Rocks & Stocks: Junior Miners Buy when no one's shopping

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
02 July 2019, 3:14 PM
Sectors Covered:
Resources, Metals

  • Morgans is again pleased to support the Noosa Mining Conference to be held July 17–19. The conference is into its 9th year with 70 companies presenting in 2019.
  • Market interest in the Juniors is depressed despite the fact large miners – and their shareholders – are reaping the cash flow rewards of a production boom.
  • History shows that the best time to buy the Juniors is when no one's shopping. Overlooked companies with real prospects will in many cases deliver capital upside measured in multiples of their current value.
  • Noosa is an ideal forum to uncover the next wave of emerging Juniors. We preview key themes, tactics and stocks to watch. 

The Production Boom is in full swing

Australian mineral production is booming. In the past 15 years, output of key commodities like coal, copper and bauxite has increased 3–4 fold, iron ore more than six–fold, and LNG 10–fold. Unsurprisingly the value of Australian mineral exports today is around six times higher than pre–boom levels. Robust prices, the industry’s unrelenting cost focus and the sharply lower AUD are also major drivers.

But mining Juniors are badly out of favour

Normally the Juniors accelerate ahead of the Producers, both to the up and down-side, however their current underperformance looks stark. Larger miners (S&P XJR index) are trading at roughly two thirds of their all–time highs. Smaller miners (S&P XSR) are at less than one–third, while the micro–caps (no index) are faring far worse. The prioritisation of cash flows in a low returns environment and competition for capital from the tech boom are contributing to this.

Juniors with real prospects still command real interest

While the equity market may be ignoring them, Juniors with real prospects still command real interest. This can be seen in an active Private Equity segment, increasing producer–junior Joint Venture activity (e.g. via Fortescue Metals (FMG), Oz Minerals (OZL), South32 (S32)), increasing direct investment in juniors (e.g. via BHP (BHP), Newcrest Mining (NCM)), and the significant premiums achieved for acquisition of development/strategic exploration assets (e.g. Avanco Resources (AVB), MOD Resources (MOD)).

Buy when no-one's shopping

Equities are a fashion market and the Juniors are badly out of it. We’re not calling for another speculative mining boom, but think Junior valuations look disconnected from a far healthier reality, with the sector therefore likely concealing several opportunities. Overlooked stories with real prospects will in many cases deliver capital upside measured in multiples of their current valuations. Think Sirius Resources (SIR) from 2012, SolGold (SOLG) from 2016 and Mineral Deposits (MDL) from 2017. We flag key themes, tactics and stocks to watch at Noosa 2019.

More information

Morgans clients can login to view our detailed report and share price target for the Junior Miners. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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