Commodity prices are booming again, and that’s great news for penny shares. As I pointed out to readers of Red Hot Penny Shares back in January, this is a key year for many natural resource hopefuls. It’s a great opportunity for investors to make some hefty gains.
Mining ventures that were started four or five years ago are now coming to fruition. The money has been raised, the commodity has been found and the mine has been built. These mining minnows have the product to sell which could turn them into next year’s big fish.
These miners can hardly believe their luck. Even in the middle of a global economic crisis, they are able to sell their new output at prices that are comparable – or in some cases even better – than those prevailing before the roof fell in on markets two years ago.
Take just two examples. The price of coal is some 40% above last year’s level. Prices for iron ore, meanwhile, are twice those quoted 12 months ago…
That is superb news for a host of penny share companies. Two that spring to mind are Wales’s last remaining coal producer Energybuild (LSE: EBG) and Anglesey Mining (LSE: AYM).
Energybuild shares have climbed by a massive 50% since January. Over at Anglesey the story is even more impressive. Since I first mentioned this one on 6 October last year, it’s up a staggering 282%. In fact, chief executive Bill Hooley has seen his company’s share price rise nearly ten-fold over the last 12 months!
Why the market thinks Anglesey’s 7m-tonne Parys deposit is ‘worthless’
If ever a share has proved the extraordinary power of penny shares Anglesey is it. Key to its success has been the rising price of iron ore and its 41% stake in Canadian iron ore miner Labrador Iron.
Labrador (TSE: LIM) is quoted on the Toronto Stock Exchange where at a price of $7.06 it is valued at C$306m. This gives a value of C$125m, or £80m, to Anglesey’s stake.
Given that this is some way above Anglesey’s London stock market value of £65m, this implies that its other mining interest, the Parys mountain deposit on the island of Anglesey, is worth less than nothing – which I am sure it is not.
Parys is a seven million tonne resource of copper, lead and zinc first exploited by the Romans. But having seen repeated attempts to revive the mine fall flat, the City has become wary.
Anglesey is planning to bring in a partner to finance the resumption of production. But this has become a minor issue, as the stake in Labrador has become the driving force of Anglesey’s share price. Let me tell you a bit about this Canadian interest.
Labrador has a 150m tonne iron ore resource in Canada’s premier iron ore belt, the Labrador trough to the north-east of Quebec. The company plans to start producing later this year, building up to an annual rate of six million tonnes.
This is a low-risk operation. This is partly thanks to the high quality of Labrador’s ore, but also because mining has been conducted here for over 50 years, so almost all the vital infrastructure has long been in place.
Because this is such a low-risk operation on the production side, the only big thing that Labrador (and by extension, Anglesey) needs to worry about is the price of iron ore. And to gauge this, we need to watch China.
Why Anglesey’s stock market value could be about to double
Canada’s east coast is closer to Europe than the world’s biggest supplier of iron ore, Brazil. With this freight advantage, Hooley expects the majority of Labrador’s output to be taken to Rotterdam. But the global price is dependent upon China.
Thanks to its plan to shift tens of millions of rural dwellers into its gleaming new cities, China has an insatiable need for iron and steel. Three-quarters of sea-borne supplies end up here.
The questions now are whether China can sustain its extraordinary growth rate and how much it will be prepared to pay for supplies of iron ore.
While predicting a price of over $100 per tonne for iron ore in 2011 and 2012, analysts at Canaccord Adams warn of “potential steel demand destruction as steel producers attempt to pass on substantially higher input prices during 2010”.
They have assumed that the price will subside to a long-term equilibrium price of $61 per tonne by 2014.
Even on this basis, though, they have set a 12-month target price for Labrador of C$10.80, which takes the value of Anglesey’s stake to some £123m – more than double today’s stock market value.
So Bill Hooley is smiling. He is bringing new supplies of iron ore to the market just as the world is prepared to pay a handsome price. Other small miners now find themselves in a similar position. No wonder the junior mining sector is hot.
• This article was written by Tom Bulford, and is taken from his free twice-weekly email
The Penny Sleuth