Some call gold the barbarous metal and others are far less polite – however I'm not about to argue with the regard for gold as a store of value across many centuries and cultures. With the global deflationary cycle showing signs of easing the first miner covered here looks to be in the right place at the right time.
Independence Group (ASX: IGO) has ownership interests in the Long nickel mine (100%) and the Jaguar and Bentley zinc, copper and silver mines (100%). It also has an interest in the exciting Tropicana open cut gold mine (30%). All of these producing mines are located in Western Australia.
At currently depressed metal prices, the Long nickel mine is profitable and the predominantly zinc producing Jaguar and Bentley mines are cashflow positive.
However, the business changing event is the recent start of production at Tropicana (30% owned), which is shaping up to be one of the lowest-cost gold mines in the world and there is plenty of additional scope left for further discoveries in this spectacular new gold province. To quote AngloGold Ashanti's CEO Srinivasan Ventkatakrishnan (regarded as mining's most cautious CEO): "What we've found and now built, is a tier-one asset which we believe only scratches the surface of a new gold district. Our initial focus is finding additional mineralisation close to the plant, while testing the promising targets in our joint venture tenement".
The joint venture tenement comprises 10,500 square kilometres and is situated close to the Great Victoria Desert, approximately 300 kms north east of Kalgoorlie. With a partner such as AngloGold Ashanti – the world's third-largest gold producer – Independence Group is well placed for significant earnings growth over the next decade.
Ok, how does Independence Group stack up as a potential investment?
Currently priced at $3.15, earnings per share are expected to grow rapidly (more than 20%) over the next few years largely due to the commissioning of Tropicana. Earnings in 2014 may be affected by write offs associated with the start of production. On a conservative view 2015 should see earnings of 48 cents per share (cps) followed by 57 cps in 2016. Importantly, fully franked dividends of 2.4 cps and 2.6 cps can be anticipated. In my view, Independence Group is a highly attractive resources investment and represents good buying below $3.50.
Western Areas (ASX: WSA) is Australia's lowest-cost nickel producer and the third-largest after BHP Billiton (ASX: BHP) and Glencore. Western Areas owns and operates two high-grade nickel mines (Flying Fox & Spotted Quoll), as well as the Cosmic Boy concentrator.
Western Areas remains an active explorer with defined prospects located in Australia, Canada and Finland.
As an industrial metal (70% of use is in stainless steel) the nickel price has been in the doldrums for some time, however there are some recent signs of a turnaround as world economies improve and supply constraints appear (largely due to higher-cost mines gradually ceasing production). Against this nickel stockpiles now total 260,000 tonnes and it would be very optimistic to anticipate a significant upward price move in the short term.
Currently priced at $2.38, Western Areas can be expected to earn 12 cps in 2014, 30 cps in 2015 and 42 cps in 2016 as production levels increase and the nickel price slowly recovers. Western Areas is also a dividend payer. $235m of debt (convertible bonds) is due in 2014-15, however the strong cashflow and standby bank credit of $125m should be able to cope with this.
Foolish takeaway
This Fool is convinced a few attractive opportunities lay waiting in some mid-cap resource companies. At this fragile stage what to look for are those with low production costs, high-grade mines, positive operational cashflow, long mine lives and additional outstanding exploration prospects. Both Independence Group and Western Areas fit this bill; however Independence Group is a safer situation.
