Meteoric Resources and Rusina Mining 17 Sep 08

Flagging exploration fortunes and low cash dictate a switch to RML

Meteoric Resources is a grassroots junior exploration company in our portfolio with a disappointing track record. Whilst micro-cap exploration companies present higher risks for investors, they also offer much higher potential rewards. We believe that some exposure to such companies is appropriate in a diversified resources portfolio. Unfortunately, Meteoric has not lived up to its exploration promise and we believe it is now appropriate for holders to switch into another exploration junior in our portfolio, Rusina Mining. This company offers much healthier exploration prospects, a three-tiered growth plan based on nickel, as well as solid cash backing and joint venture partners to fund its project development plans.

Meteoric Resources
We are by no means singling Meteoric Resources out, but our switch decision is part of our broader view that the market will inevitably focus on those companies that can fund their ongoing exploration and development activities without recourse to the markets in the short-term. This is particularly so for ‘grassroots’ exploration companies that may not even have a major advanced asset to underwrite company value.

Junior companies have been the hardest hit component of the resource sector downturn due to a range of factors mostly out of their control. As well as normal selling, stocks have been subjected to additional pressure by hedge funds forced into sales to cover losses elsewhere, in addition to pressures related to margin-lending. The junior end of the market is therefore a real minefield for investors at the moment.

But inevitably confidence will slowly return and it will be the better-quality exposures that will recover first. Hence, we are revamping our portfolio as an appreciation of this inescapable fact.

Meteoric Resources was initially recommended in our portfolio in November 2006 on the basis of its very small market value and its leverage to exploration upside from its 1,000 sq km portfolio of grassroots exploration properties in Western Australia. In particular, we believed the company’s more advanced Wilthorpe project, which contains the modest-sized Harrods gold deposit, might generate interest as exploration progressed.

To some degree we were correct, with exploration drilling by the company identifying a 61,000-ounce Inferred Resource, which remains open at depth and to the south. The company’s share price also held up well for a time, before things soured as the junior end of the resource market took a turn for the worse.

The company also seems to have re-prioritised its exploration focus by concentrating instead on grassroots iron ore exploration in its latest quarterly report, which we believe is an unwarranted distraction.

With cash low reserves at just over $1 million as at 30 June 2008, the company is in the unenviable position of having to raise funds in the not too distant future. Given its current low cash-burn rate, this gives the company about four quarters of funding before the well runs dry.

Fat Prophets initially recommended buying Meteoric Resources around 25.5 cents in November 2006 (Fat Mining 51). Our actual entry price was 30 cents. Our last review of this stock was in February (Fat Mining 113).

From a share price perspective, Meteoric Resources has been a disappointment since inclusion in the Fat Prophets Mining and Resources portfolio. Given the persistence of the downward trend, we cannot rule out further declines in the months ahead. In our opinion, an extensive period of consolidation and base building at the lows will be required before a long-term sustainable uptrend is likely to emerge.

Accordingly, we recommend that Members sell Meteoric Resources at around 5.8 cents and switch the proceeds to Rusina Mining (RML).

Rusina Mining
In contrast to Meteoric Resources, Rusina Mining is currently generating a modest but solid cash flow from a first-stage production operation from its Philippines nickel project, which is allowing it to pretty much finance its ongoing administrative and exploration expenses. At the same time, there are two much bigger-picture projects that offer real upside for investors, which are currently being funded by other parties. So Rusina does not currently have to contribute a cent to these projects, which is obviously important in the current tough environment for junior companies and their ability to raise funds.

In fact, Rusina Mining currently boasts cash reserves of around $6 million, along with receivables currently worth around $5 million, and no debt. The company’s total market value is just $23 million.

As a reminder to Members, Rusina has a three-fold strategy for the development of its nickel laterite resource base at Acoje. The initial plan is to develop a first phase operation that will generate early cash flow through direct shipping of nickel ore in a 50/50 joint venture with Philippines partner DMCI. This is now underway.

In addition, the joint venture is looking over the medium term to develop more highly value-added nickel opportunities as part of a second phase development. This will be through the proposed development of a ferro-nickel (pig iron) smelter on nearby Semirara Island.

Finally, a third development phase involves a long-term feasibility study to assess the development of an acid heap-leach project on the Acoje site in conjunction with European Nickel Plc.

The geology of Acoje has many similarities to the world's major platinum (Pt) and palladium (Pd) producing provinces. In fact, Acoje is one of the few projects that have produced PGM-rich nickel sulphide outside of the major producing areas of South Africa’s Bushveld, Zimbabwe, the Stillwater complex in Montana, USA and Siberia. Acoje was South East Asia’s largest metallurgical chromite mine for more than 50 years, before closing in 1991 due to low chromite prices and a lack of capital to resolve flooding issues.

On the exploration front, Rusina is undertaking a fresh drilling programme on its Acoje project area in the search for platinum group metals (PGMs), chromite and nickel sulphides. We spoke to the company’s Chief Financial Officer Mark Hanlon this week, who advised us that the programme was around 71% complete. He also advised that the company is examining various proposals with respect to the future equity funding components of its projects.

Rusina recently announced a positive resource re-estimation on both its Acoje and Zambales Chromite Mining Corporation (ZCMC) projects. The combined Indicated and Inferred JORC-compliant resource estimate for both properties is 72 million tonnes grading 1.15% nickel (Ni) and 0.06% cobalt (Co), which represents 830,000 tonnes of contained nickel metal. This represents a substantial 163% jump in the overall contained nickel content of both projects as compared to the last resource estimate completed in February 2007.

With respect to its direct shipping operation, Mark Hanlon confirmed that the company is looking to nickel buyers domestically, as well as in China. Although the contract prices domestically would be lower, this would help lock in security with respect to short-term cash flow, which is important for any junior company in the present environment.

With respect to work on the proposed heap-leach project being undertaken by European Nickel, the upcoming Pre-Feasibility has been delayed for a few weeks while the final consultant reports are received and compiled.

The company has also received final confirmation of a major project acquisition entered into earlier this year. In April, Rusina applied to acquire the Barlo exploration tenement, which lies just 30km north of the company’s Acoje project area and which hosted an operating copper and zinc mine between 1974 and 1991. In addition to the area’s base metal and gold potential, Rusina believes the project could supply sulphuric acid (a major input cost) for the proposed heap-leach operation at Acoje.

CFO Mark Hanlon also confirmed that the company has been the unfortunate victim of recent selling by major shareholder, the UK-based RAB Capital, which is exiting positions across its worldwide portfolio of around 100 junior resource companies, in order to cover losses in its Special Situations fund. The group initially held around 12.25 million shares and has sold around 3.5 million shares so far, and Rusina is hoping to find a buyer for the balance.

Again, this demonstrates the headwinds being faced by quality junior companies at the present time. Not only are markets difficult enough, but they are also confronted by distressed sellers that pay no attention to the respective companies quality of assets or future prospects. No wonder smaller investors are driven to panic when they see share prices tumbling.

Nevertheless, we maintain our positive longer-term outlook on Rusina Mining and believe it represents an extremely cheap, but highly-leveraged and financially solid junior nickel exposure. The volatility in the company’s share price will inevitably subside. The company effectively has three project irons in the fire, all of which are currently funded, which strengthens its growth options and broadens its appeal, whilst minimising risk.

Fat Prophets initially recommended buying Rusina Mining at 23 cents in March 2007 (Fat Mining 69). Our last review of this stock was in August (Fat Mining 137).

From a charting perspective, Rusina Mining recently suffered a significant setback as prices broke below long-term support at 12.5 cents. As a result, the stock has recently dipped to 9.2 cents. This is the lowest level for the stock since mid-2004.

While there is potential that the move below 12.5 cents was a false break, we would prefer to see a return above this level to ease the risk of deeper falls. In our opinion, a further break above the 19-cent region is needed to signal the early stages of an attempt to revive upward momentum.


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