IF you think about the number of the JSE’s listed junior miners as a beauty pageant, they’d look more like a turnout from a high school, perhaps, than Miss Universe.
Fewer than 20 companies now grace the small end of South Africa’s mining sector on the stock exchange, compared to more than 700 on Australia’s ASX, and roughly 900 on Toronto’s booming TSX Venture mining sector.
Yet trading platform EasyEquities last week revealed that three juniors alone — PGM play Southern Palladium, copper prospector Orion Minerals and potash hopeful Kore Potash — count more than 30,000 individual investors on Easy’s database between them. Together, these investors hold almost R200m worth of stock; the oldest shareholder is 97 and the youngest is 12. The appetite to own these more speculative companies is clearly there.
The three agreed to take part in Easy’s first junior mining showcase. All have produced meaty gains for punters over the past year: Orion Minerals has risen about 107%, Kore is 10% ahead and Southern Palladium has surged 144% in value. Over five years the picture is far more sketchy; Kore shares are 320% ahead, Orion has lost 20% in value, and Southern Palladium has sunk 83%. Not for nothing are these stocks regarded as hit or miss.
It’s telling that all three companies have their primary listings offshore: Orion and Southern Palladium in Australia, Kore in the UK. Asked about this, Southern Palladium’s Johan Odendaal says: “I think it’s because our institutions are not operating in that space, and our high-net-worth individuals don’t get the kind of incentive that you get in Australia and in Canada.”
Odendaal says that “when we reached out, way back, when we started with the project, there was just no interest, and the hurdle that you need to overcome as a junior is to get your project to feasibility stage”.
For Kore Potash chair David Hathorn, the one-time CEO of paper giant Mondi Plc, Australia is better for raising exploration money because “you don’t need a working capital forecast to list”.
“You can list and you can raise money, hole by hole. [Here] you can’t do that. You have to have a working capital requirement to be listed in South Africa. So that’s one area where the JSE could reconsider its requirements and enable exploration capital to be raised,” he told investors.
A binary bet?
Kore is easily the most binary of the three companies hoping to make it big, given that it is now a takeover target. One of the conditions of the financing term sheet for its mammoth $2bn Kola project in Congo-Brazzaville was that it found an industrial “strategic partner”.
“In that process, we ended up speaking to a number of potential parties, and after an initial look, they came back and said, ‘we don’t want to partner, we want to own the whole thing’. So we are now officially in a formal sales process, and we have two parties who are well advanced in the process of assessing the opportunity,” says Hathorn.
That opportunity is a huge potash deposit with average grades of 33%, well above the industry norm of the upper 20s. Kola is a shallow, 280m deposit, and sits 35km from the west coast of Africa. Even more handy is that the biggest importer of potash in commercial agriculture is Brazil, directly across the Atlantic.
The company also has a signed construction contract with a Chinese firm, PowerChina. Unusually, this is a fixed-price contract, “so they take all the risk” in terms of cost variation, says Hathorn, in return for a slightly higher fee.
Once Kola gets going, “we can deliver (potash) to Brazil substantially cheaper than the other major production areas of Canada, Belarus or Russia,” says Hathorn. “The outcome is that we’ve got an average ebitda margin of about 74% across the cycle, which is an incredibly high cash margin.”
While potash can be cyclical, it’s less so than PGMs and copper. Russia’s attack on Ukraine caused prices to spike from $300/t to $800, now they’re back at about $400. Demand, though, “is pretty consistent”, says Hathorn.
Kore’s major negative is the cost to build its mine and infrastructure, and the need to find either a funder or a buyer. A sale means a handy windfall for investors who’ve stuck with Kore; no sale would imply a much longer slog to extract Kola’s promise.
But Kore’s story is still evocative of the junior mining dream, where characters and grand ambitions collide. A friend of Hathorn’s, who’d spent his life drilling for interesting mining deposits in Africa, managed to secure an exploration licence for Kola after he’d sold his business.
“He formed a company in Australia, drilled, raised money hole by hole as they drilled, proved up the resource, and at that point he approached me,” recounts Hathorn, who, at the time, was retiring from Mondi. Hathorn was so convinced that he is now one of the bigger shareholders in Kore, with almost 8% of the stock. Kola, he says, “should be part of a major; it’s a world-scale project, not a junior scale project”.
For a sense of potash’s importance in the global mining game (and its cost), look no further than Anglo American’s mighty Woodsmith deposit, which is expected to cost up to $9bn to develop, as well as BHP’s sprawling Jansen project in Canada.
The Glencore game changer
In Orion’s case, the big game changer will be to (finally) receive a $250m cash injection from mining major Glencore; despite having signed a funding and offtake agreement in September last year, red tape means the money is still not in its bank account.
“As always, we’d hoped it would be done much quicker,” said Orion CEO Tony Lennox at the showcase event. “We are finalising, you know, six legal teams across three continents, so it has kept us busy.” However, in an update to the market last week, Orion confirmed it had received approval from the Reserve Bank, among others, with tranche A of the roughly R4bn funding boost “expected … to become unconditional and drawdown to occur by the end of August 2026”.
The cash is crucial for Orion, which needs it to begin de-watering and mining the upper sections of its historic Prieska mine. It has sat flooded for decades since former owner Anglovaal shut it in 1991. It has promised a 13-month timeline to first production after receiving the money.
“To pump the water out of the mine is a two-year programme or slightly less, and we have tested that programme,” says Lennox. “Next year we will have uppers production, then while we’re producing from the uppers, the mine will be de-watered, and we’ll transition into deeps production.”
It’s not just Prieska that has drawn investors to Orion; the company has around 3,400km of tenements in the Northern Cape region, as well as the Okiep mine. Prieska alone sits atop 31Mt of “resource”, with grades of 1.2% copper and 3.6% zinc.
Zinc isn’t much associated with Orion, but, says Lennox, “when you look at the revenue split between copper and zinc on current prices, it’s roughly two-thirds, one-third. We will produce a reasonable amount of zinc (but) we are a copper play.”
The overarching copper story, he says, is that “over the next 20 years, there needs to be as much copper mined as there has ever been since time immemorial”. Lennox says even if that doesn’t transpire, Prieska will have the buffer of being in the middle of the lowest quartile of global copper producers.
Chrome windfall
As for Southern Palladium, a rebound in platinum prices has helped, big time, as has the discovery of much better chrome recoveries from recent drilling work.
Odendaal and his team need $279m to make Southern Palladium a fully fledged mine. Handily, that’s 38% less than originally forecast. Odendaal told investors at the showcase that “the surprise is going to be on the processing side, and in particular on the chrome recoveries and contribution that we get”.
That, and higher PGM prices, mean that stage 2 of its Bengwenyama mine can “be paid by the cash flows generated from Stage 1, so you won’t have to raise all that money to invest”.
Southern Palladium has $25m in the bank and won’t necessarily have to go to the market to tap it for more equity. “You can do a lot in terms of prepay, and then also debt financing. With Platinum prices much more positive, debt providers are starting to show an interest in the company as well,” says Odendaal.
Risks galore
Still, the company continues to wait for its full mining licence. Over at Kore, meanwhile, a rising surge of continental resource nationalism could upend its existing contract with the Republic of Congo.
This contract stipulates a free carry of 10% to the state, in return for a long-term title with some tax concessions. “Our convention, which is an act of law, stipulates very clearly that no future law may adversely affect us unless they compensate us for it. Having said that, they clearly want us to operate under the framework of the new code, so we’re going to need to find a way to make our structure work within that framework. And those discussions are taking place at the moment,” Hathorn says.
Ultimately, say all three firms, the difference between raging success and spectacular failure for a junior miner boils down to confidence: in the ore body, the planning, the mining, and the jurisdiction in which you operate.
Says Hathorn: “Mining is a long-term investment and a high-risk proposition. When it works, you get extremely wealthy. When it fails, you can lose a lot of money. That’s the reality of the game.”
This article first appeared in the Financial Mail. Click here for more articles in South Africa’s best, buzziest, busiest financial publication.
