The junior end of the listed mining sector can be a brutal place to inhabit.
Life seems to constantly revolve around the need to keep the coffers topped up without diluting down existing shareholders. Then there are the inherent risks that exist with a cyclical commodity market.
One day, you are the cockerel of the show and the next, a feather duster. Then, overlay that with general market risk ... and when the tide goes out, the smaller boats are always stranded first.
Who would ever be the CEO of a small mining company?
Well, the answer to that lies in the rewards that one drillhole can deliver. Or a corporate deal that suddenly finds the explorer at the end of an absurdly overpriced bid from a major that wants the ground to expand its footprint.
Clearly, those who do decide on this line of work believe that the rewards outweigh the risk.
As the hardened veterans of the industry will tell you, though, the probability of success versus failure can be dramatically improved by attracting the right shareholders to the company register. A notable investor tends to draw a crowd, simply from the fact that the easiest way to make money is usually to follow the smart money.
Enter, Stephen Copulos.
Copulos, is probably best-known for his deal to sell 42 KFC franchises in New South Wales for $82.4 million to New Zealand group Restaurant Brands in 2016. Since then, he hasn’t looked back, including at one stage becoming Myer’s biggest private shareholder after spotting an opportunity to create value for shareholders by shaking up the board in conjunction with fellow shareholder, Solomon Lew.
But Copulos also has a taste for junior resource companies and during the past eight years he has dabbled with a diverse share portfolio in the space. As well as being a big shareholder in Queensland-based Macarthur Minerals (ASX: MIO) for the past six years, he also features in the top 20 for others such as Middle Island Resources, Black Rock Mining and Galilee Energy.
Earlier this week, Copulos lodged a substantial shareholder notice for Macarthur, showing that the canny investor had increased his holding from 6.36 per cent to 14.45 per cent during the past few months. The holding was topped up by acquiring a further 15.1 million shares in a small placement at 5.3c a share, taking his package to almost 29 million shares.
Copulos has clearly spotted what he believes is a money-making opportunity.
On the one hand, by subscribing to the Warren Buffett theory of being fearful when others are greedy and greedy when others are fearful, Macarthur is not so different to other juniors right now, having had their share price decimated in the past year or two. That could be valid reason enough to tempt a patient investor, but Copulos has also recognised another angle that the market appears to be missing.
That angle is the almost immediate cash flow benefits that lie ahead for Macarthur after its recent decision to sell its shovel-ready Lake Giles hematite iron deposit in the Yandal region north of Kalgoorlie in Western Australia.
Gold Valley, which is buying the 79-million-tonne deposit, will pay $750,000 before the end of the year, $10 million once two million tonnes have been exported and a $1 royalty on every tonne of ore shipped – a deal estimated to be worth up to $70 million if all of the Lake Giles ore is shifted. Macarthur has a market capitalisation of $10 million, so in effect, every $100 that Copulos has invested could turn into a $700 return.
Cam (McCall) recently approached me as a long-term passive investor in Macarthur with a great opportunity to invest in the company though a placement. I believe, at a $10 million market capitalisation, Macarthur is extremely undervalued and given its work over the past 18 months, it has a big future ahead of it in the Australian market.
Copulos Group Managing Director Stephen Copulos
Apart from the $2 million to $3 million in cash flow that the deal is likely to make the company each year in royalties, the icing on the cake, according to Copulos, is the prospect of bringing in a partner to help develop the separate 1.2 billion-tonne magnetite deposit that is also owned by Macarthur.
The deal struck in June for the hematite, though, has been particularly well-timed given that one of the biggest incumbrances to mining Lake Giles has always been access to rail and port infrastructure. But no more.
In a shock announcement two months ago, Mineral Resources (ASX: MIN) revealed that it would cease shipping ore from its Koolyanobbing hub in the Yandal district after six and a half years, citing the capital expenditure and time required to increase the mine life as reasons for the decision.
The MinRes move has potentially opened up 8 million tonnes of annual capacity through the Port of Esperance … and the port authority is extremely keen to fill that hole.
Gold Valley’s incentive for striking the deal with Macarthur appears to be the opportunity to shift additional 60 per cent grade ore from its Wiluna West hematite mine – that isn’t already moving through the port of Geraldton to Esperance – and blending it with some of the higher-grade 55 per cent Lake Giles hematite for a blend close to the 58 per cent sweet spot.
According to Gold Valley executive chairman Yuzheng Xie, the immediate plan – with small rail and port capacity agreements already in place – is to ship 1.6 million tonnes per annum (Mtpa) of Wiluna West ore through Esperance from October onwards, moving to 3Mtpa from April.
Macarthur’s ore will take slightly longer to shift as road and site infrastructure still needs approval before being completed. But within the next 12 months, Xie is confident his company will be shipping up to 5 million tonnes through the port, with 2 million tonnes coming from Lake Giles.
Xie sees a once-in-a-generation opportunity to develop the Yandal region into another iron hub similar to the Pilbara.
“I believe that the port and rail facilities are for the common good, and that all future producers should have access to them, now that Mineral Resources has signalled its intention to vacate,” he said.
“Future large-scale development of the hub, though, comes down to government funding. I would like to see the region grow and create jobs, but it will only happen if the state is prepared to help fund part of the beneficiation plant costs to some of the lower-grade orebodies in the area.
“With reduced capital expenditure, the cost of 66 per cent beneficiated magnetite production will fall. It could be a win-win for the region, producers, the local workforce and the government, which would generate many more royalties from increased production.”
It also fits well into the Esperance port authority’s long-term plans to increase capacity to 20 million tonnes via a dual rail system.
Value in the stock market rarely hangs around long before being picked up. In Macarthur’s case, it appears that the smart money, through the Copulos’ investment, has started to move in.
Now, it may only be a matter of time before FOMO – the fear of missing out – starts to kick in for other punters.
Is your ASX-listed company doing something interesting? Contact: office@bullsnbears.com.au