How to pick the next top mining stocks


Transcription of Finance News Network Interview with CRU Group consultant and author, Professor Allan Trench.

Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me at the RIU Sydney Resources Round-Up is CRU consultant and author of a number of books on mining and investment, Professor Allan Trench. Allan, thanks for joining us.
Prof Allan Trench: Hi Lelde, good to be here.
Lelde Smits: Firstly, could you detail your experience?
Prof Allan Trench: Well, I’ve about 25 years experience in the mining sector and that’s ranged from operational roles at mine sites in gold and nickel, through to development roles building new mines, and actually out there trying to find the next generation of mines and exploration as well. That’s the industry side and then in the background as well some academic experience.
Lelde Smits: And which organisations or companies are you currently affiliated with?
Prof Allan Trench: I’m a consultant with CRU Group, that’s an independent metals and mining advisory. I’m a professor at the University of WA and of Curtin Graduate School of Business. I’m an independent director to a number of companies, some of whom are here at the conference today and that would be, Hot Chili Limited (ASX:HCH) would be one, which is actually a mining company not a meal, that’s a copper company in Chile. Trafford Resources Limited (ASX:TRF) is an iron ore company in South Australia and Kimberley Rare Earths Limited (ASX:KRE) which is a rare earths company, not surprisingly, in Western Australia.
Lelde Smits: Now Allan, you’ve just given a presentation on your commodities forecast to 2015, but how does one predict movements so far in advance?
Prof Allan Trench: Well it probably wouldn’t come as any surprise really Lelde, to any of the economists out there: One looks at the supply side and then one looks at the demand side. On the supply side you forecast what existing mines will produce. Some will expand, some will deplete. You look then at the next generation of projects and then you even look so far as exploration, that’s on supply.
On the demand side you come at it from two ways there again. From the macro-economic drivers of demand; things like the Chinese urbanisation. And then you also look from a micro-economic perspective on the demand side; how much metal do you need on cars, in houses, in PDAs, things of that nature. So you come at from both ways.
Lelde Smits: So could you paint a picture for commodities between now and 2015?
Prof Allan Trench: It’s a complex picture. What we’ve just presented is a summary of 23 different minerals markets, and some of those will go up and down between now and 2015. So the important thing is to be aware that metals do go up and down on a year by year basis. This year, 2012, as a basket of metals, we’re predicting a 5-10 per cent increase in prices. And, that increases to about 15 per cent-plus by 2015. But, there are fluctuations within those numbers.
Lelde Smits: So which commodities do you see as being stand-out performers?
Prof Allan Trench: Actually, it’s the LME metals, that means the London Metals Exchange, which are typically the base metals. So, that’s things like tin, which may not be on everyone’s radar. Zinc, again, sometimes unloved but shouldn’t be. And, then you’re into the normal main market, things like copper for example, and nickel, quite good too even though nickel has been weak a little bit recently, we’re expecting that to pick up again.
Lelde Smits: And what sort of price increases do you think we’re looking at here?
Prof Allan Trench: Across the basket of metals it’s in the order of 10-15 per cent. But, there are some metals that stand out substantially more than that. So, we may see many 10s of per cents. Unfortunately, from CRU Group’s perspective, I’m not allowed to give absolute numbers out on TV because clients pay a lot of money for those things. But, you’ll see 10 per cent to even over 50 per cent for potentially the likes of tin and even zinc and palladium.
Lelde Smits: And which commodities are due for a correction?
Prof Allan Trench: I wouldn’t say a harsh correction, but we’re looking at some metals and bulk commodities, that may come off in the 10-15 per cent range over that period. So, things like coking coal and iron ore, which have done very, very well, we’re expecting to soften a little bit. Doesn’t mean to say you can’t make very good money in coking coal and iron ore, it’s just that the price might come off just a little bit in the coming years.
Lelde Smits: Allan, you’re latest book is titled “Next top mining shares”, so why do you believe investors should be looking at mining stocks?
Prof Allan Trench: It’s a great opportunity to get in early, quite frankly. It’s almost like being a venture capitalist. They’re fairly small companies. Some of these companies will go up 10-fold in the next few years. Others of them will unfortunately not do very well. So investors should spread their risk and have a reasonable basket of companies, 10 or more you might say, and you might expect two or three of those 10 companies to really stand out in performance. Unfortunately the other six or seven will be where they are now or perhaps lower in years to come. So, you’ve got to invest in enough companies to find those real diamonds in the rough you might say.
Lelde Smits: So how and where should investors look for value in mining stocks?
Prof Allan Trench: I think what the reasonably risk averse way to do that would be, right now, the markets been weak in recent months, you can find companies will quite a lot of cash that are trading very close to their cash bracket. So, you can find a company with a $10 million market cap, which in some cases has got more than $10 million in cash and that means that company doesn’t have to go back to the market again and there’s an asymmetric risk profile which is wonderful, it can go up quite a lot but the cash will stop it going down.   
Lelde Smits: Now the Federal Government’s carbon and mining taxes will come into effect from July 1, 2012. How do you anticipate the new taxes will impact the resources industry?
Prof Allan Trench: Take a simple numerical case, where if you had a company with a $100 million cost base, all exposed to the carbon tax, and typically diesel, and it would typically add about 2-3 per cent to a cost base, just from a carbon tax perspective. If it’s a fairly high cost marginal mine, and they’re the smaller miners typically, it can be as much as a 20-30 per cent tax on their cash flow. So the carbon tax is certainly a big impost.
For the MRRT [Minerals Resource Rent Tax], the iron ore and coking coal tax. That is specific obviously to those commodities and it depends there on how they have handled their accounts on the treatment of their assets as to how much of an impost it is in the near term.
Lelde Smits: And which tax concerns you the most?
Prof Allan Trench: The carbon tax, in terms of its direct impact on the cost base through the diesel costs.
Lelde Smits: Finally Allan, which stocks or sectors do you believe could benefit from these new taxes?
Prof Allan Trench: Well, it’s interesting, I’m looking at some pre-IPO investments at the present time. They are actually solar investments, but they are solar investments actually linked to the mining space. So, what people are looking to do now, and I think miners are being smart about this too, is to augment their diesel powered power stations that process ore at the mines, with solar powered bolt-on stations as well. It’s a win-win, good for the environment and lowers the power costs of the mine sights. So I think we may see some opportunities coming to the market of that nature in the near future.
Lelde Smits: Allan Trench, thanks so much for your insights today.
Prof Allan Trench: Pleasure Lelde, pleasure.

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