[miningmx.com] – WHILST the JSE’s precious metal stocks are generally off-limits owing to a fluid labour relations and dim looking metal price prospects, there are a few miners in other sectors that have been quietly creeping up in value.
They are unglamorous – even by mining standards – but they unfussily go about their business. Perhaps that’s a reason to like them. In any event, we think they are worth keeping a few tabs on for 2014.
Merafe Resources
The share is up 25% since its 12-month low in August last year. That’s impressive considering Merafe sails in the troubled waters of the ferrochrome industry. Ferrochrome is used as a strengthening agent in the fabrication of steel so it’s a market tangibly linked to broad economic pointers such as population growth, urbanisation, and a healthy middle class.
Although the Chinese economy is still growing at a fair clip, and the US is showing signs of recovery, the South African ferrochrome industry has its own problems of sky-rocketing electricity prices. Cheap chrome exports from South Africa to China that has also helped the Chinese secure market share that once belong to South Africans. The SA Government has promised to step in, but nothing has materialised yet.
The key for Merafe, however, is getting its Lion II project underway, a R4bn venture it holds with Glencore Xstrata (20:80). It’s been tough financing its R1bn share, but with Lion II, Merafe lifts output 18%. The share has been edging up encouragingly.
“It is difficult to pinpoint the reasons for the movement,’ says Merafe’s Kajal Bissessor of Merafe’s one quarter value increase, “… but the contributors are good production and sales volumes, the anticipation of Lion II coming on stream, the increase in first quarter ferrochrome prices as well as the weaker rand’.
According to Macquarie Research, the ferrochrome price is expected to increase 7.5% to $1.18 per pound in 2014 while the first quarter benchmark price, which was recently agreed, was the largest increase since the first quarter of 2008.
“Chinese stainless steel output continues to exhibit strong double-digit growth, with European output showing initial signs of recovery,’ said James Oberholzer, an analyst for Macquarie Research.
The one criticism about Merafe is that it doesn’t have much control over its own destiny owing to the dominance of Glencore Xstrata as a major shareholder. Perhaps, though, this is not such a bad thing either as the Swiss group has among the soundest fundamentals in the resource market.
There’s also talk Merafe will one day pay a dividend. Miningmx scoffed slightly when CEO, Zanele Matlala first mentioned this last year. There’s nothing wrong with humble pie, however, especially if it brings some much-needed light back to the stricken South African mining sector.
Pallinghurst Resources
For years, Brian Gilbertson’s last great contribution to the world of mining slumbered to the point that even the urbane Arne Frandsen, Pallinghurst’s CEO, started to lose his rag with journalists’ questions about the enormous discount to net asset value.
Finally, the company has stirred. The stock is up about 28% in a year, an outcome Frandsen said was “inevitable’. Part of the reason is excitement about the approaching listing of Pallinghurst’s platinum unit, Sedibelo Platinum.
Gilbertson and Frandsen took this company off market two years ago when it was called Platmin in order to conduct some consolidation in the industry and re-list the firm at a better time and with a more cogent asset base. One is unsure if the platinum market is about to improve, but the feeling is it won’t worsen considerably.
Says Frandsen: “With the PGM IPO (initial public offering or listing) getting closer, investors start appreciating the value in that investment. As to the share price – I guess it was just a question of time before the discount to NAV narrowed. Still, it remains a bargain deluxe at current levels.’
Pallinghurst, which is an old-style investment company, has three basic legs: manganese and iron ore (steel feed ingredients), semi-precious stones, and platinum. “In some respects, we have been boringly consistent. As one of the few international mining investors, we continue to back SA and have shown our willingness to put proper equity money into the ground of the republic,’ Frandsen says.
Wescoal Holdings
What’s interesting about Andre Boje’s Wescoal Holdings is that it hasn’t been tempted to enter the scramble for coal exports. Whilst it has secured about 200,000 tonnes of export entitlement through Richards Bay Coal Terminal (RBCT), it has quietly set about the more diminuitive domestic market.
Although a small market, domestic coal offers decent pricing. Customers are industrial users of coal such as SAB or the cement manufacturers.
Boje, who came to the mining industry relatively late in life, has rationalised the company’s reserves holdings, exchanging coal mining properties his company is unable to mine with land-holdings he can.
Boje said the scope for consolidation in the South African coal industry was significant, while Eskom’s demand for coal underpinned the domestic market.
Said Robinson Ramaite, chairperson of Wescoal Holdings: “We remain on the lookout for acquisitions. We should see some consolidation and strongly believe Wescoal is well positioned to become one of the formidable players”.
Boje said Eskom required 60 million tonnes of coal a year by 2015. “By then, Eskom falls off a cliff. I don’t know where they are going to get this production from. It’s about 20 Wescoals and they would have to start investing in these projects now so that the coal was ready in time,’ he said.
Aquarius Platinum
Although we said the precious metals markets looked treacherous (and it does with the Association of Mineworkers & Construction Union) calling a strike, there may be some gain from picking up shares in Aquarius Platinum.
This is a mid-tier company about which Miningmx has written in the past, alerting readers to its lower quality assets and difficulty paying off a large convertible bond in the next 18 months. But on valuation, it’s worth a bet, analysts say.
The stock was down about 16% down since September 30 and has already started climbing this year on expectation that an improvement in the platinum price, and better than ever performance at its Kroondal mine, can add a bit of lustre.
The company is also talking about refinancing its $300m convertible bond although there’s some scepticism about how this will be done in a highly difficult platinum group metal market.
