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Special series: SPECULATIVE MINERS} 20-Feb-2013


A number of factors are moving in favour of the junior miners and explorers, highlighted by the trebling of Azure Minerals (AZS) over the past few weeks and the four fold increase of Inca Minerals (ICG) over the same period.

Both companies have market caps under $40 million, very little cash and both came out with indications that they were on the cusp of discovering big copper deposits.
The first factor encouraging investors to look for big windfalls from this sector is the “Great Rotation”, which is broker shorthand for saying that money is moving into riskier and riskier assets as investors gain confidence that the world isn’t going to implode again as it did a couple of years ago.

There has been serious underperformance by Small Caps in relation to their bigger, income producing peers, which have been led northward by the banks and Telstra in what some call “yield compression”, as investors buy big companies with big dividends pushing the entire market up.

The ASX Small Industrials has underperformed the ASX 200 Index by almost
20 per cent in the past 12 months. The biggest contributor to this underperformance has been the small resource companies, or miners. The ASX Small Resources Index is down 30 per cent over this period.

The little miners of this world could be the big winners if this “Great Rotation” continues.

The Sirius Effect
This is the second factor in the market’s improving appetite for the speculative resources stock after one of their number literally shot the lights out.
As the mining expert Trent Allen who has a Phd in geology, says of the Inca Minerals find:

“Twelve months ago, good news was viewed as bad or indifferent. You needed something really amazing to get any traction. That’s what finally happened with Sirius last July – and it changed the sentiment of the whole market.”

Radar is on the hunt for another Sirius Resources (SIR), which climbed from 6 cents in mid-July last year to as high as $3.28 less than four months later in early November.
The explorer’s shares soared 679 per cent thanks to a single drill hole that intercepted nickel and copper in Western Australia’s Fraser Range. Before the discovery Sirius had a market cap of $30m and was looking down the barrel of going under. At $2.12, it now has a market cap of $476m.

A word of warning
A friend bought Sirius at about $1 and sold at about $2, doubling his money.
He lamented that he hadn’t made more, but he made good money and realised that it wasn’t worth the risk of holding on.
Often with explorers, particularly for the investor who hasn’t got deep pockets,
it is best to get out one you have made what you consider to be a good return –
which depends upon your tolerance for risk.

It is important not to get carried away with explorers, because at some point they will definitely be asking for more money. Small investors that can’t take part in placements or rights issues often get the value of their holding diluted away. As the shares go sideways, or even down, the market cap of the explorer as it turns into a developer and then producer keeps going up if it successful, because it is able to tap bigger investors for more money.
The Idle Speculator says: “Often with these companies it is better to travel than arrive.”  Investors should take advantage and profit on the expectation of good news, rather than holding on for it.

Red Metal (RDM) is a company Radar has mentioned recently, whose stock doubled in the two months to mid-January on the expectation that it had discovered a giant silver-lead-zinc deposit at its Maronan project in Mt Isa, North Queensland.

Management has been touting the project as the next “Cannington mine” which it sits next to. Cannington is owned by BHP and is reckoned to contain more than $25 billion in minerals.

Investors were positioning for a massive strike after the company itself was saying that a hole drilled late last year led to a new geological interpretation indicated it had hit upon a massive motherload of lead and silver. In January it emerged that it had missed the mark, but it is ploughing ahead with more holes.

Who knows? This company is led by talented management who have a record of geological wizardry, and this might still pay off. If geological success were a 12 part pie it would be something like two parts geological intellect, one part sweat, two parts money and seven parts spin of the wheel.

After speaking to a number of investors in the sector, and consulting our crystal ball, below is a list of stocks that Radar thinks have a shot at greatness. They’re all very risky, but in the exploration risk, big risk can deliver big returns (or nothing).


You will then find the rest of the article in our stock research section under SPECULATIVE MINERS