Planning for the next phase

As we prepare to enter year six of the greatest resources boom Australia has experienced there’s a hunt under way for the next mining and oil investment theme to maintain the momentum. And wouldn’t you know it, Briefcase has just the plan for you.

But before continuing, Briefcase inserts a disclaimer of the sort seen at the start of every corporate promotion, though it would be an enormous surprise to find anyone in the country who’s actually ready that government-inspired drivel that boils down to just two words – caveat emptor (let the buyer beware).

The names you’re about to see are for adults only. Furthermore, if you buy, sell, swap or do anything about the companies mentioned without seeking professional advice, more fool you.

Now that the disclaimer is out of the way, here’s the plan, which is all about looking beyond this phase of the boom and picturing the next phase – and that’s all about exploration and discovery.

To explain, let’s use the Harvard Business School case study approach.

Kagara Zinc, a remarkably successful business run by highly competent people who annoy Briefcase intensely because they are such poor communicators, has the perfect plan for the next phase of the boom – get bigger, get much bigger, or get bought.

Either way, by success or by acquisition, the shareholders of Kagara are in for a fun time.

Until now, Kagara has been all about re-developing old and well-understood zinc, copper and gold assets in north Queensland. The timing of the entry into the boom, and the timing of bringing on the different assets, has been faultless.

But the north Queensland base and precious metals of Kagara, and everyone else who has worked the region, are relatively small beer. They are not the stuff that would attract a BHP Billiton, Rio Tinto, Xstrata – or one of the new Russian, Brazilian, or Chinese players in the Australian resources sector.

That’s why Kagara is placing a big bet on the potential world-class Admiral Bay zinc and lead deposit bear Broome in the north of Western Australia. Discovered more than 30 years ago by oil explorers, and pinpointed by Rio Tinto more than 20 years ago, Admiral Bay is a very deep but potentially enormous blob of metal. The ore-bearing structure itself starts at 1,300 metres where the surface rock temperature is close to 60 degrees Celsius.

Just digging a mine to the top of the ore would cost more than Kagara’s current stock market capitalisation of $1.3 billion.

But there’s method in Kagara’s astonishingly bold plan, which involves this tiddler of a company (by world standards) committing to an exploration project costing about $40 million to punch a hole down the first 1,200m, before a conventional diamond rig brings back the core required by geologists.

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Bold is a word that barely does justice to what Kagara is doing at Admiral Bay. More interestingly, the first phase of the work at the project, which has passed the half-way mark, raises two questions; why, and is it such a different approach at this stage of the boom?

On the why aspect, the first point is that Kagara is drilling out a potential (deep) mine at Admiral Bay because it can.

In other words, it has the money from north Queensland, it has the technical smarts, and it has a vision.

That vision, in the opinion of Briefcase, is to either (a) find a way to actually start a mine at the 1.3 kilometre mark (wow!), or (b) wait for the big, fat, cheque from a Brazilian, Russian, Indian, Japanese, or Chinese buyer desperate (sorry, keen) to secure future, long-term supplies of raw materials.

Translated into an investment theorem, Kagara either gets much bigger, or gets taken out – either way, shareholders win.

On question two (is it different), the answer is no.

There are an increasing number of small explorer-producers moving up a notch in the game. They have got a start in life, and now they’re ready to play on a bigger stage.

Jubilee Mines is case study number two. It is small, rich and, like its chairman Kerry Harmanis, perfectly proportioned. But it is also doing pretty much what the old WMC did at Kambalda (only better) by mining relatively small pods of high-grade nickel.

The big game awaits Jubilee, and it’s called Anomaly One. Without boring readers with too much geological mumbo jumbo, Anomaly One is a big blob of low-grade but world-class, nickel ore, which Jubilee currently estimates to contain 328,000 tonnes of nickel, worth about $10 billion on today’s market.

Harmanis says he’s not rushing to develop Anomaly One, partly because he can make better profits focusing on the richer pods of high-grade material. It’s also possible that developing Anomaly One is a project better undertaken by a major miner, such as BHP Billiton, or the big Brazilian, CVRD Inco.

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There’s an investment theme here, although it’s not for the faint hearted or those who believe the metal price projections from the so-called experts (really just unreconstructed economists who make forecasts by looking at past trends with no concept of the power of the Chinese version of the industrial revolution).

The theme, which can also be seen in stocks such as Marengo (copper in Papua New Guinea), Sundance (iron ore in Cameroon), Equinox (copper and uranium in Zambia), Resolute (gold in Mali), Lynas Corporation (rare earths in WA), and Precious Metals Australia (vanadium in WA) is to think big. Thinking big means not being afraid to bite off a big and seemingly tough mouthful – and letting the price of the commodity involved do the heavy lifting by delivering fat profit margins.

For believers in the ‘all booms must bust’ theory of investing, year six of the boom (2008) will be an interesting time.

Briefcase, depending on which side of the bed it got out of, can see how year six is indeed a challenge – simply because we haven’t been going up for so long since the 1960s.

Age, that curse which brings wrinkles and sagging body parts, also brings experience and a small dose of wisdom, which is saying that we really are in an era reminiscent of the 1950s and 1960s that delivered 20 years of good times.

Which all boils down to the fact that year six of the boom possibly means that we are actually just 30 per cent of the way through the experience, and there are 14 more boom years to go – which should take  Briefcase into a comfortable retirement.

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“When a man is intoxicated by alcohol he can recover, but when intoxicated by power he seldom recovers.” James F. Byrnes (US senator and supreme court judge)