Taking Stock 2 May 2024

ANY regular readers of our client newsletters will know that I hold high hopes for one new project to convert to a star performer on the NZX in the next year or so.

I refer to Santana Minerals, actually an ASX-listed gold explorer, but very likely to be dual-listed if the plan becomes a reality.

Santana is an Australian company that plans to make all of its revenue in New Zealand by mining for probably many decades the gold that has been indicated in the Bendigo hills near Cromwell.

I cannot think of any other ASX-listed company wholly dependent on NZ.

For seven years I have watched this exploration project advance, admiring the two highly experienced geologists, Kim Bunting and Warren Batt, build the project, quietly and cautiously.

They have built an excellent team of geologists to work with them and, having satisfied themselves that the discovery was commercial, have helped transition the project from its origin, Matakanui Gold, comprising fewer than 20 shareholders, into an Australian company with the capacity to raise overnight tens of millions, as it just has proved.

Santana Minerals understood the data, supplied the tens of millions needed to drill hundreds of holes into the hills and valleys, and was richly rewarded when the drillers struck an ore body which contained high grades of gold, thus converting a good project into one that might have a large impact on New Zealand in coming years.

Last week Santana Minerals took another crucial step, raising A$30 million from “wholesale” investors and fund managers.

Santana placed shares at A$1.15 each and found demand so far exceeded the Santana target that scaling of around 50% occurred. Its previous capital raising was at A$0.62cents.

The company now has the cash to progress its transformation to a mine, fully funded to complete its consent application, its continuation of drilling (to convert “inferred” gold into the more certain status of “indicated” gold) to spend on better roading, and to prepare for the conversion to a long-life mining company.

This seems eons beyond the time when the geologists invited me to invest, and to find wholesale investors willing to take the substantial risk of funding an exploration project.

Any such project has risks beginning with: - 

a) The possibility that no meaningful gold resource will be discovered.

b) The project might end because of lack of future funding.

c) The project might fail to attract the expert staff needed if gold is found.

d) The gold price might fall, ruining the economics.

e) The consenting process might fail because of ideology.

f) Unknown events – earthquakes, floods – might make the mining of a discovered resource impossible.

These have gradually been addressed, to the extent that they can be mitigated.

This has been to the immense credit of Batt and Bunting, and more lately to the Chief Executive Damian Spring (an engineer with extensive experience in managing mining developments).

My view is that if the project achieves its potential, Batt and Bunting would be far more appropriate recipients of a knighthood than most of our business knights.

Consent has yet to be considered, the price of gold has risen sharply but still could fall, and the unknown events occur randomly.

Yet Santana has high levels of certainty that it has located a vast resource of high-grade gold, on private land, well away from housing. It now has money to fund itself for at least two years, and it has to its credit very fully addressed the old standards required of miners, ensuring that if it is not “fast-tracked” by the Crown, it would have a thorough application for a “slow” track.

This month it has released a pre-feasibility study, which it says by definition could overstate OR understate its financial forecasts by up to 25%. The study, including extensive environmental issues, indicates an expectation that for at least 10 years it will mine.

Mathematically, the odds of it being a mine for only 10 years are like the odds of finding in its rock dinosaurs playing netball. The 10-year time frame ignores other site discoveries and assumes the untested boundaries bring an immediate end to the presence of gold.

The cost of extracting gold would be low because the rock processed releases gold without the need to burn off the carbon, which usually traps gold, but at Bendigo is absent.

The energy cost of burning off carbon is high. The saving is immense. Without that cost Santana’s margin is unusually wide.

The pre-feasibility study highlights the value of the project to investors and the Crown. The Crown stands to benefit by around $1 billion over the first 10 years of the mine’s life. 

The project will employ around 250 people, most of whom are likely to live within a 50-kilometre radius of Bendigo. The company is likely to have buses for its workers. The wage bill will exceed $25 million per annum.

Cromwell’s town of around 6,000 is likely to supply the mine with provisions. Suppliers will like the new customer.

The project will largely be electrified. The Clyde dam’s renewable energy will have a new demand.

Investors, according to Santana’s plan, would enjoy over 10 years a surplus of around $2 billion producing an internal rate of return of around 75% per annum, if the gold price remains at current levels.

One imagines that Cromwell’s supermarkets will have more customers, that the motels and the Harvest Hotel will be busier and that the schools will have to cater for more kids.

Taking Stock has regularly presented the facts and discussed the potential for some years, anticipating that the milestones will be methodically achieved.

For reasons of their own, not understood by me, other brokers and most of the media have made no attempt to understand the project.

To anyone prepared to analyse its drilling results, listen to the regular briefing, and watch the ASX announcements, Santana Minerals has provided real hope that there might be bright lights on at least one line of investor portfolios in the fairly glum global, and very bleak local, economy.

If Santana is consented, builds its open pit and extracts the high grade of indicated gold at the modest costs predicted, it would produce, at current gold prices, around $200 million of nett profit after tax, every year.

In New Zealand, that would make it comfortably enter the NZX Top 20 stocks if it were listed here.

A Top 20 stock entering various indexes must be bought by KiwiSaver managers and will benefit from the research reports of the major brokers, who currently have made no effort to understand the project.

In Australia, a mining company producing $200m of nett profit after tax would rise in market capitalisation to a level that qualified for the ASX Top 300, meaning index funds there would robotically buy Santana shares.

The share register currently reflects low levels of trades, primarily, I suppose, because most NZ investors in Santana have watched the milestones be reached and have good reason to hope that the forecast profits occur, leading to dividends that would reflect the high grade of gold, the low cost of production, and the current (elevated) gold price.

Imagine that! NZ, Cromwell, might have a new star, shining brightly, within two years.

The final steps to get there will be: -

Consent (not guaranteed).

Debt funding (for the plant and equipment).

Successful gold extraction at forecast yields.

A consistent gold price.

Footnote: The history of gold mining around Cromwell is fascinating. I will discuss this at a seminar I will hold in Cromwell on May 6. The public will be welcome but must pre-register as seating is limited at the Harvest Hotel (seminar@chrislee.co.nz 042961023). As at the time of writing there were 40 unclaimed chairs.

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THE announced result of BUPA, the aged care provider, was yet further evidence that major operators like Ryman, BUPA, Summerset, Oceania, and Arvida are being short-changed by the Crown.

The government refers people who need care to the providers and sets the price it will pay the operator for its care service.

The operator must employ nurses and meet high standards of care to retain the licence, and must be open, where possible, to those the Crown refers to the private operators.

The cost of meeting these standards is much greater than the Crown pays, the most obvious high cost being the wage bill, especially for our wonderful nurses.

So the providers either subsidise those needing care by making profits from property sales, or subsidise them by charging, more than cost, those who are able to pay for additional comforts, like a nice outlook from what the sector calls a “premium” room.

Business models based on cross-subsidies do not work for long.  Smart operators enter the sector and provide only premium rooms.

Weak operators go broke. The sector under-provides. The Crown then has an unfixable problem, at least in the short term. Building more beds requires a lead-in time of several years.

Our Health Ministry has just completed a study of this and concluded that the sector is heading for crisis, with more people needing care (by 12,000) than beds are available.

The Crown’s responsibility to provide care will be tested. 

Many may recall what I regarded as the air-headed comments of the Retirement Commission when two years ago it released statements that I viewed as an attempt to justify the commission’s survival. The commission was supported by a little-known provincial commentator with a good eye for self-promotion.

If I were in charge, the commission in its entirety would be at the top of my list to cut the numbers who feed off the public purse.  While there may be examples of care providers having different protocols and different ways of surviving, like deferring settlements until properties are sold, there never was a case for relitigating the contracts that residents had signed when they bought a licence to occupy a room.

Every aspiring resident was required to receive independent legal advice before buying care. Empty little fist-waving cannot alter the facts.

The aged care providers and the retirement village sector invest huge capital into property and take what clearly is the significant risk that its sales and care services will cost less money to deliver than the market will pay.

If some want to add more pressure on the providers, they would find that the provider of last resort – public hospitals – would have to absorb the surplus numbers needing care, as the private sector would cancel its plans to build more beds. That is happening now.

BUPA, a reputable provider, has property that has cost hundreds of millions to provide its service. One in 11 care beds in New Zealand is provided by BUPA. Its 2023 profit of $12m is risibly inadequate, a bubblegum profit for an organisation with enormous capital invested, taking very real risks.

Those who provide the luxury facilities retain the right to stop growing, stop building more facilities and let the Crown and the Retirement Commission work out a replacement service. Frankly, that scenario is hideous. Silverstream Hospital, of the 1960s, would presumably be rebuilt, its equivalent in every town.

What would then follow would be a two-tier sector, those with little or no money being in a Crown “poor house”, while those with money would pay the private sector whatever it costs to live with dignity and, as “Frederick” would say, in “propitious” circumstances.

Is that a desirable outcome?

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Travel

Our advisors will be in the following locations on the dates below:

3 May (am) – Timaru – Chris Lee

6 May – Cromwell – Chris Lee

7 May – Cromwell – Chris Lee

15 May - Auckland (Ellerslie) – Edward Lee

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee

27 May (am) – Christchurch - Fraser Hunter

28 May – Christchurch – Chris Lee

29 May (am) – Christchurch – Chris Lee

30 May - Levin - David Colman

5 June – Nelson – Chris

6 June – Blenheim – Chris

11 June – Tauranga – Chris

19 June - Lower Hutt - David Colman

25 June – Napier – Chris

Please contact us to arrange a meeting office@chrislee.co.nz   

Seminars

Chris Lee will be holding a small number of investment seminars in May.

He will be discussing the economy – how to read the signals and avoid disasters – along with a presentation on a proposed gold mine in Bendigo, Central Otago, including the history of gold mining in the area and its plans for the future.

Location: Cromwell

Date: Monday May 6

Time: 7.15pm

Venue: Harvest Hotel

Location: Auckland

Date: Friday May 10

Time: 2.00pm

Venue: Milford Cruising Club

Location: Paraparaumu

Date: Monday May 20

Time: 11am

Venue: Southwards Car Museum

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

Reservations are required and can be made by emailing seminar@chrislee.co.nz or phoning 042961023.

Chris Lee

Chris Lee & Partners Limited