Value Investing Case Study: How to analyse a business before investing
19 Nov 2020
How do you determine if a single company would make a good investment? Datt Capital specialises in analysing companies for investment and below they map out a model for value investing through the case study of Strategic Energy Resources.
High risk could bring high rewards in this frontier greenfield exploration
Strategic Energy Resources (‘SER’) are a company specialising in frontier and undercover mineral exploration. We find this junior exploration opportunity compelling for a number of reasons: namely the strong technical management team, the ability to generate projects in regions prospective for tier 1 mineral deposits, and the company’s existing suite of high-quality mineral assets all at a relatively low market valuation.
Canobie Province
SER’s flagship project is what we refer to as the Canobie Province, an enormous land holding of approximately 1500 square km in Northern Queensland. The Canobie Province encompasses the entire northern belt of the Mt Isa Eastern Succession.
Contextually, the Mt Isa Province is one of the most heavily mineralised terranes globally and geophysics clearly show that these key structures continue to trend north under sedimentary cover to the areas now held by SER. Indeed the large Ernst Henry IOCG mineral complex lies under 60m of cover to the north east of Cloncurry, along the same trend as Canobie. The total resource endowment of Ernst Henry is well over 200 million tonnes of ore, and has been continuously mined since 1997. This provides an idea of the size of the potential opportunity at hand at Canobie.
The largest operational challenge in the Canobie area is the depth of cover, around 400 metres in thickness; also the fact that the cover is conductive which makes it difficult to use conventional electrical geophysics. Despite these challenges, the region has always been regarded as a promising, frontier locality for potential Tier 1 mineral deposits – similar to how the Paterson Province in Western Australia was once regarded before the discovery of Rio Tinto’s Winu and Newcrest’s Haverion discoveries.
Our analysis of historical drill results in the district showed that an extraordinarily large percentage of holes hit some form of mineralisation; even more extraordinary when considering the ‘blind’ nature of the drilling and mineralisation due to the depth of cover. Our interpretation of this data leads us to believe that the Canobie Province encompasses an extremely fertile mineral district whose scale is yet to be revealed. This is further reinforced by studies conducted by Geoscience Australia, which rate the Canobie Province as possessing the highest potential for Iron Oxide Copper Gold (IOCG) deposits. Minerals discovered to date include high-grade gold, nickel-copper sulphides as well as anomalous uranium, platinum, and rare earths.
The most advanced prospect within the Canobie Province is the Saxby Gold Project, where 200 metres of strike has been defined to date at relatively high gold grades between 10 and 15 grams per tonne along with lower grades of copper. Intriguingly, the key structure has not yet been tested and the prospect remains open to the north, south and the west. In addition, studies by previous explorers indicate the gold is largely non-refractory in nature which is positive. Favourable metallurgy can be a critical factor in determining the commerciality of mineral deposits. SER expect to commence the next drilling campaign at Saxby sometime this month.
The Tea Tree nickel-copper prospect is another lead which we find very interesting. Historical drilled by Mt Isa Mines (MIM) and Anglo American, Tea Tree has been considered by past explorers to be prospective for a Voisey’s Bay/Norilsk (large-scale) style, magmatic nickel-copper system given the size of the gravity anomaly which extends around 8km in length. Past exploration holes have hit large intersects of gabbro host rock, some over 300m in length, with anomalous nickel-copper sulphides. In addition, the historical holes have encountered mineralisation over a strike length over 2km in length, definitively proving the potential for a large scale system at depth. Anglo American who last explored the prospect concluded that the gravity anomaly could be explained by a deeper, yet to be tested intrusion. There is clearly more work to be done here.
Other exploration assets
SER also hold 2 other projects in Tier 1 locations, Billa Kallina situated within the Olympic IOCG Province in South Australia and Tennant Creek East in the Northern Territory.
The Olympic IOCG Province hold numerous Tier 1 mineral deposits such the world scale Olympic Dam Mine, Oak Dam West (both BHP), Prominent Hill, Carrapateena (both OZL) etc. Successful exploration in this region has typically been via targeting using gravity and magnetic surveys along with other conventional exploration techniques. Billa Kallina is a long recognised prospect defined by gravity and magnetics however, to date untested due to the depth of cover. We expect this anomaly to be tested in the coming months.
Tennant Creek has a long and proud mining history. Today, much of the future exploration activity is expected to be directed towards the East. This area has recently been opened up for mineral explorers with a moratorium being lifted in late 2019. This has led to a land grab in the region with many companies, including Newcrest, securing ground. Interestingly, Newcrest and SER appear to have secured the most prospective ground for IOCG potential according to Geoscience Australia. We also note that the National Drilling Initiative will be drilling several holes on a tenement bounded by Newcrest and SER which should provide valuable geological information to all explorers in the region.
SER also hold a small suite of passive and legacy assets encompassing a joint venture with FMG in South Australia (Myall Creek), a mineral sands resource in Ambergate and an investment in a private graphene company.
In conclusion, we believe that the value of SER is underpinned by the quality of its exploration assets all situated in regions where the potential for Tier 1 mineral discoveries is high. Its suite of passive and legacy assets can also potentially be monetised in time. The strong emphasis on value creation via project generation and exploration in genuine Tier 1 potential locations is attractive and has the potential to provide highly asymmetric returns for shareholders in the case of exploration success. Several value accretive catalysts lie ahead over the next 6 months via the completion of drilling programs and associated targeting works.
Original article published at Datt Capital 2020 and repurposed with permission. Main Image Source: Gopixa (Shutterstock)
About Emanuel Datt
Emanuel is the Principal of Datt Capital, a boutique Melbourne-based investment manager focused on identifying high growth and special situation opportunities. Emanuel has obtained a Bachelor of Commerce (International Business) from Deakin University, a Master in Applied Finance (Corporate Finance) from Macquarie University and is a graduate and current member of the Australian Institute of Company Directors.
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