Commodities drive top performers

THE companies that have achieved the strongest growth in market value over the past five years illustrate the breadth and depth of the resources boom currently being enjoyed in Western Australia.

Iron ore, uranium, nickel, oil, coal, zinc and copper are all booming, allowing companies in these sectors to enjoy stellar returns.

A conspicuous absence from the list is gold, traditionally a mainstay of WA’s mining industry but presently going through a flat period compared with other commodities.

The top performing stocks also include stockbroker Euroz, which is like the proverbial shovel seller during a gold rush. Euroz has prospered by raising money for many of WA’s booming mining and industrial companies.

Top of the list is Fortescue Metals Group, which has achieved spectacular gains over the past two years.

Investors have piled into the stock in support of its entrepreneurial managing director, Andrew Forrest, who has ambitious plans for a $2 billion-plus iron ore project in the Pilbara (see page 17).

The stock is currently trading around $3.10, which is well below its 12-month high of $5.55 but still enough for the stock to rank as a top performer in terms of market value growth.

Aquila Resources is another stock to have enjoyed strong gains on the basis of future potential.

When the company floated in 2000, its focus was on gold exploration, but it has boomed after shifting its focus to Queensland coal.

Aquila and its joint venture partner, AMCI Holdings, recently committed to mine the Isaac Plains coal project after a bankable feasibility study confirmed its financial and technical feasibility.

Aquila has also reported good news on its Belvedere coking coal project, which has a massive 2.7 billion tonnes resource.

It announced last month that Brazilian mining giant CVRD would conduct an exploration study of Belvedere and would have an option to acquire 51 per cent of the project.

Two companies on the top 10 list – Paladin Resources and Hardman Resources – have delivered strong returns on the back of projects currently being developed.

Paladin is poised to become the world’s next uranium miner, after recently commencing development of its Langer Heinrich uranium project in Namibia (see page 16).

It has also commenced a bankable feasibility study on a second project in Malawi and has uranium deposits in other parts of the world.

Hardman has a 22 per cent interest in the $US625 million ($A890 million) Chinguetti oil project in Mauritania, West Africa.

Chinguetti has been a classic example of a ‘company making’ project for Hardman.

The project, operated by Woodside Petroleum, is on schedule for first output in the first quarter of 2006.

Despite foreshadowing a likely 10 per cent blowout in project costs, the market has still taken a positive view, reflecting the very strong rise in oil prices.

Hardman’s other interests include a 22 per cent interest in the Tiof oil field, also operated by Woodside, which analysts believe is also likely to proceed to development.

Four companies on the top 10 list – Kimberley Diamond Co, Mincor Resources, Arc Energy, and Kagara Zinc – have gone from being explorers to producers over the past five years.

Kimberley floated in 1994 and, while it has delivered impressive returns over the past five years, its share price has been volatile.

Its shares enjoyed a big run in 2000, ahead of the acquisition of the Ellendale project, inland from Derby.

They subsequently slumped as low as 36 cents in 2003, after production commenced at the Ellendale 9 project.

Strong diamond prices helped to push the stock as high as $1.67 last year but it has since eased off to $1.05, as the market has digested its plans for the $47 million Ellendale 4 expansion project.

The expansion will lift production from 120,000 carats to about 700,000 carats per annum, establishing Kimberley as a top-five diamond producer in the Western world.

Patersons analyst Alex Passmore has a positive view on the stock, based mainly on the record prices being received for its diamonds.

“We see ongoing buoyant diamond prices, successful near-mine exploration and advances in the company’s current marketing strategy, as providing significant upside to our current DCF valuation of $1.34 per share,” Mr Passmore said.

Mincor led the new generation of Kambalda nickel miners, buying old mines from WMC Resources and turning them into highly profitable ventures.

It acquired Miitel in 2000 and Wannaway in 2001, and recently redeveloped the Mariners and Redross mines.

Mincor achieved enormous share price gains over the three years to mid 2004 but since then its price has been flat to weak.

Its cause was not helped by poor production last year, though it tackled that problem by introducing a new contractor and a new mining schedule.

It disappointed the market again in June when it reduced its production forecast for 2005-06 by 12 per cent to 13,000t of nickel.

Managing director David Moore sought to put this in a positive light, stating that: “The reduced forecast for next year still reflects a robust 30 per cent increase in 04-05 production levels, and does not change the overall very positive outlook for Mincor, which has entered a period of strongly rising cashflows and growing production.”

RBC Capital Markets is bullish on Mincor, giving it a 12-month price target of 90 cents per share, compared with a current price of 78 cents.

“We believe that Mincor is undervalued due to its exposure to the nickel price, negligible future capex and impressive investment multiples,” RBC said in a recent research note.

Macquarie Equities is not so positive, saying that, with a four-year reserve base, exploration success would be the key over the next year.

The booming oil price has been great news for Arc Energy, which is trading at about $2.10, just below its all-time high of $2.22.

After listing in 1997, it hit paydirt in 2001 with the discovery of the Hovea oil field near Dongara.

It has an interest in eight producing oil and gas fields in the Perth Basin, with the biggest being Hovea and Eremia (which it operates) and Jingemia.

Arc is looking to expand its interests in the Perth Basin by acquiring Voyager Energy through a scheme of arrangement.

ABN Amro Morgans says Arc provides “good exposure to the junior oil and gas sector with a strong cash flow, an ungeared balance sheet and a strong regional ground position”.

Its target price is $2.15, just above the current level.

Kagara Zinc illustrates just how much the stock market has changed during the past six years.

It listed in 1999, in the midst of the tech boom, making it the first mining IPO on the Australian Stock Exchange in more than 12 months.

Its share price went sideways for the first two years but, since 2001, its shares have achieved very strong growth, peaking at $1.47 and currently trading around $1.30.

Macquarie Equities believes the price could go higher, with a 12-month target of $1.50.

Kagara’s Mt Garnet project in Queensland, which comprises a treatment plant processing ore from multiple deposits in the area, has been in production since 2003.

The company recently reported a four-fold increase in annual net profit to $14.4 million and has forecast continued earnings growth in 2005-06.

Executive chairman Kim Robinson said output of zinc, lead, silver and gold would be similar in the current financial year but copper output was expected to increase substantially, enabling the company to gain from record copper prices.

CO2 Group (formerly Revesco) has also made the list of top 10 stocks, though this result needs to be qualified by its low market cap and its change of business direction in 2004.

CO2 runs carbon sequestration programs, which involve establish-ing mallee eucalypt plantations to generate carbon credits.