Australian small cap mining shares can be amongst the most exciting, yet most speculative companies trading on the ASX.
For every mining stock that hits pay dirt, there are many that start as penny stocks and stay as penny stocks.
For all the excitement of securing a tenement, of exploratory drilling, of visible gold occurrence on a drill hole trace, of feasibility studies, of capital raises, the number of mining companies that actually make it all the way to production is tiny.
And if they do happen to make it to production, making a meaningful profit from this capital intensive industry, one where you are at the whims of rising and falling commodity prices, is notoriously difficult.
When it comes to mining stocks, buyer beware
If you choose to buy small cap mining shares, go in with your eyes wide open. They are highly speculative, and generally destroy shareholder value.
Any small cap mining stocks should be part of a diversified portfolio, including high quality growth stocks, like the companies in The Capital Club 10.
If you decide to allocate say 15 per cent of your total portfolio to small cap mining stocks, you want to diversify that 15 per cent over a number different companies and different commodities.
Many retail investors get their speculative mining stock tips from a mate, often someone who has heard from another mate that some 2 cent penny stock is about to announce to the share market that it has hit gold. Or lithium, cobalt, nickel, copper, coal, iron ore…
It sounds compelling. A good source. Insider information.
Because the share price is only 2 cents, you can buy 250,000 shares, and it only has to rise 2 cents for you to double your money.
Except… by the time you hear about the hot tip, you can bet your bottom dollar hundreds of others have heard it before you, something that has already driven the share price from 0.5 cent to 2 cents.
And, even if the company does announce positive drilling results to the ASX, it’s a million miles away from turning them into any sort of commercial reality.
You’ve probably heard the saying “buy on rumour, sell on news.” Before you know it, your 2 cent mining stock will be trading back down at 0.5 cents again, never to move higher again, in the process torching thousands of dollars of your hard earned money.
Follow the mining experts
Now, with all the caveats out of the way…
Each month, I read the updates of some of the top performing fund managers in Australia. Many of these funds have returned upwards of 30 per cent for their investors over the past 12 months, far out-pacing the returns of the ASX 200 index.
When it comes to mining shares, deep research and knowledge is required. Site visits are often under-taken. Fund managers have regular meetings with management of these companies. The last thing these fund managers want to do is publicly torch the money of their investors.
So you can bet they’ve done their homework. Sure, some of these positions will be relatively small, and they are part of a 40 to 60 stock portfolio, but these fund managers are always betting their reputation. Get too many wrong, and existing investors bail out of your fund, and new investors won’t want a bar of your fund.
10 small cap mining stocks the experts like in 2018
Here are 10 small cap mining stocks some of the top fund managers in Australia have highlighted in their monthly letters.
New Century Resources (ASX:NCZ) — share price $1.30
New Century continues strong progress toward restarting of operations at the Century Zinc Mine in Queensland, with refurbishment activities on budget and schedule. According to the company, the project remains on track for commissioning in July & first production in August 2018.
In its May report, the Chester High Conviction Fund said New Century Resources was “the cheapest cash generator we can find.”
Agrimin Ltd (ASX:AMN) — share price 89 cents
In its June report, the Paragon Australian Long Short Fund said it believes the risk-reward for Agrimin is asymmetric to the upside and it remains a key high-conviction position.
The fund attended a site trip of Agrimin’s outback Western Australian Lake Mackay in April and were positively surprised on the scale and quality of its world class Potassium Sulphate (SOP) project.
Galena Mining Ltd (ASX:G1A) — share price 17 cents
Galena Mining was declared a holding in the June report for the top performing Perennial Value Microcap Fund.
The share price rose in June after a scoping study for its Abra lead deposit suggested a financially robust project with quick payback. This is a high risk investment, given the pre-production company will have to raise significant cash in advance of first production in early 2021.
Kalium Lakes Ltd (ASX:KLL) — share price 49 cents
Kalium Lakes was also declared a holding in the June report for the Perennial Value Microcap Fund.
Its share price rose in June following an off-take agreement with a global potash producer which helps finance stage 1 of the project. The fund has under-taken a site visit.
Aurelia Metals Ltd (ASX:AMI) — share price 59 cents
In its May letter, the Eley Griffiths Emerging Companies Fund said the ~200,000 ounce per annum gold producer has a strong board, has made a timely acquisition by buying the neighbouring Peak mine, an acquisition that is tracking ahead of expectations, and Aurelia shares are trading on an attractive valuation of around three times EBITDA.
Hillgrove Resources Limited (ASX:HGO) — share price 9 cents
The Supervised Fund says that from the December quarter of 2018, this tiny copper producer will begin to generate substantial free cash flow for equity holders, in the order of $8 to $11 million per quarter. This should allow Hillgrove to pay its first fully franked dividend since 2009.
Bounty Mining (ASX:B2Y) — share price 37 cents
This coal producer is a holding in the Glennon Small Companies LIC.
Bounty Mining is the 100 per cent owner of the recommissioned Cook Colliery in the Bowen Basin & the Cook North project. Production of coking coal is ramping up at Cook Mine to 2.2 mtpa run of mine over 18 months. In late June, Bounty shipped its first coal from the Port of Gladstone.
Global Geoscience Limited (ASX:GSC) — share price 33 cents
This lithium stock is a holding in the Paragon Australian Long Short Fund.
Paragon says Global Geoscience shares are currently trading at a conservatively fully-diluted and fully-funded Price/NPV of ~0.5x. The fund expects this discount to close, as it has done in the past for several of the fund’s other tier-1 project investments.
Near term catalysts include its pre-feasability study (PFS) due in the next couple of months.
Panoramic Resources Limited (ASX:PAN) — share price 59 cents
This nickel play is another stock in the Paragon Australian Long Short Fund.
The fund says the nickel bull market is real, with fundamentals presenting like lithium did 2-3 years ago and cobalt 12-18 months ago.
Panoramic Resources Limited is a Western Australian mining company that is about to restart its Savannah Nickel Project in the East Kimberley. The company says it is fully funded, giving it the confidence to commence Phase Two of pre-production activities, targeting to export the first shipment of Savannah nickel concentrate to China early in the March quarter of 2019.
Emeco Holdings (ASX:EML) — share price 35 cents
Unlike the other companies on this list, Emeco is a mining services company, providing rental equipment to the sector.
The Ausbil Microcap Fund is amongst a number of fund managers who have declared holdings in Emeco shares. Others include Pie Funds, and the aforementioned Glennon Small Companies LIC.
In May, Emeco bought Matilda Equipment, a national rental equipment business for an enterprise value of $80 million. The implied acquisition multiple, based on Matilda’s recent run-rate, was just 3.3 times operating EBITDA.