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Material Matters: Diggers & Dealers Feeling More Upbeat

Commodities | Aug 12 2014

-Zinc juniors garner attention
-Fewer large cap presentations
-Focus on costs, obtaining capital


By Eva Brocklehurst

The lead up to this year's Diggers & Dealers conference in Kalgoorlie, Western Australia, caused some angst among analysts. Last year's resources downturn provided a backdrop of gloom but brokers found this year's event was more optimistic, given steady to improving gold and base metal markets relative to prior years. UBS found sentiment was more upbeat on most commodities and particularly positive for zinc, copper and, to a lesser degree, gold. Uncertainty centred mostly on iron ore and uranium. UBS observes keynote speaker, former Bank of England governor Mervyn King, suggested that, in a period of geopolitical instability, as is currently the case, countries reliant on raw material imports will likely be concerned to maintain security of supply.

Those companies that caught most broker attention were junior resources, which have been starved of exploration investment. The market is ever intent on the "next big find" and to this end UBS cites Gold Road Resources ((GOR)), which caught a breeze with the announcement of a maiden resource of 3.8m ozs grading 1.23g/t gold from its Gruyere project in WA. At the other end of the spectrum Western Areas ((WSA)) and Sandfire Resources ((SFR)), which the broker visited on site, continue to demonstrate stability, high grades and low cash costs. Exploration success is still a focus. Zinc stood out and those stocks which have some of this metal were gleaning interest.

UBS understands Rox Resources ((RXL)) has some interesting zinc projects, while Minotaur Exploration ((MEP)) recently announced a new discovery at Artemis, Queensland with the first hole intersecting 22m at 3.0% copper, 3.8g/t gold and 6.6% zinc. Aurelia Metals ((AMI)) is developing the high grade gold, zinc, lead Hera deposit near Cobar, NSW and expects first production in the September quarter. UBS did conclude that interest in junior explorers is lifting and, if a company has a highly prospective project, funding is available through capital markets.

JP Morgan observed attendance was low relative to previous years, with a focus on costs uppermost. The driver by the larger cap stocks such as BHP Billiton ((BHP)) and Rio Tinto ((RIO)) to reduce costs has worked down through to the mid cap sector. The broker notes Atlas Iron ((AGO)), Fortescue Metals ((FMG)), Western Areas and Sandfire Resources are working hard on this matter. A number of junior miners were still finding it hard to attract capital and the broker believes those intending to drill in the near-term will need to raise capital, or obtain deals and joint venture arrangements which allow the bigger miners to farm into prospective tenements. Most conversations ended on an upbeat note but JP Morgan is cautious as whether that sentiment holds up in the longer term.

One company presenting at the conference that caught Morgans' attention was Orbis Gold ((OBS)). The company has upgraded its Natougou project, Burkina Faso, to 2m ozs gold at average 3.4g/t. The broker finds the stock appealing as a development stock or potential acquisition target. The broker's top picks among presenters were Regis Resources ((RRL)), Saracen Minerals ((SAR)) and Cassini Resources ((CZI)).

Macquarie observed positive sentiment regarding base metals, noting that, for the first time in years, there was a distinct lack of presentations from the major producers. BHP Billiton, Newmont Mining and Barrick Gold did not present, although the recent asset sales by Newmont and Barrick and BHP's planned sale of Nickel West probably explain their lack of involvement. The broker found a more bullish mood prevailing, particularly for zinc, nickel and copper. Exploration was back in focus and Macquarie expects to witness increased expenditure, should commodity prices hold up or increase from current levels. Aside from base metals, there was a focus on key exploration regions such as Western Australia's Fraser Range, Bryah Basin and the Tropicana and Yamarna belts. There was little discussion on emerging African provinces.

To Citi it was a contrast to the prior year, with a sense that the worst was over in terms of the downturn. The broker is of the view that this event is largely conducted for the resources "hopefuls". Those small cap diggers and hungry and speculative dealers and investors, as well as the pick and shovel sellers. The broker breaks down the statistics to reveal 138 exhibition booths of which 45% were occupied by service providers. Resource companies had the remainder and of these, 22% were miners and 33% explorer/developers.

Gold was the dominant commodity. Well, the event does take place in Kalgoorlie. Gold's dominance was followed by base metals, iron ore and then all others. Citi notes some interest generated by stocks which do not feature in its coverage, such as Aurelia Metals, Cassini Resources, Gold Road, Ironbark Zinc ((IBC)), Minotaur Exploration, Panoramic Resources ((PAN)), Northern Star ((NST)), Rox Resources and Sheffield Resources ((SFX)).

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