​The relationship between Adriatic Metals and Sandfire Resources has been complex. In theory, the relationship should be positive; a junior miner with a world class development project allied and supported by a credible and proven Australian mine builder and operator. In practice, the relationship has seemingly been complicated by the consistent increase of Sandfire's holding in Adriatic and presumably it's influence.

We thought it would be an interesting exercise to go through Adriatic's disclosures to observe how the relationship has developed around Sandfire's actions.

The relationship began innocuously in May 2018 with both companies seemingly enthused by the strategic and technical expertise offered by Sandfire to assist in progressing Adriatic's projects. Sandfire became the largest shareholder outside the management team as part of this deal and were afforded an anti-dilution right under certain circumstances.

​The ASX granted a waiver of its listing rule 6.18 under certain conditions in August 2018.

​Adriatic Metals conducts its first capital raise post listing, raising $10 million with Sandfire participating to maintain its stake in November 2018.

Between June and August 2019, Sandfire raises its stake in Adriatic by buying shares on market. It's interest in Adriatic rises from 7.7% to 12.8%.

Adriatic conduct their next capital raise of $25 million, with Sandfire subscribing for their pro-rata interest.

​Sandfire appoint a nominee, John Richards, a respected Australian mining director to Adriatic's board in November 2019.

ASX amend their listing rules in December 2019. In particular, the rules around strategic relationships and anti-dilution rights are significantly amended effectively invalidating prior waivers granted.

​The ASX discloses that its needs to be satisfied that the basis for the original waiver granted still holds true and a genuine strategic relationship still exists between the entities. In addition, the ASX must also need to be satisfied that the terms of the anti-dilution right remain appropriate and equitable to minority shareholders. 

Notably, the waiver must be initiated by the entity that held the benefit of the anti-dilution right, ie. Sandfire.

Source: ASX guidance note 25

Sandfire continue to increase their stake in Adriatic on-market to 15.8%.
​Sandfire do not disclose the change in interest to the ASX but rather Adriatic disclose the change of Sandfire's interest in December 2019.

Sandfire withdraw the nomination of John Richards from the Adriatic board who consequently resigns in July 2020.

​Sandfire commence litigation against Adriatic, alleging contraventions of the strategic agreement between the two companies in July 2020.

This puts Adriatic shareholders in a peculiar position. We have Sandfire, a substantial shareholder of the company, alleging that Adriatic has contravened the strategic agreement between the two companies - without any specific discussion of what particular points of the agreement have been contravened. In addition, Adriatic shareholders can note the increasingly tense language and  relationship between the two companies over time which ultimately begets the question - What is Sandfire's ultimate goal?

Ultimately this raises a number of questions for shareholders of both Sandfire and Adriatic, namely:

What is the specific basis for Sandfire's claim given that they have participated in every capital raise conducted by Adriatic Metals?

Have Sandfire submitted a waiver application to the ASX, given the onus is on the benefiting party to apply for the waiver? If so, has this waiver application been rejected and in what form?

Given the litigation has been initiated by Sandfire against Adriatic, has the strategic relationship between the two companies effectively ceased? How long has this been the case for and at what point did it effectively cease?

Given that ASX listing rule 10.11 is considered as the fundamental protective clause for minority investors, is it appropriate that this rule is waived to the potential detriment of Adriatic's minority shareholders, especially if the strategic relationship appears to have effectively ceased?

Why is Sandfire, a company worth almost $1 billion, fighting over $8 million worth of stock that it is purportedly owed?

What was the reason for Sandfire removing their nominee director from the board of Adriatic? Was it to notionally circumvent ASX listing rule 10.11.3 - substantial (10%+) holders with board representation?

Why has Sandfire been non-compliant with general ASX requirements regarding substantial shareholder disclosures, especially around December 2019? What is Sandfire's current interest in Adriatic Metals?

Is Sandfire's eventual intention to control or takeover Adriatic or Adriatic's projects in some form at some point in the future?


Without adequate disclosure of the issues identified above, it is our opinion that the lawsuit brought by Sandfire against Adriatic appears to be frivolous at best. 



​
Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way. The author holds shares in ADT.

At the beginning of May, we highlighted SelfWealth ('SWF') as an outstanding growth opportunity [HERE] that would benefit from exposure to the COVID19 curfews and the generally higher levels of market volatility. In this update, we review the company's progress based on its latest regulatory disclosures and compare how it is tracking relative to our internal growth model.

Since our article, the market has recognised the growth thematic embedded within the SelfWealth business model. Consequently, the share price has tripled from 22c on the date of the release to over 66c at the close of trade on the 9th of July. The company's results did not disappoint, more than meeting our expectations and those we shared with other market participants.

The latest quarterly release once again demonstrates the strong tailwinds the company is experiencing with quarter-on-quarter ('QoQ') growth in active traders of 44% compared to the previous quarter. Operating revenue and trade volumes grew over 100% and the company achieved its first-ever positive quarterly cashflow from operating activities. The value of client cash on the platform remained stable at $366 million despite very strong trade volumes. All these metrics affirm the company's ability to capture a disproportionate share of trader 'churn' and subsequently increase its market share; which was a core aspect of our investment thesis.

We believe the company will be able to maintain its strong growth momentum given the market and product fundamentals whilst increasing the 'monetisation efficiency' of its platform. We expect this increase in monetisation to be driven by several organic growth initiatives the company has been working on that are projected to be rolled out over the next 6 months.

The first is a revamp of the SelfWealth mobile application which we anticipate will be a market leader in customer usability and experience. It is a known fact that two factors are strongly aligned with customer satisfaction and use; consequently, we anticipate that this will lead to an increase in time spent on the platform and potentially a rise in trade volume.

The second large initiative is the launch of US equity trading via the SelfWealth platform. The US equity markets are the larger and most followed in the world. The ability for SelfWealth customers to purchase direct shareholdings in global market leaders like Amazon and Google, will no doubt increase trade volumes on the platform and provide valuable diversification from reliance solely on local equity market trade volumes.

Our base growth model assumed that SelfWealth could grow to 80,000 users by the end of June 2021. The latest disclosure demonstrates that active users currently sit over 46,000, implying on average that monthly growth in users should at least 3,000 users per month. The past 6 months have exceeded this figure by a large amount, so we remain confident that our base case will be achieved ahead of the time frame we originally projected. The business model dictates that each user acquired becomes increasingly profitable as overall customer numbers grow. This adage rings true in terms of valuing the company on more traditional measures such as 'value attributed per user' or conventional financial metrics such as potential earnings multiples.

One observation we have seen in high growth sectors is that scale begets scale. As the user base grows and broadens from its initial dominant user demographic, we often see the next leg of growth driven by strong uptake by broader mainstream society attracted by a compelling product offering. We believe we will observe a similar dynamic with SelfWealth going forward.

SelfWealth remains strongly capitalised with cash holdings of over $5 million and no debt. We believe the company is in a position to maintain its current profitability as well as build upon its strong market and product position. We believe the company remains compelling long-term value at its current market value.


Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way. The author holds shares in SWF.


To request a copy of Datt Capital's comprehensive research note on Self Wealth please follow THIS LINK

Following on from our recent update on Adriatic Metals Serbian acquisition, we share some thoughts on the short term outlook for Adriatic.

Adriatic aim to complete a Pre-feasibility study ('PFS') on the Vares Project by September 2020 and a Definitive Feasibility Study ('DFS') by January 2021; having previously completed a Scoping Study on the project in late 2019. The Scoping Study had highlighted the world-class economics of the Vares project with the key metrics being:
Post Tax NPV8 of USD$916
Post Tax IRR of 107%
Capex payback period of 8 months
LOM Capex of US$178 million (inc. 30% contingency)

Since the completion of the Scoping Study, we note that Adriatic have made material progress on a number of fronts. The company have successfully discovered mineralisation outside the maiden Mineral Resource Estimate ('MRE') area on which the Scoping Study was based on. Phase 2 metallurgical testwork has led to materially better outcomes than those assumed in the Scoping Study itself with the new copper concentrate proposed being 95% payable vs only 30% assumed in the study. We estimate that a revised MRE has the potential to increase ore tonnage by at least 25% at a similar grade as the initial MRE. We estimate the combination of the increased MRE and payable metal may lead to a larger NPV8 figure in the PFS relative to the previous Scoping Study. We estimate that an NPV8 of circa USD$1.2 billion (AUD$1.85 billion, 0.65 FX) using similar metal price assumptions as assumed in the Scoping Study, may be achieved in the PFS.

As such we consider Adriatic to be extremely undervalued trading at a fully diluted value of around AUD$250 million which is only circa 14% of our estimated NPV8 figure for the PFS. We have noted in the past that high-quality projects generally trade or transact at small discounts to NPV - HERE. 

Adriatic's management team are directly aligned with shareholders via their substantial shareholdings in Adriatic. They have a track record of obtaining maximum value from funds spent and being cost-conscious evidenced by the recent disclosure that they are running $2 million under budget for the PFS works. There is a strong incentive to reduce dilution for the existing shareholders and preserve the value of their own holdings. Adriatic have disclosed that they are funded until the completion of the BFS and may require additional capital at some stage next year.

We believe that it may be prudent to sell a royalty over the Vares project after the completion of the BFS. This would minimise dilution for existing shareholders given the present large value differential, provide a large capital injection and cover a large portion of the project's CAPEX requirement. 

A net smelter royalty ('NSR') is a very common form of royalty in the mineral space. Usually, it is calculated as gross revenue less transport, insurance, and refining costs. A rough rule of thumb we like to use is that a 1% NSR is equivalent to a 4-5% working interest in the royalty property. 

An NSR owner benefits in a number of ways:

• Low risk - the first dollar invested in an NSR is the last dollar spent
• Bespoke to project and is tailored to project specifics - eg can contain buyback provisions and other special clauses
• positive exposure to underlying commodity price without direct production cost risk
• a relatively liquid and transferable asset

Some factors that determine the value of an NSR are:

• quality of orebody - higher value ore and a long mine life can lead to a higher NSR value
• the current stage of the project - more certainty around the project's financial and operations lead to higher NSR values
• time-frame to production - the shorter time to production the better
• monetary environment (interest rates) - low-interest rates lead to lower NSR hurdle rates

A recent NSR transaction was where the market-leading royalty company, Franco-Nevada, created a 1% NSR over Solgold's Alpala project in exchange for US$100 million. This project is at a similar stage to Adriatic with a PEA/scoping study having been completed in 2019. The NSR was sold over this project to fund DFS study costs vs Adriatic that would require capital to bring the Vares project into production. An NSR created over the Vares project would be highly sought after and highly valued given the world-class nature of the orebody, project financial metrics and near-production status; and we believe may attract a similar valuation as the Solgold royalty.

Once the Vares project is producing, surplus cash flows could be invested in the development and exploration of its numerous brownfield and greenfield prospects across Bosnia and Serbia. We feel there is clear potential for Adriatic to evolve into a mid-tier miner once Vares is developed. The recently acquired Serbian assets provide another valuable expansion opportunity in addition to the clear exploration potential remaining in Bosnia

We believe the key Catalysts over the short term remain: 

• achieving exploitation permits for Rupice & Veovaca
• the release of an updated JORC MRE for Rupice and Kizevak
• delivery of a PFS & BFS for the Vares project

Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way. The author holds shares in Adriatic Metals (ADT).

Adriatic Metals announced on the 11/5/2020 that they had reached an agreement to acquire Tethyan Resources, a Serbia focused explorer, in an all-stock deal in exchange for 6.9% of the company. Adriatic appears to be focused primarily on the brownfield Serbian assets, Kizevak and Sastavci.

There are very similar historical parallels between the Raska district and Vares as a locality where Adriatic have their present operations. The Raska district has a long history as a mining region. The Kizevak and Sastavci mines were discovered in the mid-1970s and operated by the Yugoslav geological survey between 1984 and 2000 when mining ceased due to the Balkans conflict.
The projects benefit from numerous infrastructure advantages including water, power, road and rail access all within 5 kilometres, and a local workforce with a long history of mining.

No significant exploration work has been conducted on either licence since mining ceased, and the projects offer significant exploration potential for the expansion of existing mineralisation along strike and down dip from the open pits at Kizevak and Sastavci. The historical deposits have been untouched by modern exploration techniques.

Interestingly, Tethyan has historically only been able to explore the areas surrounding the historical mines as it did not hold the ground containing the historical mines. However, this ground has now been acquired as part of the Adriatic transaction and only a relatively small amount of drilling needs to be done to confirm continuity between the historical mineralisation and the mineralisation encountered by Tethyan. We note that the deposit appears to be very shallow, with very little exploration at depth with historical cores that have not been tested for precious metals.

Adriatic have proven they can add value via interpretation of historical cores and follow up exploration drilling on the brownfield assets given their experience at Veovaca and Rupice. They have also demonstrated their ability to progress projects at extraordinarily fast pace delivering a Scoping study/PEA for the Vares Project within 2 years of their ASX listing and are on track to deliver a DFS within the next 7 months.

We believe that Adriatic's management team can add significant value to the Serbian assets being acquired by the end of the calendar year. The acquisition firmly positions Adriatic as the pre-eminent Balkan polymetallic developer, whilst providing a longer-term development pipeline over and above the existing Vares Project. The acquisition provides an existing in-country team and relationships, whilst also providing the advantage of jurisdictional diversity to both sets of shareholders.

Adriatic have stated that they intend on delivering a Maiden JORC resource estimate for Kizevak and Sastavci before the end of the calendar year 2020. Assuming a small uplift on the existing non-JORC deposits, we anticipate that between 8-10 million tonnes of ore could be delineated at grades between 6-9% Zn equivalent. Adriatic aim to deliver a PFS for the acquired assets by the end of the calendar year 2021, with permitting likely to occur in conjunction with feasibility studies.

Overall, we consider this an acquisition that may prove to be extremely value accretive for Adriatic shareholders. We think the timing of the transaction at a cyclical and covid-affected low was strategically sound and well-executed. Our thesis is that the seeds of a base metal boom are being sown in the current market duress with many marginal, higher-cost mines being shut down; however, this dynamic will take time to play out. We believe that it's quite likely within the next 2-3 years, base metal prices will be considerably higher; leaving Adriatic well-positioned and strongly leveraged to a recovery in base metal spot prices.



Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way. The author holds shares in Adriatic Metals (ADT).

Self Wealth (SWF) is a platform with a unique product offering that offers flat-price online broking and ancillary services.At present there are 4 separate revenue streams:

1. Broking - Self Wealth offers Australia's cheapest online broking, investors pay only $9.50 a trade irrespective of trade value with no strings attached. Investors are able to invest under their own HIN (CHESS sponsored), hold the stock directly, and without paying monthly account fees or subscriptions.
2. Interest on client funds - Self Wealth benefits by collecting an interest spread on client funds held within the platform. The client funds are held in segregated individual accounts for the benefit of the client, significantly reducing counter-party risk for clients.
3. Subscriptions - Platform users can access additional features for a subscription fee of $20 a month. This allows them access to trading and portfolio data to provide actionable insights for investors. In particular, high performing portfolios can be filtered and replicated easily by users.
4. ETF fees - An ETF has launched that is constructed using the data collected via the strategic relationship with BGL. The portfolio holds a number of liquid ASX 200 constituents, has outperformed the market benchmark, and is rebalanced quarterly.

There is significant scope for additional revenue streams to be developed at very low incremental cost that will become increasingly more valuable as the user base grows; we have made suggestions to the management team and it is to be seen whether these will be pursued. The company also has a number of significant organic growth opportunities within its current product lines: International trading, multiple trading account functionality and a new mobile app are all in development and have the potential to further increase the company's rate of growth in the near term.The strength of the self wealth model is its low touch, automated, highly scalable approach. Prior to the COVID19 curfews, it was growing strongly year on year: having grown all key metrics by more than 100% between January 2019 and January 2020. The effect of current curfews has been like pouring petrol onto an already roaring fire. In the most recent March quarter vs the December quarter: Trade volume grew over 100%, Client cash held grew over 150% and active users grew by almost 50% (achieving almost 70% of their previous annual growth target in 3 months).

​We believe this growth cannot be looked at in isolation but is a validation of the structural shift we see in the local online broking markets. Self Wealth is unequivocally the lowest cost provider in the market providing a large incentive for new users to try the service; this consequently leads to increased client 'stickiness'. The platform is very stable and in the recent market volatility, outperformed it's larger competitors (Commsec and Nabtrade) in terms of uptime. We note that market trade volumes are correlated with overall market volatility, meaning that Self Wealth may benefit from the higher than usual levels of market volatility.

It is clear that Self Wealth has been profitable since the month of March and we expect this to continue going forward. Our information gathering suggests that April may very well be another record month of growth for the company. The increasing scale of the company's operations will lead to a fall in incremental costs. Our internal growth model suggests a base case EBIT projection for FY21 of ~$6.5 million; with our upper case scenario being multiples of the base case. Currently trading at an undemanding $45 million market cap, this represents a forward projected EBIT multiple of only 7x.


This is an excerpt of Datt Capital's comprehensive research note on Self Wealth.

​To request a full copy please follow THIS LINK




Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way. The author holds shares in SWF.

The biggest investment risk today for investors is to be underweight equities. The ASX Total Return Index as at the end of March, was down approximately 27% from it's January highs. This means for an investor who bought the high and held through the volatility, they would need to achieve a 37% return from the end of March to breakeven.

According to the Credit Suisse Global Investment Returns Yearbook 2020, Australia has been the highest equity returns in global markets on average since 1900. Achieving a 7% real return calculated in US dollars, compounded over a long time frame is not something that can be ignored by any investor, local or global. It is a testament to our relatively stable political environment, our natural resource endowment and our growing population; all of which bodes well for potential future returns.

Focusing on the present situation, we are clearly in an inflationary environment with widespread monetary and fiscal stimulus and support being provided by governments worldwide. In an inflationary environment, stocks are the only listed asset class that will provide a positive real rate of return; bonds and hybrids are vulnerable to the achievement of future negative real returns given interest rates are at their lowest rates in history. If you are a large investor who has been invested across asset classes, you have effectively have been made whole by the Australian government if you have had investments in local bonds and have sold. The next question in this instance would be: where to store your wealth to ensure it retains its purchasing power whilst achieving a nominal real rate of return?

Virtually all fund managers are cautious and under-invested holding larger than usual cash weightings. As we've seen in the past, the majority are usually wrong in a risk-off environment filled with the perception of uncertainty. If the market continues to grind higher it increases the risk of manager under-performance and consequent pressure from investors to increase market exposure to invest at higher equity values.

Another aspect to look at is could there be any news worse than what has transpired over the past 2 months? There is now significant data around the treatment and prevention of COVID-19. We know almost unequivocally that the elderly and obese with pre-existing conditions are highly susceptible whilst younger, healthy individuals have a relatively benign response to the virus. We believe that it's unlikely that COVID-19 will ever be fully eliminated for reasons beyond the scope of this article.

We expect societal restraints to be relaxed sooner than later, with higher risk individuals maintaining quarantine. The government can mitigate the impact of vast social issues that are arising from an extended lockdown by loosening current restraints. Behavioural changes don't need to be mandated to be followed, for instance, the past impact of SARS affected social behaviour in the hardest-hit nations leading the widespread voluntary adoption of wearing face masks in public.

Over the past 2 weeks, we have been selectively increasing our equity weighting with a focus on quality. Markets always move in anticipation of change and the seeds of every bull market are sown in times of uncertainty.
​
We discuss 3 of our new positions in a recent podcast which can be found here: https://bit.ly/Datt-Media



Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should
not be construed as advice in any way

Alkane yesterday confirmed another strike of 689 metres @ 0.46g/t gold, 0.19% copper from 402 metres depth from the Boda prospect, stepping out a further 100 metres to the east. This followed up on the initial discovery strike of 502 metres @ 0.48g/t gold, 0.20% copper from 211 metres depth.

We consider this a fantastic intercept, clearly demonstrating consistency and the continuation of grade at depth. We believe the latest result is high quality, having spatially explored a different plane to the discovery hole by apparently skewing to the north. As such we believe the odds of confirming a large scale porphyry system have shortened significantly. Alkane has disclosed that another 2 holes to the south will be drilling along with another to the north, all at 100-metre step-outs. We expect that given the scale and nature of the recent strike, this program will be materially expanded and we expect to see multiple drill rigs on site for the foreseeable future.

Should Alkane confirm sufficient tonnage and grade at Boda, we believe that the deposit will be extraordinarily valuable for several reasons. Most important is the location: in a safe jurisdiction, on flat open grassland, only a 4-hour drive from Sydney and 30 minutes from Dubbo providing a readily available skilled labour force. The economics of mining large mineral deposits in NSW are very well understood given the various operations at Cadia, Northparkes and Cowal. The key levers of any mining operation are: capital intensity, political risk, ore grade, operating cost and byproduct credit value. From our perspective, Boda's geographic location alleviates many of these levers, with of course the scale and ore grade of the deposit still needing to be confirmed by further drilling. 

Even though it is still early in the exploration process, there is no doubt that this project would have the attention of all the large Australian miners; BHP, Rio Tinto and Newcrest all who are desperate to increase their exposure to Tier 1 projects on their home turf. The economic potential of large disseminated ore bodies is generally not well understood by Australian investors, which is to their detriment.

Alkane are in the truly fortunate position of being able to largely self-fund exploration at this stage, due to their gold production assets at Tomingley. Tomingley itself has good growth potential with cumulative exploration targets of approximately 2 million ounces on their ground. If successful, this would materially increase the life of mine operations at Tomingley to a range of 10-20 years depending on exploration success. Whilst this is a very handy resource, it is dwarfed by the exploration potential at Boda.

Boda deposit and district-scale exploration potentialAt Boda, Alkane appears to have found the extent of mineralisation to the west, however, they still have not found the high-grade core of the porphyry which provides an indication of how truly significant this deposit may be in time. The current results have effectively only scratched the 'halo' of the porphyry itself.

We speculate this high-grade core lies further to the east at depth. Mineralisation remains open along strike (north-south), at depth and to the east. We note that porphyry districts usually contain multiple, clustered deposits, typified by the Cadia complex which contains 5 separate ore bodies. We expect that other deposits may be found in time within a 3-5 km radius of Boda. We consider the 100m interval step out drilling being conducted to be fairly low risk, considering the number of shallow but low-grade historical strikes.

Alkane suggests that the style of alteration and mineralisation at Boda has several apparent similarities as Newcrest's giant Cadia East deposit (2.9 billion tonnes @ 0.36g/t gold, 0.26% copper), including equivalent grade. We note that in the early stages of the Cadia East deposit, the first 4 successful holes were relatively low grade; it was only once exploration was conducted at depth to the east that the high-grade core was discovered. 

West North West (WNW) is an extremely important direction in NSW resources, the Cadia deposits and other major mineralised faults broadly follow this angle. We feel this is replicated by the geometry of the Kaiser-Boda complex with further exploration potential along the Belgian and Sullivan faults which runs towards the south-east. Also, we note that Cadia East and Boda both begin from approximately 200m depth.

Our analysis and review of the historical drilling by Alkane and others in the area leads us to the conclusion that it is likely that Boda is already a substantial deposit in its own right. Mineralised intercepts have already been recorded for at least 500 metres of north-south strike, at least 450m in width east-west and at least 800 metres in depth. Whilst this still needs to be confirmed via step-out drilling, we believe there is clear evidence for a large ore body existing at depth.

There is very strong evidence for district-scale exploration potential evidenced by the purchase of an exploration block by Alkane from Impact minerals for $100,000 mid last year; immediately to the south of Boda.

Alice Queen holds the ground only 600 metres east of the latest Boda drill collar with various faulted structures, most prominent being the Belgian and Sullivan faults, running directly into Alice Queen's large tenement that has never been tested. This ground at Boda East must surely be the hottest exploration ground in Australia, especially considering that Alkane appears to have found the western extent of Boda's mineralisation. 

Our research suggests the average width of commercial porphyry deposits to be over 1 km, with multiple deposits clustering within a radius of 3-5 kms. We also note that should Boda prove to hold a commercially viable deposit, it is highly likely that any mining lease application would have to extend into Alice Queen's ground given the nature of cave mining, making this an extremely strategic and valuable parcel of land.
Alice Queen we expect will be very interested in Alkane's results going forward in addition to their exploration works on the other side of the fence. The company controls the entire northern part of the Molong Belt, a large area of approximately 700 square kms. There is no doubt that Alkane among others are observing the efforts of their junior neighbors to the east.

Dubbo Project - Australian Strategic Minerals
The Dubbo Project is one of the world's largest and advanced rare earth projects that are in pre-development. The current large resource supports an open pit mine life of over 70 years making this a strategic and valuable asset, especially considering the anticipated rise in demand for rare earth products over the next 10 years. The project has been fully permitted and front end engineering studies completed; along with completed feasibility studies that have been kept current by the company. The feasibility study was conducted on an initial 20-year base case operation scenario, which provided an NPV of $1.24 billion, however, with a large initial capital outlay of $1.3 billion.

There have been further studies conducted to reduce this figure including a staged, modular design as well as more recently some very promising Korean technology that has the potential to materially reduce the capital expenditure and operational costs of the project. We feel there is potential to materially improve the project's projected financial metrics in the case of success for these various initiatives.

We note the recent appointment of an MD for Australian Strategic Minerals and that a decision will be made before the end of the financial year to demerge or spinoff this project into a separate ASX listed vehicle. Should the demerger go ahead, we expect Alkane shareholders will receive shares in the new listed vehicle in proportion to their shareholding, an attractive proposition considering most spinoffs are value accretive to shareholders and the strong industry fundamentals.
​
We consider Alkane to be an outstanding investment proposition given its exposure to 3 unique projects, all which have the potential to add material value over the coming months.


Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way. The author holds shares in ALK & AQX.  ​

Towards the start of the 2019 calendar year, we identified a strong investment thematic in junior gold companies driven by the confluence of 3 primary ideas:

• A potential rise in gold prices based on geopolitical factors
• A weakening of the Australian Dollar based on macroeconomic factors
• A resource and mine life deficit amongst mid-tier Australian gold producers

This led us to the identification and subsequent investment in Echo Resources, which was consequently taken over by Northern Star for a return over 100% in less than 12 months.
We believe this thematic is still strong and in this wire, we discuss a number of qualitative factors that help assist us in identifying high-quality gold opportunities and outline 2 names that tick our boxes.
Generating our own ideasWhile it is very difficult to quantitatively screen companies due to the early-stage nature and non-financial characteristics of these companies, there are a number of different methods of discovering companies in this space. The most common of these are: sell-side (broker) research, industry comparisons and independent project assessors (typically covering later stage companies).
However, we tend to rely heavily on our own proprietary research library of almost 1000 primary research pieces to generate ideas and identify broad brush investment thematics. 
We largely avoid secondary research, but do find it useful on occasions to confirm and question the veracity of our own primary research efforts.
Geological factors1: Depth and scale
These factors are very important in determining whether a deposit may be economic. A general rule of thumb is that the deeper a deposit, the higher grade it needs to be economic – this is a function of higher mining costs at depth. This should be looked at in conjunction with the scale of a deposit, as generally the larger the scale the lower the cost.
2: Geometry and mineralisation style 
The shape of a deposit is an important indicator of potential mining cost for example, a gently dipping equidimensional (spread consistently in all directions) shaped deposit will almost always be cheaper to mine than a steeply dipping, planar deposit. Disseminated (spread uniformly) style mineralisation deposits are preferable to vein or reef hosted mineralisation from our perspective, again due to lower processing costs.
3: Historical context and potential exploration upside 
We have a preference towards ‘time capsule’ projects where little modern exploration has been conducted. This could be for a number of reasons including areas where mining exploration has been banned, or where exploration was not conducted due to a low commodity price environment. We consider that exploration upside is generally considerably larger with these particular projects, given the historical context.
Corporate factors1: Location/jurisdiction: 
This is important from an economic and strategic perspective. Government royalty rates can vary significantly between jurisdictions, along with the general legal and social environments. A resource situated near infrastructure will generally hold an advantage over a similar more isolated deposit. Being close to other producing mines allows optionality in terms of commercial outcomes for example, a smaller deposit that may not be large enough to support its own processing plant could potentially utilise a neighbouring mine’s processing plant for a fee.
2: Management team and corporate strategy 
Pursuing a prudent strategy can expedite the time needed to bring a deposit into production, and add considerable value to a project whilst mitigating risk. One common mistake we see is rushing into production too soon for marginal or higher-cost projects. Mineral production has its own skill set quite different from mineral exploration.
3: Overall economic evaluation 
To be robust and minimise downside, any economic studies on the deposit should use conservative assumptions and incorporate all costs. In the gold sector, a commonly used metric ‘AISC’ (all-in sustaining cost) is one of the most misquoted with each producing company using their own poetic licence to their quoted metric. Investors should perform their own calculations instead of relying on company provided AISC figures. In addition, we have a bias to project with relatively low capital intensity which usually results in a higher project IRR. Higher metallurgical recoveries are positive.
4: Ability to build relationships with credible larger counterparties: 
This is an important factor especially when considering commercial terms could be negotiated for production or exploration. A management team that can attract large partners to the company or its projects, adds credibility from our perspective.
5: Catalyst/s to rerate the stock: 
This is one of the more important elements in our process and can be either external, internal or multi-faceted. One must remember that the company cannot change the physical resources that may or may not lie within their ground and accordingly be very selective when investing in this space, taking a ‘resource first’ approach.
Preferred namesOur preferred names in the junior gold space are Yandal Resources (YRL:ASX) and Alice Queen (AQX:ASX).
Yandal Resources: Multiple catalystsYandal currently has a gold resource of approximately 200,000 ounces at their flagship Flushing Meadows deposit at a grade of 1.3 g/t. The deposit is at very shallow depths of less than 150m, is currently 1.8kms in length and is open at depth and in multiple directions. As such, we think there is strong potential for the size of this deposit to increase materially. This deposit, whilst planar and dipping is very shallow and likely to be able to be cheaply mined via an open pit. This tenement of 472 sq km has been historically held by majors during times of lower gold prices, and has had virtually no exploration over the past 20 years.
Yandal's projects are located in the Yilgarn Craton, Western Australia; this locality is thought to hold up to 30% of the world’s resources and is regarded as a Tier 1 jurisdiction. All the projects are located within trucking distance of multiple gold mills operated by 3rd parties, so can be commercialised rapidly. The quality and largely oxidised nature of the current resource ensures that this ore will be sought after by gold processors. The company intend on further building out its resource base via lower risk extension drilling and have recently started a program of 20,000 metres.
The management team are experienced, credible and focused having worked on the neighbouring projects that are held by Echo Resources. 
Northern Star, who have just acquired Echo, holds 15% of the company; with the Top 20 shareholders holding 80%. 
We think there are multiple potential catalysts for the company to rerate and believe the company will become increasingly attractive as they build out their resource base.
Alice Queen: More upside than downsideAlice Queen has a gold resource of around 500,000 ounces at its Horn Island project, in the Torres Strait, at a grade of 1.9g/t. The deposit is shallow with a maximum depth of 250m. Horn Island was reopened to mining activities in 2014, after a 25-year hiatus. 
Since then, AQX has lightly explored and applied modern exploration techniques to the project, attracting Saint Barbara (SBM:ASX) as a joint venture partner. What is so unique, is that SBM agreed to excise the existing 500,000-ounce deposit and associated infrastructure from the joint venture; with an option to buy into these areas for a 70% interest by paying ‘fair value’. We believe there exists significant potential at depth for the discovery of further gold resources, along with potential extensions at shallower depths.
Horn Island is located in the Torres Strait, Queensland. Northern Queensland hosts a gold endowment of around 40 million ounces, with 19 million hosted in Intrusion Related Gold System (IRGS) deposits; the system speculated to exist at Horn Island. The company intend on progressing the Horn Island project further in conjunction with SBM. The management team are committed, practical and focused; and have a world-class consultant team.
Horn Island has significant existing infrastructure in place including a deep water port, a domestic airport, and existing freshwater supply. We believe that this should translate into significant savings in terms of capital expenditure and consequent superior returns, should a mining operation recommence. 
The company have a proven track record of attracting and working with larger counterparties, having attracted SBM and Newcrest to its projects in the past. 
The company also hold very prospective exploration ground in NSW, less than 1 km from Alkane’s discovery at Boda; this was regarded as the best Australian porphyry discovery in 20 years.
Again, we see multiple catalysts for AQX to rerate notably, the exploration program being funded by SBM as well as further exploration success on the neighbouring tenements in NSW held by Alkane. 
Disclaimer: Datt Capital currently holds shares in AQX and YRL. ​

Alice Queen ('AQX') are a junior exploration company that hold 3 projects: 1 gold development project in the Horn Island gold deposit and 2 very prospective exploration projects in the Horn Island JV and the Lachlan Fold projects.

Horn Island gold deposit
AQX has defined a shallow, open pittable inferred resource of 492,000 ozs (7.96 Mt @ 1.9g/t), with a maximum depth of 250m. Horn Island has significant existing infrastructure in place including a deep water port, a domestic airport, and existing freshwater supply. It also is the logistical hub of the Torres Strait, being easily accessible from the mainland. Being a brownfield operation, it's likely that the company could potentially utilise some remnants of the old mining operations.

As part of our evaluation process for Horn Island, we made a number of assumptions to determine what a potential mining operation may look like. Readers should note that this is purely a hypothetical exercise, especially given the current inferred nature of the deposit.

Hypothetical Project Assumptions and Parameters:
80% of inferred JORC resources converted to Indicated or better status.
1 Million tonne per annum plant capacity
LOM of ~6.5 years
Average gold production per annum: ~56k oz
Gold price: AUD$2,000/oz
Recovery rate of 93%
Initial Capex: $60 million
All-in Sustaining Cost: ~AUD$1,200/oz
Discount rate: 8%
NPV using assumptions above: ~$160 million

We consider our assumptions reasonably conservative; for example, the company has disclosed that metallurgical recoveries from the ore are ~98% whereas we have assumed a lower figure of 93%. We also note that our assumptions are blunt, and do not consider any optimisation studies generally conducted as part of a Bankable Feasibility Study ('BFS') process.

As the company progresses the development of the deposit via additional infill drilling to upgrade the resource estimate to Indicated or better, we expect further value accretion. We expect that the company will conduct further studies on the deposit to a BFS standard. We estimate it will cost the company approximately $3.5-4.5 million to conduct the necessary works and studies to delivery a BFS for the deposit and take approximately 12-18 months to complete. This expenditure should provide significant value add for shareholders.

Having examined a large number of gold deposits, we consider inferred resources that have a higher degree of uncertainty, to be fairly valued at a range between 2.5-3.5% of in-ground value relative to the spot price for shallow deposits which are sub-250m in depth. This provides us a range between $55 and $77 per inferred ounce at a gold spot price of AUD$2,200. As such we consider that as a raw, undeveloped project the Horn Island gold deposit would be worth ~$30 million, possibly more considering the existing infrastructure in place.

Horn Island JV
St Barbara ('SBM') a mid-tier gold miner has entered into a JV with the right to earn 70% of the Horn Island Exploration Project, encompassing Horn Island and Prince of Wales Island, by sole funding $4 million over 36 months. The agreement specifically excludes the Horn Island gold deposit as well as the existing critical infrastructure and sites necessary to begin a mining operation. SBM has been granted an option to acquire a 70% in these areas for 'fair value'. SBM may withdraw after committing a minimum amount of $500,000 within the first 12 months of the JV. AQX has agreed not to commence mining operations at the Horn Island gold deposit during the term of the JV. However, further progressing the project to the completion of a BFS is allowed. AQX will manage SBM's ground operations on Horn Island for a fee under a services agreement.

The JV will be targeting Intrusion Related Gold System (IRGS) deposits. Out of a total discovered gold endowment in Northern Queensland of ~40 million ozs ('Mozs'), over 19 Mozs are contained within IRGS deposits in this region. It is believed that IRGS deposits are generated by the collision of major tectonic plates and are focused mainly on the Ring of Fire region around the Pacific Rim which hosts a gold endowment of over 100 Mozs. This proliferation extends into Queensland which was a tectonically active region 200 million years ago. We note that IRGS deposits are on average larger than types of gold-bearing systems; providing a potentially large reward for successful explorers. The sweet spot in terms of exploration for IRGS deposits is in the 200-500m depth range, where AQX has barely explored.

IRGS deposits can be discovered using a systematic approach including but not limited to: geochemical sampling, reverse magnetic analysis, interpretation of drill samples & multi-element metal zoning. We note that AQX has performed significant analysis works to date, performed by world-class technical consultants in Scott Halley (geochemistry), Gregg Morrison (IRGS specialist) and Ben McCormack (structural geology). We note that should an IRG system be proven to exist on Horn Island, Prince of Wales Island to the immediate west will represent an outstanding greenfield opportunity for the joint venture being 3 times as large within a similar geological setting.

Horn Island Conclusion
We note that the Horn Island JV agreement, allows SBM to acquire a 70% interest in the Horn Island gold deposit and associated infrastructure for 'fair value'. According to our research, recent transactions for commodity projects at the BFS stage have ranged between 40-70% of NPV8 value depending on various factors including capital requirements, depth of resource, commodity type etc.

As such, this may result in a significant bullet payment made to AQX, of an amount above the company's current market capitalisation, should SBM exercise this right and assuming AQX has completed a BFS.

Should SBM withdraw from the JV at any time, AQX will remain well placed to deliver the project in their own right having conducted the studies necessary to obtain project finance.

In summary, we believe that the Horn Island JV has the potential to deliver a multi-million-ounce resource in time, at depth. We believe the fact that SBM, within the JV agreement, restrains AQX from initiating a small scale mining operation is telling. We note that the company's discovery cost per oz is exceptional at under $20/oz, relative to the industry average of circa $30/oz. We believe this reflects the genuinely under-explored nature of Horn Island as well as the significant and thorough geological analysis the company conducts prior to major drilling works.

NSW Lachlan Fold Projects
AQX hold 4 exploration tenements that encompass the entire northern part of the Molong Volcanic Belt, on-trend with the globally significant Cadia-Ridgeway mine operated by Newcrest ('NCM'). The area is prospective for large scale Au/Cu porphyry deposits.

NCM entered into an exploration JV with AQX in 2017 covering some of these tenements. Under the terms of the prior JV agreement, NCM could earn up to an 80% interest in the Mendooran tenements over 9 years by spending $10 million. 3 diamond core holes were drilled under NCM JV, with no material results disclosed. We note that the NCM JV targeted the most accessible prospects, rather than the best prospects which lie within a State Conservation Area, where special permits are required. These permits were not in place for the term of the JV, although AQX has recently disclosed in their latest presentation that a land access agreement is near, with permission expected to be granted by the end of the calendar year.

NCM terminated the JV however, we consider this to be positive. Our preference when investing in junior explorers is that it retains a majority stake in their most prospective ground when engaging in a JV. This ensures that shareholders receive the appropriate benefit in the case of success. We have found that exploration projects can be 'lost' in the bureaucracy of a larger company, so we prefer companies that retain material exposure and control over their core prospects. We also noted that the Yarindury tenement was acquired after the NCM JV was executed, so was not included in the JV. The sedimentary cover in this tenement is shallower at around 200m depth, so believe that AQX can explore this tenement in their own right. AQX has disclosed that drilling will commence in the next couple of weeks on the northern targets at Yarindury.

Alkane's recent discovery strike at Boda, was the best porphyry exploration discovery hole in the Lachlan Fold Belt outside the Cadia, Cowal and North Parkes mines in the last 20 years; according to John Holliday, the discoverer of the world-class Cadia deposit and a technical consultant to AQX. The discovery strike of 502m @ 0.48g/t Au, 0.20% Cu from 211 metres in depth, ended in strong mineralisation to the end of hole. We believe this is exceptionally significant. The strike is exceptionally gold rich relative to other porphyry deposits, and we are encouraged by the fact that the copper grade appears to increase at depth. Importantly, a clear high-grade zone of approximately 361m of over 1g/t exists between 228m and 589m intervals. To put it into context, this high grade zone of strike was superior to the Cadia Hill discovery hole which struck 243m @ 1.21g/t Au. A lot more work needs to be conducted by Alkane to prove that a large deposit exists, but the potential for a large, commercial discovery is clear.

Large porphyry deposits are generally clustered, typified by the monstrous Cadia-Ridgeway complex which spans almost 20 sq km and enjoys a rich mineral endowment of 38 Mozs of Au & 8.3 Mt of Cu. With Yarindury only 700 metres away from Boda's discovery hole, we believe that there is very strong potential that the mineralisation that Alkane discovered at Boda, may extend onto the Yarindury tenement. Whilst still early days, we believe that the strike at Boda has added immense value to AQX's Lachlan Fold tenements and significantly increased the odds that AQX can perhaps make their own discovery.

We consider the upside potential and leverage to success within these tenements to be extremely large.


Conclusion
We consider that Alice Queen hold 3 very attractive projects: 1 gold development project in the Horn Island gold deposit and 2 very prospective exploration projects in the Horn Island JV and the Lachlan Fold projects.

It is our opinion that the company's value is strongly underpinned by the existing gold deposit on Horn Island which we consider in isolation to be worth the company's current market capitalisation of ~$30 million. We believe the market is ignoring the considerable potential upside from both the Horn Island JV and the Lachlan Fold projects. Successful exploration by the Horn Island JV will result in a clear and substantial monetisation event via SBM's right to purchase 70% of the Horn Island deposit. Successful exploration at the Lachlan Gold projects will result in enormous value creation for shareholders.

As such, we view Alice Queen as an attractive investment opportunity given the large, asymmetric potential upside balanced by what we perceive as limited downside. 



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Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way

I explicitly began my investing education by reading what is considered the bible to value investors: Security Analysis by Benjamin Graham. To be honest, I couldn't and still haven't finished the book as I found it fairly dry and uninspiring; especially for a young, new investor. Thankfully, there are a whole universe of books out there, and I list a number of books I found have useful in my investing education.


1) Am I being too subtle - Sam Zell
Sam Zell is a self-made billionaire, who earned his fortune primarily via real estate. His blunt, spare and contrarian style makes for a refreshing read; the title is a question he often asks himself which reflects his personality. The book is filled with business wisdom, covering a wide range of time eras, industries, personalities, successes and failures. Themes covered comprehensively are real estate investment, controlling risk and value investing.


2) Dead companies walking - Scott Fearon
This book is mandatory reading for our investment team. Written by an investment manager it focuses primarily on why, when and how companies fail. By learning the warning signs, and avoiding an investment in a company which may fail; readers learn a great deal about becoming a much better investor. Chock full of practical advice and wisdom, major themes include the psychology of investing, the role of cognitive bias in business and the importance of time horizons.


3) King Icahn - Mark Stevens
This book provides an insight into the personality, mindset and business philosophy of Carl Icahn, one of the greatest investors of our era. It covers the early part of his career comprehensively, and provides a great overview of 1980's corporate America from the perspective of a corporate raider or activist. In particular, the book articulates how much value can often be overlooked by passive shareholders and how it can be released by a well motivated and funded activist.


4) Metal Men - Craig Copetas
An intriguing book about the hard and fast world of commodity trading; and the ascent of Marc Rich who founded the world's largest commodity trading company today, Glencore. The physical mechanics of commodity trading are fascinating; encompassing a multitude of different aspects such as financial, geo-political and logistical. Major themes broached are the mechanics of physical commodity trading, risk management and the effects of the geo-political environment on trade flows and commodity prices.


5) 100 Baggers - Chris Mayer
This book examines the investor's holy grail of the 100 bagger or making 100 times your money invested on a stock; it is an update on a book on the same subject written in the 1970's. The beauty in this book is the breadth of the content, as the author examines a multitude of historical examples and the various elements that led to their 100 bagger status. We learn very quickly there is no 'magic bullet' for obtaining outsized returns, but there are a number of factors that can increase our probability of investing in one of these companies. Major themes are the impact of compounding returns over longer time frames, evaluating the quality of a company and how to maintain a long term perspective on your investments.


6) The Most Important Thing - Howard Marks
Howard Marks is an investor well known for co-founding Oaktree Capital, a value orientated asset manager. This book is effectively a compilation of writings on various aspects of investing from the perspective of a value investor. Whilst a little repetitive, it hammers home a number of factors that any serious investor should consider when making any investment. Major themes are the thought process behind investing 'defensively', understanding and managing risk and expectations.


7) Margin of Safety - Seth Klarman
Written by Seth Klarman, a highly respected investment manager, this is one of the most sought after investment books. The book is divided into 3 sections encompassing: where and how investors typically make mistakes, an overview of a value investing philosophy primarily focused on risk mitigation and finally a number of case studies and discussion on portfolio management. This book has a lot of value for anyone regardless of your investment experience or methodology.


8) My own story - Bernard Baruch
The author was a well known financier in the early 20th century before becoming a statesman. This is a classic account of the economic change in the US as experienced through the lens of a successful stock market investor. Baruch's humility and wisdom shine through this book, which is filled with many practical examples and lessons on life and the markets amplified by his obvious gift for story telling. In particular, I found his lessons and recounting of periods of desperate economic times to be enlightening.


9) Education of a Speculator - Victor Niederhoffer
This is a wild account of the author's life and investment principles. This is a difficult read, it is clear the author is brilliant but also deeply flawed. There are many valuable nuggets to be extracted by a patient reader, such as the necessity to perform your own analysis of opportunities regardless of the 'commonly held' or market knowledge. Major themes include the necessity of risk management, probabilistic investing and embracing randomness.  The author's honesty and candidness is refreshing throughout, although a lot of biographical elements can be skipped over.


10) What works on Wall Street - James O'Shaughnessy
This book is effectively a statistical study of the historical returns achieved by various investing strategies. The real value in this book is educating the reader on various methods or factors which may contribute to an investment return; which provides a lot of food for thought for the reader in formulating their own investment methologies. 


11) The investment checklist - Michael Shearn
This book focuses on evaluating a company using fundamentals. This is quite a dense book and covers a lot of ground; I particularly found the author's focus on management useful which is often overlooked in investment books. In addition, the emphasis on utilising investment checklists in the decision making process I think is especially important to ensure consistency in the investment process. 


12) The Art of Speculation - Phillip Carret
Phillip Carret ran one of the first investment funds in the US, the Pioneer Fund, for 55 years starting from 1928. He was idolised by a young Warren Buffet and had a great long term record over a long time period. The book covers a lot of ground: market cycles, technical vs fundamental factors and security analysis to mention a few topics. Even though the examples are now dated, the concepts are all sound and still very relevant to today's markets.

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