A surge in metals and mining is empowering a commodities supercycle

Largely as a result of the Covid-19 lockdown, those with too much time on their hands, ranging from casual stock market observers to hardened traders, cannot fail to have noticed the surge in valuations and general interest in metals and commodities over the past year.

 Commodities

Whether watching gold and precious metal prices, always a safe-haven investment in uncertain times, looking for movement in battery metals such as copper and lithium, or investing into iron ore, the bedrock of the upcoming economic recovery, the choice of company or investment instrument available can seem bewildering to the uninitiated.

Much of profile of the subject matter is due to speculation by large investment banks that the global economy is entering a new ‘commodity supercycle’.

Forbes magazine asked whether this was the case in an article by Randy Brown in mid-April, noting that the most prominent commodity index, the S&P GSCI, had risen over 86% since March 2020. Brown pointed out that while most markets have roared back since the depths of the Covid-19 market scare, commodities have been a frontrunner in the recovery.

Cautioning investors against overreaction, Brown highlighted there have been four supercycles since the mid-19th century, each lasting a decade and all underscored by major infrastructural shifts.

The good, the bad and the ugly

Historically, any surge in a sector or asset class is accompanied by myriad investment instruments and packaged opportunities. As any investment adviser will say, it is vital to spread the investment across a number of assets and minimise risk.

While this is no doubt a laudable strategy, the very sniff of a potential commodity supercycle will create a ‘gold rush’, with investors exposed to all manner of investment instruments on offer from the good, the bad and the downright ugly.

Throughout 2020 and the first part of 2021, the commodity and investment juggernaut was welcomed with open arms by a much larger-than-usual and highly receptive audience.

Many newbie investors enthused by early successes in multi-bagger Covid-19 stocks turned their attention to the mining and commodity sector, and in order to maximise gains, invested into micro-cap mining companies, some in charge of assets questionable in both value and nature.

By definition, the junior mining sector is a risky place for the inexperienced investor. Equally, as has been seen during the past year, the right asset can turn a micro-cap exploration company into a mid-cap explorer/developer in very short order.

Micro wave

Power Metal Resources (AIM:POW) is a London-listed company structured specifically to provide all of the spectacular upside potential while at the same time removing much of the risk for investors keen to gain exposure to commodities and precious metals.

It is rare to find a listed micro- cap mining exploration company with exposure to numerous quality projects across the globe. It is even rarer to find one still in micro-cap territory with exposure to nine projects and advanced plans to spin off three projects for listings on various global stock exchanges in the near term.

In the past year, this company has continued to expand its portfolio while at the same time advancing existing exploration projects closer to its ultimate objective of making one or more major metal discoveries, and maximising value by spinning out projects into separately listed entities.

The first of the spin-offs is likely to be Red Rock Australasia (RRAL), which, jointly owned with AIM-listed Red Rock Resources (AIM:RRR), is a project package of granted licences and applications covering more than 2,300 sq km in the fertile Victoria Goldfields in South Australia.

Red Rock is chaired by mining veteran Andrew Bell, who is also the chairman of Power Metal Resources. Most recently, on the same continent and in Western Australia’s Pilbara mining region, Power Metal announced a conditional acquisition of a 75% strategic interest in a UK special acquisition vehicle to acquire a portfolio of copper and gold- focused exploration interests in the Paterson Province.

The level of interest in this region has built steadily over the past year due to Rio Tinto’s success with its Winu copper and gold asset, not to mention the Havieron copper and gold asset discovered by Greatland Gold (AIM:GGP), a company restructured in 2016 by non-other than Power Metal CEO Paul Johnson and chairman Bell.

Each transaction undertaken by Power Metal goes through an exhaustive due diligence process, with completion usually entailing a mix of shares, warrants and cash paid out of the company’s substantial cash reserves. The success of this model is due in no small part to Johnson, the public face of Power Metal.

Johnson and his team aim to seek out undervalued, quality assets and extract maximum value for shareholders and investors.

In recent years the company has undergone three listed reincarnations, the first as Sula Iron & Gold, and then African Battery Metals from January 2018, with the name change to Power Metal Resources occurring in June 2019. Johnson and Bell joined the Power Metal Board in February 2019 when the group raised £1m at 0.5p per share.

Johnson is, of course, well regarded by investors who have followed him from his previous ventures. After co-founding Metal Tiger (AIM:MTR), a joint venture (JV) with MOD Resources led to a landmark deal, when Sandfire Resources (ASX:SFR) acquired MOD in late 2019, resulting in a near threefold return on investment.

Power is also working to develop assets directly. Drilling activities at the Molopo Farms Project in Botswana targeting massive sulphide deposits have already produced promising nickel grades, with the asset drawing early comparisons in size to the world- class Voisey Bay Mine nickel deposit in Labrador, Canada.

Further spin-off companies are expected to materialise later in 2021, including the Canadian silver project in British Columbia and Kanye Resources, the JV with Kavango Resources (AIM:KAV), which holds a range of prospective silver, copper and rare earth element projects in Botswana. The intention is to list these spin-offs on a recognised stock exchange.

The next Greatland Gold?

Any mining group operating in Australia will inevitably undergo the cursory chatroom and bulletin board slide rule comparison with the aforementioned Greatland Gold, currently blazing a trail with its Newcrest Mining JV drilling campaign at the Havieron deposit in the Paterson region of Western Australia.

Success during the past year has seen Greatland morph from small-cap miner to a near £1bn exploration and development group.

Broker First Equity is equally enthused by the range of opportunities to add value and is also attracted to the manner in which risk is mitigated within the Power Metal investment proposition. In a note published on 21 April, First Equity rates Power Metal stock as a ‘buy’ with a 6.1p price target. According to FE, the value achieved on the first listing “will help to significantly underpin the current market capitalisation”, and if the subsequent two or three IPOs prove successful, it believes management may seek to earmark and fast track other projects towards listing.

First Equity also highlights that encouraging nickel grades at the Molopo Farms Project in Botswana could mean Power Metal is edging nearer to a possible first major metal discovery, which will see valuation and price target “likely revised upwards if a major resource deposit is discovered”.

On current evidence, with or without a commodity supercycle, investors in this junior London mining and exploration group could well be empowered and possibly enriched before the
end of 2021.

Alan Green is Founder and CEO, Brand Communications, a stock market research group.

See also: Russia and commodities – is a super-cycle coming?

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