It’s not easy for a big company to think small, but for investors there could be interesting opportunities developing as the world’s mega-miners are forced to deal with junior explorers if they are to hit their growth targets, especially in battery metals.
BHP (ASX: BHP)’s failed attempt to acquire Canadian nickel hopeful Noront Resources is a perfect example of what’s happening at a corporate level.
Rio Tinto (ASX: RIO)’s plans to develop a small copper and gold mine at Winu in Western Australia is an example of a change at an operational level because small mines have previously been treated as more trouble than they’re worth.
With Noront, a bidding duel which pitted BHP against iron ore billionaire Andrew Forrest, saw the share price of the stock rise by 350% over 12 months as each side countered the other, driving Noront up from C$0.24 (A$0.26) a share to C$1.08 (A$1.18), an increase in value from C$134 million (A$148 million) to C$603 million (A$665 million).
Losing to Forrest will have been painful for BHP but the fact that it was even prepared to engage in a financial scuffle with a private opponent is an indication to how serious BHP is about growing its nickel business.
If BHP’s pursuit of a takeover target the size of a footnote in its petty cash accounts is a guide to future potential corporate activity by the big miners seeking access to exploration acreage, then Winu is a guide to big companies being prepared to invest in small projects normally associated with mining minnows.
A third example of this “think small to grow” approach is BHP’s direct investment in the undeveloped Kabanga nickel project in Tanzania, a pointer to a decades-old aversion of things Africa being swept aside in the hunt for metals exposed to energy transition.
There could be a lot more to come as the big miners address the challenge of growing in new directions at a time of high prices and difficulty in finding big targets.
Jumbo takeover bids impeded by governments
Over the past few weeks both BHP and Rio Tinto have been associated with a number of potential jumbo corporate transactions such as possible bids for rivals such as Glencore, Freeport and the base metals business (nickel and copper) of Brazil’s iron ore champion, Vale.
Government anti-monopoly regulators, including those in China, would have a lot to say about that sort of deal, which is prime reason for them not happening, just as Canada banned BHP’s 2008 bid for the big potash producer, Potash Corporation (now Nutrien), and China banned a proposal for BHP and Rio Tinto to merge in 2010 because it concentrated iron ore ownership.
This time around, the problem for the mining majors is that most of the big targets have unappealing features.
Glencore, for example, has an attractive base metals (copper and nickel) business but is also one of the world’s biggest producers of thermal coal, which BHP and Rio Tinto have been quitting to improve their environmental, social and governance (ESG) appeal.
Freeport’s best asset is the Grasberg copper mine in the highlands of Irian Jaya (west New Guinea) with significant waste disposal issues.
There has also been fresh speculation that BHP might take its renewed interest in Africa to a much higher level than Kabanga by teaming up with Robert Friedland, an American/Canadian billionaire who has his foot on an extensive array of copper assets in the Democratic Republic of Congo, a no-go country for most international investors.
The easiest big deal for BHP seems to be a merger with Nutrien, effectively revisiting the Potash Corp proposal but this time with the Canadian Government indicating that it would not oppose the transaction.
So, with big ticket corporate growth hard for the big miners at a time of increased government vigilance, the job for the sector leaders becomes one of taking greater risk in location, such as BHP’s Tanzanian deal, or to start rummaging around among the small fry – which is where investors might also get involved if it looks like a Noront repeat.
Finding opportunities close to bigger players
The trick in identifying small stocks which might appeal to one of the majors is to start looking for opportunities close to where the big boys have existing interests or are familiar with the geology and its potential to yield the keenly sought future facing metals, nickel and copper, preferably in world-class orebodies.
With BHP, that starts with stocks close to its Australian copper flagship, Olympic Dam in South Australia, where Coda Minerals (ASX: COD) has made a promising discovery at Elizabeth Creek, close to BHP’s Oak Dam discovery which is 65km south-west of Olympic Dam.
BHP’s nickel business in WA is also in need of future supplies of raw material, which is why there is a feeding frenzy among the small players with assets close to the home of Australian nickel, Kambalda.
The most interesting corporate action in WA nickel today is IGO (ASX: IGO)’s $1.1 billion friendly merger with Western Areas (ASX: WSA), a deal threatened by increased investment in Western Areas by Andrew Forrest who last week splashed out $31 million to lift his stake in IGO’s target to 9.1%.
Small cap hunters target copper in Queensland
Copper in Queensland, home to one of the world’s great base metal deposits at Mt Isa, is also a hunting ground for small explorers which are themselves potential targets for the majors.
Revolver Resources (ASX: RRR) has been attracting attention with return to the Dianne copper mine near Cairns in Queensland’s north, and the Osprey copper project north of Mt Isa.
While newly listed QMines (ASX: QML) is busy drilling out its Mt Chalmers copper-gold project 17km northeast of Rockhampton.
“Grubstaking” is another way for big companies to get exposure to exploration prospects which might be too small, or too risky, for their taste.
Examples include OZ Minerals (ASX: OZL) investing in Carnaby Resources (ASX: CNB), which is exploring the historic Greater Duchess project located 70km from Mt Isa with a pre-Christmas drill result of 41 metres at 4.1% copper and 0.5 grams per tonne of gold driving the stock up by 400% from $0.29 to last sales at $1.46.
Develop (ASX: DVP), the energy metals play led by former Northern Star boss, Bill Beament, which has taken a 20% stake in Anax Metals (ASX: ANX) a copper explorer which is looking to redevelop the mothballed Whim Creek copper mine in WA, and South32 (ASX: S32) which is using the small AusQuest (ASX: AQD) as an exploration leader on multiple projects with the latest being the Jubilee Lake nickel and copper prospect about 500km east of Kalgoorlie – close to the South Australian border.
As an investment thematic, following juniors which catch the eye of a big miner is high risk, but it does come with the comfort of knowing that people with greater technical knowledge than most of us have formed a view that an investment in the junior (or its project) is worthwhile.