Early-stage mines promise pockets of value

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Mining shares listed on Aim, London’s junior market, are seeing the fifth consecutive year of a bull market but unexploited pockets of value still remain, according to a new report on the sector.

The report, by Edison investment research, argues that several Aim-listed mining companies have now kept their promises of building mines or are close to starting production, but this is not yet reflected in share prices.

Mike Wood, mining analyst at Edison, says these are likely to be better investments than exploration companies that have not yet found anything or are in the early stages of building a mine. By the time these ­early-stage groups are ready to start production the current commodity boom may have ended, while companies starting production now can cash in on strong metals prices, he says.

Edison, which specialises in equity research and is not a broker, highlights Angus & Ross, Aurum Mining, Caledon Resources, Mercator Gold and ZincOx as stocks that are due to start production soon, and Medusa Mining, Serabi Mining and Coal International as stocks that are in production but still undervalued by the market.

“The production of mined commodities is an entirely different business from exploration,” says Mr Wood. “Companies going into production deserve a rerating in the market. These companies will be selling into a starved market that is paying record-high prices for metal.”

The Aim mining sector has performed well this year, supported by high metals prices, and has so far escaped the sharp corrections in stock prices seen in the second quarters of 2005 and 2006. Ernst & Young’s index of the largest Aim mining stocks has gained about 23 per cent so far this year, outperforming the wider junior market and the whole London-listed mining sector.

Mr Wood says that “while the current high commodity prices are widely acknowledged to be unsustainable, we feel that the environment that spawned these prices will continue for some time and that a new long-term level for metal prices in excess of the historic range will emerge”.

Mining groups usually see a jump in their share price when they make a discovery, but then the share price tends to drift down while the slow work of building a mine takes place. Companies often benefit from another market rerating when they open their mines and start generating cash flows.

Investors have become increasingly discerning in recent years and are shying away from the more speculative explorers in favour of those with concrete assets. Although some of these ­early-stage ventures will hit the jackpot, Mr Wood says the chances are slim: “The oft-quoted statistic is that turning a geologic anomaly into an operating mine is at best a 1-100 chance.”

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