4 Metals and Mining Opportunities Well Positioned for Capital Appreciation

Jun. 09, 2011 7:38 AM ETBAA, AVLNF, DULMF, LCGMF2 Comments
Thomas Brigandi profile picture
Thomas Brigandi

The New York Society of Security Analysts hosted their 11th Annual Metals and Mining Industry Conference on June 1st and 2nd. The conference featured the CEOs and other corporate executives of 16 emerging metals and mining companies who are in the early stages of their growth cycles.

There were many persuasive arguments made by each presenter for their respective companies including: cheap valuation relative to industry competitors, strong projected revenue and EPS growth, and a number of other interesting points. However, out of the 16 emerging mining companies, four really stood out and made the most compelling arguments for delivering shareholders strong performance.

The standout investment opportunity from day one of the conference was the copper company Quaterra Resources (QMM). The Vancouver-based mining company has a market capitalization just under $200 million, $17 million in the bank, and a very experienced management team.

The company has an impressive portfolio of copper, gold, silver, molybdenum, and uranium projects across Mexico, Canada, and the United States. The company's main focus is on developing its holdings in Yerington, Nevada. According to Quaterra's CEO, Dr. Thomas Patton, "Yerington contains twenty billion pounds of copper resources."

In addition to the massive holding at Yerington, Quaterra's other projects scattered across North America and its strategic alliances with Freeport McMoRan and Goldcorp are convincing points in the argument to commit new capital to Quaterra Resources.

Besides Quaterra Resources on day one of the conference, the second day of the conference yielded three noteworthy companies which are all attractive investment opportunities. These opportunities should be seriously considered as an addition to any portfolio held by both individual and institutional investors alike who are looking to get involved in companies with huge capital appreciation potential coupled with relatively low risk.

Avalon Rare Metals (AVL), which kicked off day two of the conference after an overview of the natural resources sector was delivered by CPM Group Managing Director Jeffrey M. Christian, was presented by Avalon's President and CEO Donald Bubar.

The Toronto-based rare earth element miner has seen a huge jump in its share price over the past year, going from around $2.50 per share in June of last year to as high as $10.11 per share this year in early April. This increase occurred largely due to sentiments from China, the biggest rare earth consumer and producer, signaling that it will be cutting back exports of its rare earth stockpile to meet growing domestic demand.

"Global rare earth element demand had a shortfall of around 20,000 tons in 2010, and there is uncertainty about supply in 2011. This is the main reason why there has been a tremendous rise in the prices of these commodities over the past year," according to Murray Woloshin, CFA, President of New Jersey-based registered investment advisor New Century Capital Management LLC.

Avalon currently has a market capitalization of $750 million, cash reserves of 31 million Canadian dollars, and no long term debt on its balance sheet. Avalon's largest institutional holder is the Boston-based investment manager John Hancock and it currently has a little over 100 million shares fully diluted. For investors looking for exposure to a relatively cheap rare earth miner in North America based on industry valuations, Avalon should be on the top of the list.

Duluth Metals (OTCPK:DULMF), another miner that presented on day two of the conference, trades on the Toronto Stock Exchange under the ticker DM. The majority of Duluth's mining operations are in Minnesota and it is another investment opportunity that is positioned for a huge growth in free cash flows as its metal processing facilities come into production.

Duluth is a diversified mining operation, which focuses on both precious and base metals. Its total indicated holdings of the base metals copper, nickel, and cobalt number 7.75 billion, 2.43 billion, and 121.26 million pounds, respectively.

Moreover, Duluth's precious metals holdings are equally impressive in scale to its base metal holdings. Duluth currently has 3.11 million ounces of platinum, 6.93 million ounces of palladium, and 37.42 million ounces of silver within its properties.

In addition to its large natural resource holdings in North America, Duluth also has "an extremely strong partnership with Antofagasta PLC," according to CEO Christopher Dundas. Antofagasta, which trades in London under the ticker ANTO, is a Chilean mining giant. It has been a component of the FTSE 100 since March 2004 and currently has a market capitalization around $24 billion.

Duluth's partnership with Antofagasta enables the company to leverage the expertise Antofagasta brings to the table in executing large scale underground and open pit mining operations. This partnership enables Duluth to enhance productivity and thus increase its operating and net margins. Additionally, Antofagasta is Duluth Metals' largest shareholder in addition to being its most important operational partner.

According to Jean-Sebastien Jacquetin, a Director at New York and Paris-based investment bank du Pasquier & Company, "Duluth Metals' huge copper holdings with its Nokomis Project and strategic alliances with majors in the industry will most likely increase its valuations and free cash flow in the near term. It's a very interesting investment opportunity at its current market valuation."

Moreover, with a small amount of debt, a strong balance sheet, and a market capitalization slightly over $300 million, Duluth Metals is an emerging mining company that has the potential to be a diamond in the rough.

Lastly, the Toronto-based gold miner Banro Corporation (BAA) is a very compelling investment opportunity. Banro, which trades on both the TSX and the NYSE AMEX under the symbol BAA, is a mining company that is currently focusing its efforts on extracting gold from its holdings in the Democratic Republic of the Congo, or DRC.

What makes Banro such an interesting opportunity is two impressive metrics. First, the company is planning on going into production in Q4 of this year; this will enable shareholders to see free cash flow dramatically increase in the short term. Second, Banro holds a staggering amount of gold on its properties – over 11 million ounces! The cash cost to extract this gold per ounce is $356 and if gold stays around its current price, that equates to a tremendous amount of free cash flow for Banro going forward.

The annual target production will be 150, 250, 300, 430, and 480 thousand ounces of gold extracted and processed from 2012 to 2016. Banro's relative valuation, which is quantified as price over NAV, is just a tad over 0.5x, according to CIBC World Markets. Using this metric, Banro's valuation is relatively cheap compared to almost every other industry competitor. Moreover, its enterprise value per ounce is also undervalued compared to the industry with a value of $48 in enterprise value per ounce.

The only objection to not owning Banro at these levels before it starts production would be if investors are hesitant to take on the political risk associated with the DRC. However, according to Michael Cooper, CFA, President of Toronto-based Cooper Financial Research, "The political risk in the DRC has been steadily decreasing over the past few years, with major reforms that have been implemented by the pro-business government benefiting international private companies operating in the DRC."

Therefore, based on Banro's huge gold holdings of 11 million ounces, mining production that will be underway in a few months, and limited political risk, Banro is a very attractive investment opportunity at its current price and valuation.

Thus, based on the company fundamentals, solid management teams, and huge mineral holdings of these four mining companies, it seems likely that each will achieve a relatively high degree of capital appreciation for their shareholders going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

This article was written by

Thomas Brigandi profile picture
All opinions expressed by Thomas Brigandi, CFA on this website are solely Brigandi’s opinions and do not reflect the opinions of any of his affiliations (Last Article: Feb. 27, 2012). Thomas Brigandi, CFA, is a vice president in the global investor management team at a credit rating agency (CRA), where he is responsible for building and maintaining a network of senior level institutional investor relationships. Prior to this role, Brigandi served for nearly a decade in the global project and infrastructure finance group at a CRA, where he was a lead analyst responsible for a portfolio of 34 power, toll-road, airport, port, water, wastewater, natural gas pipeline, and project finance credits that collectively had over $15 billion of debt outstanding. Brigandi also served on a CRA's public pension steering committee, ESG Americas working group, and veteran recruiting sub-committee. Brigandi previously worked at the ~$200bn NYC Pension Fund, where he focused on energy and natural resources and reported directly to the chief investment officer. Brigandi is vice chair of the board of directors of CFA Society New York (CFANY), the largest CFA Institute Society globally. Brigandi, the CFA Institute Inaugural Global Outstanding Young Leader and CFA Institute 2021 Americas Volunteer of the Year, has organized over 90 CFA society conferences globally that were attended in-person by over 16,000 investment professionals, in addition to over 35 virtual conferences that reached many thousands of participants. These events featured over 350 senior asset owner and investment consultant speakers who represent organizations that collectively oversee or advise on more than $75 trillion in fiduciary assets, in addition to over 200 senior asset manager speakers who represent firms that collectively manage in excess of $30 trillion in assets. Brigandi, the founder of CFANY’s Asset Owner Series, Global Policymakers Series, Emerging and Frontier Market Series, Putting Beneficiaries First Series, and Global Infrastructure Conference Series, leads a team of over 500 investment professional volunteers globally. While serving as the director of global volunteers of the American Foundation for African Children’s Education, Brigandi organized the NASDAQ Closing Bell Ceremony on 23 September 2011, hosted for the president of Sierra Leone. Brigandi maintains over 14,000 connections ‎on LinkedIn and holds a bachelor's of science in finance, accounting, and Economics from the Macaulay Honors College (MHC) at the City University of New York. Brigandi received the college’s inaugural Alumni Pioneer Award and serves on the MHC Foundation board of directors as treasurer. Finally, Brigandi serves as an advisory board member of the Singapore Economic Forum.

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