SYDNEY (Reuters) - From gold to graphite to zinc to lithium, Australia’s army of “penny dreadful” stocks is rising from the ashes of the mining bust and growing at rates that majors like BHP Billiton and Rio Tinto can only wish for.
Micro miners are posting double or even triple-digit gains, buoyed by a belief that metals prices have bottomed, while companies that managed to come through the downturn are being aided by cheaper labor and operating costs.
“It’s about the growth and the profit that can come very quickly,” said Perth-based retail investor Tim Larmont, who has been dabbling for over two decades in a sector that’s known as a hothouse for day traders and speculators.
“There’s always that expectation it will end tomorrow, but it looks like it could last longer this time. These companies aren’t burning through money like they used to. Anyone that’s survived is more responsible.”
Renewed optimism is reflected in near-record attendance at this week’s Diggers and Dealers mining conference, where some 1,800-plus prospectors, miners and bankers are crowding into the outback town of Kalgoorlie in Western Australia’s goldfields.
Gold miners were like “rock stars”, Evolution Mining chairman Jake Klein told the conference.
“Investors are happy, investment banks love us. I’ve never had more invitations to corporate and sporting events and we’ve even upgraded our accommodation. We used to be in the caravan park.”
Metals prices have started to turn up after years of declines. Zinc is up 41 percent so far this year and nickel up 21 percent, while gold is trading at near record highs in Australian dollar terms.
Small cap gold miners are “absolutely minting it”, said UBS small companies portfolio manager Stephen Wood, while lithium, used in batteries, is grabbing interest as a transition away from fossil fuels.
LOW COSTS, LITTLE DEBT
While the mining bust spelled the end for legions of small miners, those that remain are in the best shape in years.
Labor costs have dropped by as much as 50 percent since 2010 and an inability to borrow during the lean years means most miners carry little debt.
Machinery used to power the iron ore and coal mining booms in the last decade can now be purchased on the cheap, keeping overheads to a minimum, said Frank Lee, general manager of Ross’s Auctioneers and Valuers in Kalgoorlie.
And a soft oil price is providing cheaper diesel to many Australian mines and exploration sites that operate far from the electricity grid.
Lithium miner Pilbara Minerals easily raised A$85 million ($64 million) in a heavily oversubscribed placement in April and a further A$15 million from retail investors.
“Everything is cheaper today and that removes a lot of the cost pressures new mining projects face,” said Pilbara chief executive Ken Brinsden.
Nickel and gold miner Independence Group raised A$250 million last month in an issue that was 2-1/2 times oversubscribed, while gold miner Ramelius Resources and nickel prospector S2 Resources have also easily raised extra capital.
The Australian Stock Exchange’s (ASX) Small Resources Index is up 65 percent this year, more than triple the gains for the big miner-weighted ASX 200 Resources Index, while the ASX All Ordinaries Gold Index has surged over 100 percent.
By comparison, sector big-leaguers BHP Billiton and Rio Tinto have risen around 10 percent.
Citi is forecasting earnings per share growth in the overall mining sector to turn from a fall of 53.1 percent in fiscal 2016 to growth of 14.8 percent in 2017.
Any confidence in the rally, though, is being kept on a short leash after years of bruising falls in an industry notorious for going down as fast as it goes up.
“We are in the midst of what is an embryonic resource sector recovery,” said Gavin Wendt, an analyst for MineLife, which specializes in small Australian mining companies. “It’s still early days, of course.”
Bigger miners with diversified portfolios, who are generally more measured in their public statements, have also been less enthusiastic about the prospect of a lasting upturn.
BHP Managing Director Andrew Mackenzie recently told investors to “expect a period of prolonged lower commodity prices and volatility” and others also are cautious.
“The sector is looking better than it has in a long time ... but we live in volatile times, so one should be careful not to get too optimistic,” said Shaw and Partners analyst Peter O’Connor.
Reporting by James Regan; Editing by Richard Pullin
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