When researching resource prospects I prefer to focus on those with existing high grade low cost mines and an active exploration program. Here are two of the best.
Although the share price has nearly doubled in the last 12 months nickel miner Western Areas Ltd (ASX: WSA) has plenty of scope for further gains.
Western Areas has two highly productive nickel mines (Flying Fox and Spotted Quoll) with recently reported cash costs of $2.65lb. Cash flow generation is extremely strong and the company is now completely debt free with further increases in proven reserves very likely.
Western Areas also owns 68% of FinnAust Mining, a UK listed company which has reported positive results from exploratory drilling in Finland.
The financials are appealing – estimated 2015 net profit per share is 60c before rising to $1 per share in 2016. Fully franked dividends are estimated to rise from 20c in 2015 to 40c in 2016. These estimates are based on the nickel price averaging US$11.30 over the period and the A$ averaging US$90c. With the current nickel price around US$8.30 and the nickel market showing early signs of entering a significant turnaround these figures don’t appear overly aggressive and Western Areas ($4.94) is a reasonable buy for those seeking resource exposure.
Independence Group NL (ASX: IGO) owns 30% of the exciting Tropicana gold mine in WA. This is a very low cost mine and exploratory drilling in nearby areas indicates there is good potential for further discoveries as well as an upgrade of existing resources. The mine operator and joint venture partner is the major South African mining house AngloGold Ashanti.
Although Tropicana is the jewel in the crown Independence also owns 100% of the Long nickel mine and the Jaguar zinc-copper deposit; in addition several highly prospective sites have been identified for further evaluation.
Currently selling for $4.76, estimated financials for 2015 include earnings per share of 50c and a 20c fully franked dividend; followed by 65c and 32c in 2016. As usual with resource companies estimates are never guarantees, and an adequate margin of safety should be allowed in your decision making.
Both these companies offer good exposure to the gradual increase in global industrial production and will benefit from further weakness in the A$.
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Motley Fool contributor Peter Andersen owns shares in Western Areas and Independence Group.