grubstaking” have developed recently with each offering investors in the smaller participant the comfort of knowing that there’s a financially strong party in the deal, even if it means sacrificing a share in any new mine development.
 

Ausquest (AQD:ASX)

Rarely mentioned, even in trade journals or at mining conferences, tiny Ausquest has struck a unique working relationship with one of the world’s biggest base-metal miners, South32.

Both companies are based in Perth, but the difference in size falls into the chalk-and-cheese category. South32, a BHP spin-off has a stock-market value of $19 billion. Ausquest is valued at $8.4 million.

Size, however, is not everything in mining with small and nimble companies able to do things and go places that can be awkward for big companies. They can also as operate more cheaply.

It is the differences which have drawn Ausquest and South32 into a unique Strategic Alliance which has the aim of finding potential major new orebodies with a focus on the sort of minerals preferred by South32, copper, zinc, nickel and other members of the base metal family.

Born out of a chance encounter at a geophysics conference organized by the CSIRO between Ausquest managing director, Graeme Drew, and South32 staff the arrangement is a perfect example of corporate grubstaking.

In earlier times a rich benefactor provided food and equipment for a prospector to explore remote locations with any discovery being shared.

In the Ausquest/South32 alliance it is the big partner providing much of the cash needed while Ausquest gets on with the job of conceiving exploration targets, conducting the early-stage surveys, and then presenting a prospect ready for the most expensive part of the process, drilling.

Funds from South32 flow in at different stages of the process at both a corporate level directly to Ausquest and at a project level. Exploration opportunities put to, and accepted by South32, attract an initial payment of up to $500,000 to advance them to a drill-ready stage.

After that a joint venture can be created with South32 earning up to 70 per cent of each project after it spends $US4 million with the primary target locations being in Peru and Australia.

The deal is working well with 11 projects in the alliance. Drilling was recently completed at the Chololo copper prospect in Peru which is said to have revealed the potential for a buried porphyry copper system in the project area. (A porphyry is type of orebody, generally very big but relatively low-grade).

A second Peruvian project, De Fierro, is being prepared now for drilling which is expected to start by the end of the month.

South32 likes the arrangement because it unleashes the creative talents of the small team led by Drew, a geophysicist who worked for 20 years in the exploration division of Rio Tinto, and Ausquest likes the alliance because it provides funding for its original exploration concepts without having to call on shareholders.

The proof of the deal will be in discovery but with 11 projects in different stages of assessment it only needs one to hit the jackpot – much like the way venture capital deals are structured in the technology sector.

On the market, Ausquest shares have not shown much reaction to the South32 alliance, stuck around 1.6c for much of the past 12-months, a price which could be re-rated with a discovery.
 

Peel (PEX:ASX)

Like Ausquest, Peel is a base metal specialist, and like Ausquest it has found a cash-rich partner to help fund its exploration efforts which are focussed on the Cobar region of western NSW.

St Barbara, a highly-profitable goldminer, is Peel’s big friend, last week lifting its stake in Peel to 17.9 per cent by participating in the placement phase of a $12.3 million fund raising.

What St Barbara appears to see in Peel is the chance to participate in a potential major re-awakening of the base metals mining industry near Cobar, once one of Australia’s major sources of copper and zinc.

At the same time, the specialist goldminer gets the added benefit of diversification into base metals, a sector of the mining industry which tends to move in a different rhythm to gold, rising when the other falls.

Near Cobar, Peel has made a series of discoveries which are moving through the exploration and evaluation phase. The Mallee Bull copper-rich discovery which is 50 per cent owned by the Japanese-owned CBH Resources is closest to production with ore likely to be processed through the nearby CBH-owned Endeavour plant.

Wagga Tank and the associated Southern Nights discovery are other examples of the polymetallic nature of Cobar’s mineralised systems. It is close to reaching maiden resource status.

First mentioned in the Minefield column 18-months ago when it was trading at 20c Peel has been on a roller-coaster ride as metal markets bounce around with its latest price of 40c valuing the stock at a modest $78 million.
 

Venturex (VXR:ASX)

A third example of a base metal explorer striking a deal with a bigger cash-rich partner is Venturex Resources, which is in the final stages of a feasibility study into the Sulphur Springs copper and zinc project in WA.

Like Peel, its well-heeled friend is a goldminer, Northern Star, which is interested in diversifying from its near-total reliance on gold.

Earlier this week Northern Star agreed to provide a $2 million loan so Venturex could complete the definitive Sulphur Springs mining study.

If developed the project would produce copper concentrate at the rate of 60,000 tonnes a year, plus 45,000 tonnes of zinc concentrate.

Venturex has been able in recent months to cut the capital cost of the project by $18.7 million to $65.4 million largely through a saving made on acquiring a second-hand accommodation camp.

Northern Star, which is already the major shareholder in Venturex, provided the $2 million loan at an interest rate of 8 per cent, repayable after 12-months in cash or with Northern Star taking Venturex shares in lieu.

On the market, Venturex has reclaimed a price of 18c after sinking to 16c last week.

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Tim Treadgold is a Commodities Journalist at InvestSMART (under AFSL 282288). This article contains general investment advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. You should consider the product disclosure statement before making a decision about a product. This article does not reflect the views of WealthHub Securities Limited. The article was originally published on 14 September 2018. The views and opinions expressed in this article are those of the authors and do not reflect the official policy or position of NAB and nabtrade. Consider the appropriateness of the information in regards to your circumstances.