Much of my time is spent sifting through announcements trying to find that one or two lines that might signal that a company is changing focus or on the hunt for a new project which could be a good catalyst for some share price gains. Every so often I get an idea and a top down approach prevails, this is one of these cases.
China. It is one of the drivers of the market at the moment and key to many of our resources stocks on the ASX. Whilst the focus is quite often on iron ore in China's booming construction industry there is another ingredient which is key - ceramics, which are made from ZIRCON. Ceramic tiles are used on the floors, walls and almost any surface in buildings in China.
Iluka Resources (ILU) is the heavy weight listed on the Australian market. It recently stated that there is a worldwide shortage of zircon which will continue and thus support zircon prices. The company has an excellent chart and has tripled in the last year. It will probably see more gains but I am here to investigate the smaller capped stocks.
Matilda Zircon (MZI) is the smallest play on the ASX. It has had a checkered past including going into administration whilst having a decent Tiwi Islands asset. Michael Kiernan who I used to respect somehow managed to screw the company up similarly to Territory Resources (TTY). Avoid.
This leaves three plays that have a geniune chance to make some good returns. Sheffield Resources (SFX) has only been listed for just over a month and as a result is quite cashed up with over $6million in cash (not bad for a market cap of ~$11 million). It's always hard to judge new listings as there isn't much of a chart and you cant measure the company performance. Having said that, the company does have a few projects in Western Australia and that includes an ex BHP prospect with a 1.5-2.5 billion tonne exploration target.
Gunson Resources (GUN) and Base Resources (BSE) are the ones to watch in my opinion.
I remember last year (February) when Base Resources purchased the Kwale mineral sands project in Kenya. The share price tanked below $0.10 as the market was hoping for a hot project at the time (zircon wasn't 'sexy'). They purchased the project for next to nothing and the previous owner had sunk millions into it already, including completing a DFS and having all the permits already in place. Recently Base Resources announced that the project economics have become more robust and estimate an NPV of $160 - $210 million. Goldman Sachs recently put out a research report with a $0.50 12 month target on the stock and buy rating. The report cited that the valuation put on the stock was discounted as a result of the high capital expenditure required compared to market capitilisation risk (I.e. asking how can a company that small raise the funds to get the project off the ground?). It is good to see a small stock being covered by one of the major brokers.
Gunson Resources has a smaller market cap (~$47 million) when compared to Base Resources although their project is in Western Australia. The Coburn Zircon project has an estimated NPV of $190 million. The company share price hit a high of $0.30 in December but has cooled off since. Expect newsflow especially when statements such as "Discussions with potential strategic investors in the Project are ongoing, with seven interested parties actively reviewing the investment and offtake opportunity." are made to the market.
GUN closed at $0.24 whilst BSE at $0.425 today.
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