Penny Stock Portfolio – Part 3

Today’s post is another guest post from Trader Tim. Tim has his own blog here, and you can also find him on Twitter here. 

The views expressed in the article below are Tim’s and may not reflect those of Mike or 7 Circles.

If you would like to write a guest post for 7 Circles, please contact Mike via mike@the7circles.uk

Welcome back to another instalment to Trader Tim’s Penny Stock Portfolio!

Today, we will look at a couple of resource stocks that offer upside potential. We will probably not look at too many more resource stocks after this post as we want to ensure a good level of diversification.

I am choosing to discuss these particular resource stocks in one post because they have very similar themes, so hopefully it means that you won’t have to listen to me repeat myself.

As always, please do your own research (DYOR).

Last Week

Two weeks ago, I added my first stock to the penny stock portfolio. We added the exciting wearable tech company, Cloudtag. You can read the full list of reasons here in the post from a fortnight ago. This a stock I own myself.

• For the portfolio, we will take the opening price from the day that post is published
• For Cloudtag, the stock opened the day at 4.95p
• It opened this morning on 5.5

This week

The stocks we are going to look at today are Asiamet Resources and Horizonte Minerals – both resource stocks.

• Commodities have really taken a hammering recently.
• Nickel, Copper, Oil and Uranium have all been at multi-year lows
• There is potentially an opportunity to realise some value here

Asiamet Resources

The company is an resource exploration company, based in Indonesia. Currently, they sit on three assets: BKM, Beutong and Jelai. The company meets all the criteria specified in the first post.

• A spread around 5% .
• The share price is trading at 2.6p
• Market capitalisation is £16.7 million
• Strong ties to finance backers
• Good record of raising funds while preserving the share price
• Experienced management that have grown and sold resource companies
• Tony Manini, Asiamet CEO, was instrumental in taking Oxiana from a company worth $3 million to $6 billion

Asiamet is primarily focused on copper. Copper, like most commodities, has really tumbled over the last 5 years. This creates a deficiency in the production of copper. Asiamet are looking to bring their primary asset, BKM, into production the near future.

• Not only are the start-up costs squeezed
• A large number of producers from the mid-2000s were burdened with inflationary costs
• Companies closed operations as it was no longer economically viable to continue projects in such conditions
• This creates a reduces the available supply of copper
• Optiva Securities suggest we are “currently experiencing one of the most prolonged downturns in the last hundred years”
• BHP Billiton have said “Regardless of where energy is coming from (solar, wind, electric), it needs copper”

There appears to be a tightening supply of copper despite the fact that copper demand over the long-term is going to drastically increase. Asiamet appears well placed to take advantage of the copper deficit.

Why Asiamet?

Asiamet, like a number of resource stocks at the moment, appear to be sitting in the right place at the right time.

• The low commodity prices ensure only the most cost-efficient projects are considered feasible
• Years of falling commodity prices have put resource companies out of favour
• There are a significant number of companies undervalued

Beyond coincidental timing, Asiamet has a lot going for it. It is undervalued. It offers an opportunity for investors that have both a short-term and long-term outlook.

• Optiva Securities have issued a broker note, which detailed a price target of 8p for Asiamet – over 150% upside vs. current market price
• Asiamet’s BKM project is 5 times cheaper than more expensive copper project globally
• As confirmed in a company RNS, BKM’s high copper grade is one of the factors that contributes to the robust economics
• The company also has a stake in another copper asset, Beutong
• This asset is far larger and, once work begins, would substantially add value to the company

Asiamet looks really promising to me. The company offers something to longer term holders. Unlike many resource companies, Asiamet has stakes in some key assets, which will provide a natural growth plan for the company.

Horizonte Minerals

The company is also resource exploration company. They are based in Brazil. Recently, they finalised the completion of two mining licences for the Glencore Araguaia nickel project.

The company meets all the criteria specified in the first post.

• A spread around 10%
• I notice the spread has widened a little now to 15%, but when written the spread was slightly below 10%
• The share price is trading at 2p
• Market capitalisation is £14.6 million
• Two well-respected institutional shareholders to finance backers
• Experienced management that have grown resource companies

Similar to Asiamet and copper, the nickel price was recently at multi-year lows. It has since rebounded a little, but it still has plenty of distance to travel in my opinion. I don’t want to repeat myself. In a similar way to copper, low nickel prices have restricted the supply of nickel. l

• The Philippines, historically a major Nickel producer, have restricted their supply due to environmental concerns from President Rodrigo Duterte
• Markets assume the country will lower production volumes
• Analysts have suggested that nearly a quarter of the world’s nickel mine supply is currently at risk because of this
• China, India and a number of emerging markets are heavily reliant on nickel for building transport and infrastructure
• Forecasts suggest that the nickel supply was in deficit by up to 70,000 tonnes from the beginning of 2016

Why Horizonte Minerals?

Well, like I mentioned, they recently completed the two licences on their key nickel asset. This paves the way for exploration and the feasibility process to begin.

• The company will have a steady news flow over the next few months
• The company aim to deliver a new pre-feasibility next quarter
• The company will then commission a full feasibility study later in the year

Similar to a number of companies that are growing in the commodity downturn, Horizonte Minerals have a project that offers fantastic economics, which allows them to brave volatile market conditions.

• The company have £1.6 million in the bank
• Placings will need to be made, but having a healthy cash position is good
• Their Net Fixed Assets are valued at over £23 million, while the company’s market cap is £12.9 million
• There is no debt in the business
• Financially speaking, I think they look good value
• They also have two institutional funders: Teck Resource, Canada’s largest diversified resources company, and Henderson Global Investors
• Both of these institutions own large chunks of the company

The company looks sound to me. However, with resource companies, the company is only as good as the asset it owns.

• The company’s asset, Araguaia, is one of the largest nickel projects globally
• As a result, there is huge scope and volume here
• The project is potentially very high-grade, but extremely cost-efficient
• This is hugely important in the current conditions
• In a recent RNS, the CEO said: “the project will sit on the lower end of the global cost curve and the upper end of the grade curve with low capital intensity”
• The company will aim to prove this in the pre-feasibility study that is due for release next quarter
• If this is confirmed, the share price will certainly rise
• As always, a bit of a punt, but hey, these are penny stocks!

Conclusions

There you have it, two more stocks for the portfolio. They are resource stocks. It’s worth noting that it will be years before these two companies actually begin producing copper or nickel, so share price movement will be primarily powered by hype and hope.

Nevertheless, a huge percentage of listed penny stocks are resource companies. To create a portfolio that didn’t include them would be very, very difficult.