Is such a thing possible? I think so — here’s six names to consider for 2024 if your risk appetite is low or you’re simply new to the space.
In my Christmas message, I made the case that investors should take 2024 to look for lower risk opportunities in the market that have been beaten down by high rates and negative sentiment. Of course, in investing there is a well-known concept called the risk-reward ratio.
In a bazaar where the ‘efficient market hypothesis’ works, a company’s market capitalisation reflects all publicly available information. Of course, I have taken issue with this thesis in the small cap market before — where many stocks are under-researched, and investors can gain an information edge.
But if you assume that the market is efficient, then the risk-reward ratio makes perfect sense: the riskier a company is, then the more rewarding a positive outcome should be, and this should be reflected in the share price.
However, in the markets as in life, theory and practice are not life partners. There are plenty of high risk companies with limited potential upside, and a handful of businesses which are relatively low risk but with significant upside potential. I tend to prefer the highest risk, highest reward companies, but there is no denying that 2022 and 2023 have collectively beaten down several excellent mining stocks that are not totally at the mercy of the drill bit.
These are the type of companies that newcomers to the small cap market should consider as investments — perhaps instead of investing in a stock with a chance of a 10x return or failure.
1. Greatland Gold (LON: GGP)
Greatland Gold has 30% of the Havieron deposit — which now boasts a Mineral Resource Estimate of 8.4M oz AuEq. The company is releasing its Definitive Feasibility study for the asset later this year, and while there is a question mark over whether JV partner Newmont retains its 70% shareholding, the reality is that Greatland’s fundamental value is underpinned by a significant amount of gold which at some point will be dug out of the ground.
To be fair, there are varying estimates on what GGP is actually worth, including from Grant Samuel, and through valuations of percentages of Havieron through the years. Then there’s the vast exploratory portfolio and joint ventures to consider — but the key point is that shareholders have the gold in the ground.
2. Sovereign Metals (LON: SVML)
Sovereign owns the Kasiya deposit in Malawi, which is the largest undeveloped rutile deposit and second-largest graphite deposit in the world. Rio Tinto has a 15% interest in the company and pre-feasibility numbers are simply exceptional.
The current MRE stands at 17.9Mt rutile @ 1.01% and 24.4 MT graphite @ 1.32% — leaving investors with an Net Present Value of over $1.6 billion and a 28% internal rate of return.
At $404/tonne in opex, operating costs are cheap as chips, and then there’s the low carbon footprint due to the rutile nature of the deposit — and rutile itself commands a price premium of circa 10x that of ilmenite. The asset is well connected to transport, and Rio (the world leader in titanium) will likely make a full buyout offer in time.
3. Amaroq Minerals
Amaroq is a strange company because despite having covered it several times, investors seem to not get the message despite the excellent share price movement in 2023.
The company’s Nalunaq flagship is a literal gold mine, backed by over $50 million of senior secured debt. Then there’s the exploratory portfolio — and for context, the company now boasts the largest land package in Greenland.
First gold production is scheduled for 2024, and the potential is simply enormous, with the strategic minerals assets arguably not yet priced in.
4. ARC Minerals
If you want the excitement of drilling without the stress of worrying about financing, then ARC Minerals is for you. It’s worth noting that you are still at the mercy of the drill bit — but in this case, the drilling is fully funded courtesy of Anglo American.
Here’s some context: Anglo held some extremely promising copper licences in Zambia. They gave them up during a period of political angst where the company essentially decided to commit commercial suicide by rejecting external investment (it’s massively more complex than this), and the licences wound up in the hands of ARCM.
Well Anglo’s back as the country has re-welcomed external investment— it really needs some copper right now — and ARCM has somehow, magically, got one of the best JV agreements I’ve ever seen to explore the licences. Details are here, but the general idea is that ARCM will be left with 20% of any find from millions and millions of dollars of drilling.
Then there’s the MoU on critical minerals between Zambia and the UK to consider — alongside the Green Growth Compact designed to generate £2.5 billion of UK private sector investment and £500 million government investments into Zambia’s mining sector.
5. Kodal Minerals
Kodal Minerals has agreed a $117.75 million funding package for its Bougouni lithium project in Mali with Hainan Mining. This includes not only money for the initial DMS plant — but also millions to drill Kodal’s gold projects. The downside is that the JV deal means KOD no longer has majority ownership, but the risk is limited and upside significant.
A Joint Venture means the two parties are proper partners; and for example, should the DMS plant (scheduled for production later this year) be delayed, there will be a joint effort to make it work.
Of course, the lithium price remains depressed, but analysts expect some upside by the end of the year.
6. Power Metal Resources
Power Metal has been beaten down by the wider macroeconomic environment, but there is arguably a floor on the company’s share price — indeed, at points, the market capitalisation of the company has briefly fluctuated below the value of its assets. You can talk about its majority ownership of Golden Metal (and therefore, Pilot Mountain), the UEE IPO, various drilling campaigns, shareholding in First Class Metals, or even the recent MoU with Saudi Arabia…
All of which are near-term catalysts. But for the risk-averse investor, the big point is the massive landholding across the globe in some of the most prospective mineral areas. This land is severely undervalued, and as small cap sentiment returns will be properly reflected in the share price.
The bottom line
There are a few common strings running through these companies — even though the assets are spread throughout the world, there is a value underpinning the businesses that will act as a quasi-floor on share price movement. I won’t say what buy-in points to make, but the bottom line is that if you have a major JV, a huge landholding, or a significant asset, you as an investor can be reasonably confident that the risk is measured.
Of course, this is still at the riskier end of the market (and there’s always the occasional disaster — HZM anyone?) — but I think the risk-reward is very attractive, and especially for those looking to make initial investments in the space.
One other key factor is management. GGP is run by half of the old Fortescue team, SVML by a well-regarded squad with a series of prior successes to back them up, Amaroq by all the right names…and so on and so forth. Naming individuals is generally not my game; but one of the hardest-learnt lessons in mining is that you can’t just have a great asset(s), you also need a competent team of management you can trust.
When a company is designated as high risk, this is often as much about management as it is about assets or the cash position.
I’ll finish with the caveat: these are not risk-free opportunities, and any potential investor should take care to do their own research. But comparative to the wider market, in my eyes, they qualify as lower risk for the returns on offer.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.