Argonaut has completed its annual review of the best undeveloped metals and mining projects owned by ASX listed companies. Companies that were identified with the best undeveloped projects in our previous editions outperformed their respective peer groups and relevant indices, with many being acquired, financed or partnered. A notable outcome of our analysis is that we have been unable to identify a project meeting our criteria that resides in an ASX major or mid-tier, with all the projects in aspiring juniors or small-cap companies (none of which are producers). Argonaut has applied the following selection criteria to identify the best undeveloped projects, 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
Selection criteria: Argonaut’s ‘bottom-up’ fundamental approach was commodity, management and jurisdiction agnostic and focused on meeting the strict criteria outlined above. Argonaut has undertaken site visits to nine of the ten projects.
How did our 2015 BUP’s perform?Ten projects made the 2015 list which generated a total equity return of 62% against 53% for ASX Small Resources and 1% for the ASX 200. Two of the companies that own these projects successfully graduated from developer to producer status, being Nova (Independence Group) and Wetar (Finders Resources).
Key themes in 2016 include a renewed focus on exploration, project-level acquisitions, previous “cost-out” approach, which is benefitting gold miners in terms of margin expansion. Additional benefits have arisen from competitive capital and operating costs, favourable EPC/EPCM tenders with first class teams available and reduced lead times to develop projects.
Improved commodity prices and a lower Australian Dollar drove improved sentiment across the sector and availability of risk capital for exploration, development and growth. Australian developers have benefited from an improved outlook on earnings, financing and lending terms and faster payback on invested capital.
A lack of new discoveries reflects the long period of underinvestment in exploration. Whilst the market has improved, leading to reinvigorated exploration budgets, there will be a lag for this expenditure to translate into new discoveries.
Positioned to fill new demand:Our selected undeveloped projects are positioned to replace ageing mines and also fill demand in emerging commodities such as graphite and lithium in the battery sector and potash in the fertiliser market.
High margin, low risk: Fundamental to our selection criteria is high margin, tolerable risk projects with expected near term development and the capability to provide strong financial returns to the companies that own them. The quality of these projects enhances financing options, expedites development and increases M&A appeal.
Able to endure commodity price cycles: The projects chosen have scoping or feasibility studies that demonstrate profitability that can withstand volatile commodity price markets. As sentiment and commodity prices improve, these projects are positioned to gain a first mover advantage status and deliver strong financial returns for stakeholders.
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