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» Miningmx editor's 2009 stock picks

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Allan Seccombe's 2009 stock picks
Allan Seccombe
Posted: Fri, 09 Jan 2009

[miningmx.com] -- TRICKY. That’s the word that buzzed around my mind as I studied a list of JSE-listed miners, looking for stocks I thought would perform this year.

Tricky because the tumultuous meltdown in the resources sector last year decimated the value of nearly all mining stocks, making this year’s selection, well, tricky.

Out of my choice of five for 2008, only one actually performed. Thanks Harmony Gold for the nearly 40% increase on the year.

The rest had a proper mauling, including Uranium One, Sentula, Simmer & Jack and mine engineering firm TWP.
taking traditionally troublesome mines by the scruff of the neck
I’m in two minds about whether to stick with Harmony, which CEO Graham Briggs says will be debt free this year and looking to acquisitions in the second half. It has a suite of projects that will begin adding extra, low-cost ounces.

Or do I go with AngloGold Ashanti, which has painfully excised the worst of its hedge book under Mark Cutifani? This gives AngloGold greater exposure to the spot gold price, which if the pundits are to be believed, is in for a scorching year.

Clear-thinking and methodical, Cutifani is committed to streamlining the company’s asset portfolio, stripping out those that are marginal and non-core. The question is who is able to buy much these days and at what price.

He’s also taking traditionally troublesome mines by the scruff of the neck, like Obuasi in Ghana, and giving them a good old wake-up shake. In time, there should be increased output, lower costs and improved margins from these assets.

AngloGold has stepped up its exposure to spot uranium prices, ridding itself of low-priced contracts, and increased production, making that business a nice little earner for South Africa’s largest uranium producer.

So, to make a change from last year, I’ll go with AngloGold for 2009 albeit a bit reluctantly.

My second pick is DRDGOLD under new CEO Niel Pretorius, who has a clear strategy of extracting gold relatively cheaply from tailings. DRDGOLD has bought out the cash-strapped Australia-listed Mintails in one of two joint ventures, giving it control of a large surface resource.

This promises to be a high-margin business if all goes to plan. DRDGOLD has just the one underground mine left, Blyvoor, shutting down the difficult and expensive ERPM mine. This company has not been a market darling for a long time now, but it could find fresh favour with its very focused strategy.

For fear of being labelled a gold bull and picking out too many stocks in a sector that performed so miserably despite the high gold prices of 2008, I’ve selected the diversified Metorex.

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This share was ground nearly to dust when it said late last year it had to raise R922m to complete the overdue and more expensive Ruashi project in the DRC. The exercise heavily diluted existing shareholders in a share offer priced well below the prevailing share price.

The argument is that there are sound assets within Metorex, like the fluorspar business, and it has said it will exit those deemed non-core, possibly the Cons Murch antimony mine. Also, at just over 200 cents/share compared to a year-high of nearly R25, I just don’t see how this share won’t recover some lost ground.
promises to be a high-margin business
Ruashi is an impressive copper and cobalt project in the DRC. Admittedly it’s a tough and risky operating environment, with plenty of failures to prove the point, but Metorex is on the cusp of bringing the project into full production where others haven’t been able to succeed.

The worry is the ability of Metorex to generate returns in the short term at Ruashi given that other companies in the DRC, admittedly with earlier stage projects, have suspended work because of the lower copper and cobalt prices.

Metorex’s share price can surely only go up, what with the fresh infusion of management after the year-end shakeout of stalwarts, and a new vision brought by an incoming CEO to replace Charles Needham who will remain as group managing director.

Lonmin, the third-largest platinum producer, is a high-risk pick and is likely to draw a derisive laugh. It’s not had an easy time of it and investor confidence has been battered by its inability to keep a tight rein on its smelters and the single-minded focus by former CEO Brad Mills on mechanisation.

Ian Farmer is bringing what many see as a more pragmatic approach to the company after the hostile overture from Xstrata that left the latter with 24.9% of Lonmin and potentially in the hunt for the full company within the year. What role will Xstrata play in sharing its smelting expertise in its new investment remains to be seen.

If the global economy pulls out of its tailspin this year and demand for automobiles starts picking up again, dragging up platinum consumption with it, then I reckon this could be a performer after the biggest price percentage decline of the big three producers in 2008.

My final pick is a defensive one, BHP Billiton. It is diverse, large, it has strong cash flows and relatively low debt, and it has an aggressive, competent management.

BHP will ride out the economic storm, perhaps snapping up some casualties along the way. Its share price performed better than its peer Anglo American over the past year and I reckon that trend will continue into this year.