Market Carnage everywhere you look.
Today’s market conditions present an opportunity to buy into a range of quality stocks at levels perhaps never to be seen again. The small cap resources index is at lows not seen since the deep, dark depths of the GFC.
Don’t you wish you had been buying during the GFC and selling when everything rebounded?
We are taking this recent market bloodbath in small cap resource stocks as an opportunity to build a portfolio of quality junior resource companies that have been unfairly pummelled by a fearful market. We are buying right now, and enjoying every minute of it.
But the main question is: Which commodity will rebound first?
How can you be sure that your investment will take advantage of which ever commodity comes back first? They won’t all surge back at the same time.
What if Gold rebounds next month? Or what if Iron Ore makes a rampant comeback? How about a worldwide Tin shortage that causes Tin prices to skyrocket? Will you be ready to ride “the great Manganese surge”?
How can you go about investing in a diversified portfolio of exploration opportunities with high potential, ranging across different commodities, in various countries? AND how can you ensure they are carefully evaluated and chosen by experienced mining and exploration experts, who have seen commodity price cycles come and go a dozen times, and can play them like a violin?
Is that too much to ask? …and how is an octopus going to help? (Don’t worry, I’ll explain later).
The $10 million company we are presenting here gives you all of this, by using an agile and entrepreneurial business model that allows them to “hedge their bets” on which commodity price will rebound first, and spreading their risk while commodities are getting hammered in the market.
This company deals in mineral exploration assets – either by directly owning (and adding value to) these exploration assets, or by owning stakes in other exploration companies.
They have spread their investments across a diversified portfolio, with their assets often acquired during times of low commodity prices and usually from distressed, panic sellers. Their portfolio of exploration assets covers many different commodities and countries, and they add re-sale value to their stable of assets (using their own funds) and their in house team of experts.
When a particular commodity comes back into fashion, this company has the ability to offload their relevant investment in the surging commodity to eager buyers, and uses the profits to add further value to their existing asset base… ready for the next commodity boom.
One of their deals saw them turn $2 million into $17 million.
This company also owns an asset that is about to start producing cash flow in the near future. Regular readers of The Next Mining Boom will know that we prefer companies with imminent CASH FLOW, especially in this climate when cash is hard to come by for exploration companies.
The looming cash flow about to be enjoyed by this company has been 6 years in the making (with a whole lot of capital expenditure during that time) and you are hearing about it today, when the share price is at near all-time lows… excellent timing for The Next Mining Boom readers, just don’t tell the investors who have been waiting around for 6 years!
The company is called Trafford Resources (ASX:TRF). Put them on your watch list and thank us later.
TRF is currently trading at multi year lows of 10c, and much like all other mineral exploration juniors, has taken a royal pounding in recent times.
TRF are not relying on any one single project or commodity. Having interests in varying projects allows TRF to hedge its bets and benefit from the next commodity boom. TRF can be viewed as an investment fund run by experienced miners able to identify excellent value in mining assets, and use their experience to leverage commodity price cycles to their advantage. You could say they have their “fingers” in many pies, or should I say “tentacles…” (I promise this will be explained soon)
Can you imagine what would happen to a company like TRF if there was a resurgence in commodities across the board? They would probably be trading closer to $2 like they were a few years ago, during the heady days of when commodities were in favour.
TRF is certainly a stock to be invested in if you want to enjoy amplified gains when commodities broadly rebound.
Regular readers will remember ASX:OGX - The Next Mining Boom called OGX at 14c a few months ago and it has traded as high as 40c (170% up!) after discovering what could be a MAJOR silver deposit on re-analysing some of their recent core samples…. TRF owns 16% of OGX, which is what originally brought TRF to our attention.
By now I am sure you are interested to hear about the other assets in TRF’s super diversified, international pan-commodity portfolio, and finally find out why we keep alluding to the TRF business model as an octopus – each different asset is represented by a tentacle, and when an asset is monetised (either by sale or by generating cash flow), the funds go into the head of the octopus, and flow through to each tentacle to add more value to each asset, ready for a lucrative sale when the time is right.
Key Tentacle 1: Wilcherry Hill (Iron Ore, South Australia). TRF owns ~40% of Wilcherry Hill, an iron ore project projected to be in production by the end of 2013 with ~$15m of capex required.
Key Tentacle 2: OGX (Gold, Brazil). TRF owns a 16% stake in OGX, an exciting up and coming precious metals play in South America.
Key Tentacle 3: Challenger JV (Gold, South Australia). TRF has a 51% interest in a JV with Kingsgate for exploration ground surrounding the Challenger gold mine.
Key Tentacle 4: Wilcherry Hill Base Metals (multi-commodity, South Australia). TRF recently reported a discovery of high grade, near surface tin at the Zealous prospect, Wilcherry Hill . Further, TRF has recently announced a 2,000 metre drilling program at Wilcherry Hill targeting high grade tin, tungsten and silver with drilling to start in June. Recent drilling also intersected potential economic mining widths of Manganese (Mn) at Wilcherry Hil.
Tentacle 5: Jumbuck (Gold, South Australia). TRF has acquired exploration licences surrounding the Challenger Gold Deposit in northern South Australia. Most of the tenements are being held in joint ventures with various other companies and totals 2,023km2 in area.
Tentacle 6: Lynas Find (gold/base metals, Western Australia) Alloy Resources Limited (ASX: AYR) has recently farmed into TRF's Lynas Find Gold Project in the West Pilbara region of Western Australia. If Alloy Resources proceeds through to gold production, Trafford will benefit from direct ownership of 20% of any gold produced.
Tentacle 7: Independence group JV (Iron ore, Western Australia). TRF has signed a letter agreement with Independence Group NL (ASX: IGO) for a joint venture allowing Trafford can earn up to 80% of the iron ore rights in two Mid-West located projects. The projects are known as Twin Peaks and Moorarie, and are located northwest of Geraldton.
Tentacle 8: New opportunities. With TRF’s octopus strategy and recent entry into the South American market, we imagine that TRF is looking at further diversifying its asset and investment base.
We are interested in TRF’s recent entrance into South America – check out our article titled ‘Wave of mining juniors entering South America’
About TRF
TRF is a $10m market cap company listed on the ASX with strategic assets across iron ore, base metals and gold in Australia and precious metals in South America.
TRF has been added to our investment portfolio because of its focus on near term cash flow generation, a priority for our investments in a market with growth concerns. TRF’s diversified investment base and their successful management team which recently delivered a $17m return from a $2m investment in Indonesia (Robust Resources), are compelling attributes of the company.
The TRF management team has maintained a tight capital structure during the 6 years the company has been listed. Unlike many junior exploration companies that issue stock to fund their projects, TRF have mostly funded their exploration and development internally, which is a highly desirable management trait in good times, and even more so when the market turns for the worse.
TRF management refer to their company structure as an ‘octopus strategy’ and aim to be a self-funded explorer/developer.
Early cash flow is very important when we assess a potential investment in this market. After 6 years, TRF is finally almost in a position to deliver on cash flow. Investing in TRF provides an opportunity to get in at the ‘ground floor’ of cash flow delivery. What the team at The Next Mining Boom find even more enticing is that TRF shares are trading at the lowest they have ever been! This is surprising given that TRF has a cash flow target set for the end of 2013 (with its IronClad JV at Wilcherry Hill).
TRF’s management has touted 2013 as the year that Trafford comes of age!
The Octopus: Unique and Agile Business Model
Let’s talk more about the TRF “Octopus model” and take a closer look at some of the main “tentacles” in the TRF asset portfolio.
Using the “Octopus” analogy, each tentacle represents one of TRF’s investments, which range from base and precious metals to bulk commodity iron ore, international assets and the company’s own exploration projects.
You all know about reducing risk through diversification on an investment level. TRF offers this benefit on a company level.
Instead of fully investing in its own mine sites for exploration and development, TRF takes substantial shareholdings in other exploration companies which it has identified as having a high prospect of returning value.
TRF also looks to structure JV’s with strategic partners. This allows TRF to spread its investment risk across many mining projects instead of just investing in one or two of its own (like most junior exploration companies).
This octopus strategy concurrently increases the breadth of exposure to a wider potential of increases in different commodity pricing while limiting the downside if commodity prices slide and projects don’t go ahead.
The management team at TRF are much more skilled than the average investor (technically and in experience) at identifying the best projects. TRF management are doing the hard yards, so TRF investors don’t need to.
Managing Director Ian Finch calls it “the insurance policy”. The insurance policy was born out of the global financial crisis (GFC) as a way for TRF to counter economic downturns and insulate itself from market fluctuations.
Other companies who have successfully used this diversification strategy are Western Mining (ASX:WMC) in the mining sector (eventually acquired by BHP), while the well-known Wesfarmers is a useful example for investors more familiar with the retail space.
TRF plans to self-fund their exploration and development rather than issuing capital in the market, which dilutes shareholder value – This is where the octopus strategy comes in:
Have a read of this article on TRF
"The strategy is that the arms of the Trafford octopus feed cash back to the head so that we can do more and more effective exploration and find more mines, and ultimately find more arms of the octopus," Finch explained. “Chinese astrologists may think this is the year of the snake, but it’s not. It’s the year of the octopus and the year that Trafford comes of age.”
Here is a brief summary of the four “key tentacles” in the TRF octopus which will be explained in more detail later:
Key Tentacle 1: IronClad JV at Wilcherry Hill.This “coming of age” mentioned in the above quote refers to achieving near term production (and therefore cash flow) from the Wilcherry Hill JV with IronClad. This project has been 6 years in the making.
TRF own 20% of Wilcherry Hill at an asset level and own 27% of Ironclad Mining who own the remaining 80% of the asset. TRF management expects that by the end of 2013, this project will be producing 1mtpa of iron ore. At today’s price, and given the expected cost of production, this could yield a cashflow of approximately $12m for TRF in 2014 (TRF current market cap sits at $10m).
This cash flow will provide plenty of “food for the octopus”.
Production at Wilcherry Hill is expected to double by 2015, while stage 2 (expected in 2016) is targeting production of 2-4mtpa. We like the near term focus on cash flow and the growth in production over the course of the next few years is extremely encouraging.
Key Tentacle 2: Orinoco Gold
TRF’s past success with Robust Resources (which was sold for $17m after a $2m investment in 2008) is a testament to the effectiveness of the octopus strategy. Robust Resources was an Indonesian-focused exploration play in which TRF took a major shareholding. This illustrates how TRF’s management successfully built value and is able to fund its exploration and development intentions with limited access to new market funding.
TRF is aiming to replicate this multi-bagger result with their recent investment in Orinoco Gold (ASX:OGX). TRF purchased a 20% stake in OGX in 2012 (now 16% after some small dilution)..
This investment in OGX has helped open the door to the Latin American mining and exploration market for TRF. Regular readers will know that we are extremely bullish on OGX (we called it at 14c)
Key Tentacle 3: Challenger JV
TRF has also secured 8000km² of land surrounding the recently opened Woomera region in South Australia where the Challenger Gold mine is located. The Challenger Gold mine is a multimillion ounce gold deposit operated by Kingsgate Consolidated (ASX:KCN).
TRF has a 51% interest in a JV with Kingsgate for exploration ground surrounding the Challenger gold mine.
We believe that there is significant potential to identify another “Challenger” style multimillion ounce deposit while the area is also prospective for Iron Ore, Nickel and other Base Metals.
Key Tentacle 4: Wilcherry Hill Base Metals
TRF’s work in creating the developing Wilcherry Hill Iron Ore Project has identified many significant, gold, copper, silver, lead and zinc, tin and tungsten targets.
On 9 May Trafford announced that 7m @ 3.16% tin had been intersected in one of 10 holes recently drilled at the Zealous prospect in the Wilcherry Hill Project, South Australia, with the results of the further 9 holes to come. This is high grade, shallow tin.
On 14 May the Company announced a 2,000 metre drilling program targeting high grade tin, tungsten and silver at Wilcherry Hill, with drilling to start in June.
TRF is prioritising its base and precious metals targets for early drilling with its strategy to focus first on the high value commodities gold, silver, tin and tungsten.
Analysis of TRF using our Pre-Investment Check List
The Next Mining Boom Pre-Investment Checklist Criteria has been carefully by a team of contributors that has been successfully investing and trading mining stocks for many years.
The check list lists what to look for prior to making any investment in a speculative mining stock.
You can find out about the full checklist in our eBook here:
We will be assessing TRF against a select few of the checklist criteria:
Check List Criteria - Assets: What assets do the company own? Which asset is most important? Is the asset base diversified?
TRF hold a number of investments at both an asset level and company level across a number of commodities and locations.
Before we get into a more detailed analysis of TRF’s most important assets and those that are of particular interest to us, here is a quick reminder of what TRF’s assets and its ‘tentacles’ of its Octopus are:
Let’s first focus on TRF’s Australian projects of interest to us:
TRF have a significant presence in South Australia where many majors are operating in the vicinity:
Interestingly, TRF have a major landholding in the region, with an area in size similar to that of majors Rio Tinto and OZ Minerals:
IRONCLAD MINING (27%)/WILCHERRY HILL (20%)
The Wilcherry Hill iron ore project in South Australia is an asset that TRF has been heavily involved with over the past six years.
TRF own 20% of Wilcherry Hill at an asset level;
TRF own 27% of Ironclad Mining who own the remaining 80% of the asset
This means that TRF hold an interest of just over 40% in the Wilcherry Hill iron ore project.
It has taken six years for TRF to get to a point where Wilcherry Hill is on the verge of producing cashflow. Over this time, approximately $70m has been spent on the project.
Approximately $15m is still required to get into production. This will be to complete works at TRF’s designated port and for storage areas and roads etc.
We are sure some current shareholders have been about frustrated over the length in time it has taken to develop their asset to this point.
However we are looking at this as an investment NOW where significant capex has already been spent, the hard yards have been done, and cashflow is about to be PRODUCED.
The share price has never been lower for a new entry (and was once as high as $2.00) and TRF are so close to getting there.
The Wilcherry Hill JV aims to produce approximately 1mtpa initially of iron ore, with exports anticipated to start before the end of the 2013 calendar year.
Wilcherry Hill has a number of ‘stages’ as can be seen below:
Stage One
At today’s iron ore pricing of ~$120/t, approximately $30m in PROFIT BEFORE TAX from the project is expected in 2014, if we assume TRF receive $110/t for its product and operating costs of $80/t.
With TRF’s ~40% stake, this would translate to ~$12m to TRF, already more than TRF’s market cap.
Of course, operating costs of $80/t are not small and we have seen the iron ore price drift off earlier in the year to around these levels with a sharp snap back to $140/t before settling at current levels of ~$120/t.
However, the project is on the VERGE of producing cash flow for shareholders, with the share price at multi year lows AFTER significant capex has been spent.
Operating costs will go lower after Stage One, which gives reassurance to the long term viability once scale is achieved. Costs could potentially go towards capitalising the Pilbara project with greater scale as TRF goes along its stages.
This has been TRF’s plan all along. Get in to production with the lowest possible capital expenditure. Get in to business, get operating, then reduce costs.
This is a smart plan compared to many iron ore projects with capex in the hundreds of millions, or even billions just to get started.
Many market pundits of course anticipate the iron ore price to drift lower, with new supply anticipated to come on board in the next few years. However it is worth noting that many projects and expansion plans have been delayed or cancelled (and will the big West African projects even get off the ground?).
Of course many commentators are bearish too on the Chinese market and its demand for iron ore.
However many forget the effect a falling Australian dollar has on revenues for iron ore producers (It’s a positive and offsetting effect if you don’t know already). While long term iron ore prices are predicted to lower, so too is the Australian dollar, something that many fail to mention or ignore or just don’t realise.
These are all risks one has to take account of and everyone is entitled to their opinion. However we take each opinion on its merits and weigh up the pros and cons of any investment decision and near term cashflow is attractive to us right now given a tiny market cap and multiple projects with potential.
After all, there have been plenty of ‘expert’s that have been wrong in the past by ‘making big calls’.
‘Gold to $2000’ or ‘oil to $200’ by major investment banks with teams of ‘experts’ to predict commodity pricing doesn’t sound too unfamiliar after all.
We’ll give the basic outlines of the rest of TRF’s stages. Our focus is on TRF getting in to production at low capital costs, with expansion bringing down operating costs in the long term.
TRF is aiming to ‘start small’ then expand.
Stage 1b
Stage 1b involves the addition of a gravity separator to bring production from 1mtpa to 2mtpa. This will be at a cost of around $40m
Stage 2
Stage 2 involves the addition of a wet beneficiation plant to bring production from 2mtpa to 4mtpa
Stage 3
Stage 3 is TRF’s ultimate goal, with a target of 10-12mtpa at costs comparable to the Pilbara region.
Other commodities at Wilcherry Hill
Trafford holds exploration rights to 9,770km2 in South Australia’s Gawler Craton, which is host to some of Australia’s most significant mines, notably BHP Billiton’s Olympic Dam copper, gold and uranium mine, the Prominent Hill copper and gold mine and the Challenger Gold Mine. TRF hold more exploration ground in this area that all but two other companies, one of which is BHP.
TRF’s work in developing Wilcherry Hill Iron Ore Project has identified many significant, gold, copper, silver, lead and zinc, tin and tungsten targets
TRF had an intriguing tin discovery, which rallied the share price in early May.
For those that don’t know, tin has the highest price amongst the mainstream London Metal Exchange-traded metals at ~$20,000/t. This is even higher than nickel which is interesting given the markets current fascination with Nickel after success stories such as SIR.
The assays have shown high grades at very low depths (50m).
We expect further assays which could prove to be a catalyst to the share price:
TRF also delivered some interesting manganese results in early June:
CHALLENGER JV:
The Challenger Gold mine in South Australia is a multimillion ounce gold deposit operated by the ~$230m market cap Kingsgate Consolidated (ASX:KCN).
TRF has a 51% interest in a JV with Kingsgate for exploration ground surrounding the Challenger gold mine:
Access to KCN’s success and expertise in the area through the JV is a huge positive for TRF
Of 300 gold targets identified in the 1990’s, only 30 of them have had any further investigation.
As a result, there is significant potential in the area for another ‘Challenger like deposit’. But let’s wait and see.
Do keep in mind that TRF has ‘first right of refusal’ on the plant at Challenger, should they make a significant discovery.
SOUTH AMERICA
The team here at The Next Mining Boom is very excited about exploration in South America by ASX juniors as outlined in our previous article “Wave of Mining Juniors Entering South America”
A recent TRF strategy has been to get a toe hold into the South American market. It has done this with an ~16% holding of Orinoco Gold (ASX:OGX), an exciting up and coming high grade gold/silver explorer in Brazil with multimillion ounce potential.
We recently published on OGX. Here’s our initial article in case you missed it:
and our most recent update:
Since we originally published in early April on OGX (at 14c) it has been something of a rollercoaster ride. OGX rose to a high of 40c on the back of a high grade silver deposit discovery on top of its potentially multimillion high grade gold deposit:
OGX has since settled back around 20c where it was prior to this original silver hit as a result of a second silver hole disappointing a market with very high expectations:
We suggest you stay tuned for more developments as there is eight holes to come which OGX believes will return high grade poly metallic results:
Market Cap: Does the company have a small market capitalization (<$200 million)? How many shares are on issue? Are there any options or warrants?
TRF was established in 2006 and has a history of low capital raisings in its own right.
TRF has gone from 40m shares to 100m shares in seven years.
This is atypical for junior miners, particularly over such a long period. Many junior miners would issue multiples of TRF over the same period of time to fund exploration etc.
Part of the reason for this is the previous success of TRF’s ‘Octopus strategy’ and its aim to become a self-funded explorer/developer in its own right.
TRF invested $2.2m in Indonesian focussed Robust Resources during the depths of the GFC in 2008 and later sold the investment for ~$17m. This successfully diverted raising funds via capital raisings.
TRF currently has $2.5 in cash on hand (post raisings) after they successfully raised $700k earlier this month:
TRF is in the process of an SPP which will eventually raise $1.5m (bringing TRF’s cash balance to $2.5m) enabling TRF to progress exploration at Wilcherry Hill.
With the ‘Octopus strategy’ and many different moving parts, it is important to know how TRF is able to fund each asset/project on an ongoing basis without requiring significant cash as:
- Many assets are held at a company level rather than asset level (ie TRF aren’t forced to spend money on these projects);
- Some projects do not require any spending to maintain TRF’s holding (eg. Challenger JV)
Infrastructure: Is the company’s asset close to infrastructure: roads, rail etc?
When analyzing a potential addition to our portfolio, the team at The Next Mining Boom would generally shy away from assets without defined infrastructure solutions.
Logistics and infrastructure are key to the development of projects, particularly for a high volume product such as iron ore.
From Wilcherry hill to TRF’s port at ‘Lucky Bay’ in South Australia is around a 150km journey. This involves a 40km trip from Wilcherry Hill to bitumen roads, then 110kms to port. It is NOT a stranded asset like many large iron ore projects around the world.
It also is worth noting that Onesteel is operating just down the road from TRF:
TRF’s intended port at Lucky Bay is only 4-5m deep.
Iron ore followers will know that this is not deep enough for cape size vessels (to export iron ore) to operate in.
HOWEVER, TRF has a solution to this.
Check this out:
[responsive_youtube PxwFVzcuk9M norel]
TRF plans to deliver its ore some 150km by road to port for shipment in containers by barge to vessels anchored offshore (where the water is deep enough) for export.
This will be a significant achievement, as the entire process from start to finish is unique to TRF and has not been done before. Trial runs have been completed successfully.
Followers of TRF will know this has taken some time and patience however that’s usually the case with innovation.
Once completed and proven, TRF will have done something that no one else in the world has achieved.
Pre-Investment Checklist Criteria What is the track record of management? Does management own stock in the company? Are they buying on market? How much are directors and management being paid? Is the company a ‘lifestyle company’?
The management of a junior mining company is almost as important as the asset itself. An experienced management team that has ‘been there, done that in charge of a junior company is the first thing the team at The Next Mining Boom look for in a potential investment.
We have mentioned TRF’s investment in Robust Resources previously, an investment that turned $2m in to $17m.
This is a testament to the ‘Octopus strategy’, its method in reducing shareholder dilution and a management team with a vision.
Here is the TRF team:
Price Catalysts: Are there upcoming catalysts?
As a result of TRF’s multiple investments due to its ‘Octopus strategy’ there are a number of near term catalysts for TRF, the most important and exciting being:
Production of cashflow from Wilcherry Hill
Exploration results from OGX’s recent drilling which intersected silver
Follow up tin assays from Willcherry Hilll
Here is a great article with TRF MD Ian Finch describing 2013 as ‘the year of the Octopus’ which is well worth a read:
Conclusion
The team at The Next Mining Boom is taking this once in a lifetime opportunity to secure bargain basement positions in quality junior companies during times of panic selling, and TRF is no exception.
If you are reading this from outside of Australia and want to trade on the ASX, send us an email and we’ll put you in touch with a broker who can assist (please consult your advisor first).
Remember to always seek professional advice and this this is just our opinion on TRF. Do not take this as investment advice. All information presented in this article is publicly available.
If you are interested you can like TRF on facebook and follow TRF on twitter
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