Argonaut has completed its 2018 review of the best undeveloped projects (BUPs) in the metals and mining sector that are majority owned by ASX listed companies. Notably, the selection of projects which meet Argonaut’s criteria below was lower this year. We attribute this to declining exploration expenditure and few discoveries from 2011 to 2016. Subsequently, the number of projects advancing to feasibility stage has declined.
Selection criteria: Argonaut’s ‘bottom-up’ fundamental approach is generally commodity and management agnostic. However, we do apply some jurisdictional filters, removing projects in the highest geopolitical and sovereign risk countries.
Argonaut continues to use the following selection criteria to identify what we consider to be the Best Undeveloped Projects (BUPs), which include:
1. Development stage between scoping study and pre-commercial production
2. An Internal Rate of Return (IRR) exceeding 25%
3. Profitable through all market/commodity price cycles[1]
4. A high likelihood of achieving >$100m project valuation within 24 months
5. The stock must have a market capitalisation less than A$5b
Key themes in 2018 include: Key themes we cover in this edition of BUPs include; the lack of projects entering feasibility stage as a consequence of low investment in exploration, a push for technology in mining, the onset of M&A and key targets going forward, increasing risk in African states and the increase of underground development in Australia.
How did our 2017 BUPs perform? As with previous editions, a number of stocks from the 2017 BUPs have progressed to production or more advanced feasibility studies. The eleven projects that made our 2017 list had a mixed return in terms of share price appreciation; however, all have advanced in status with four moving into production and four on the brink of commencing construction.
High margin, low risk: Perhaps the key criterion to our BUPs is low cost, high margin assets with the capability to maintain strong financial returns through the commodity price cycle. The quality of such projects enables a broader range of financing options, underpins likely development as well as increasing M&A appeal.
Macro headwinds: Whilst some of our 2017 list incurred stock specific issues which impacted share performance, the broader group was the victim of negative macro themes, foremost, the ongoing trade war between the US and China which has shaken global markets. As a result, there has been a flight from risk sectors in particular those exposed to Chinese resources demand. This is evidenced by the S&P ASX Small Resource Index which has fallen 17% since the US announced its first major tariffs in July 2018 (vs the S&P ASX 100 and 200 Indexes which are down just 7% over the same period). In addition, the rise of the US dollar has impacted demand for resources priced in USD.
Stock specific impacts: The challenges of permitting resource projects and the risks associated with delays and working capital manifested in 2018. Regis Resources’ McPhillamys’ project and Berkeley Energia’s Salamanca project were both delayed due to challenging permitting regimes. Stocks such as Dacian Gold, Gascoyne Resources, Metro Mining and Paringa Resources highlighted the need to raise sufficient capital to ward off events which led to higher working capital requirements at or near the production ramp-up stage.
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