A one-year return of 877% is exactly the sort of return on risk that commodity investors look for when putting their money in a junior miner like Xtract Resources Plc (LON:XTR).
Easier said than found, of course, as the bulk of this growth only occurred in mid-January this year when the share price rocketed from 2.40p on January 13 to 8.50p five days later. The share price fell back, losing half its gain, before reaching 7.30p at close of trading on March 5, giving a year-to-date return of 321.3%.
Expectations among some traders are that the price could reach 15.00p or more, for a number of reasons. The surge in share price followed a January 12 update about the drilling programme at Xtract’s Racecourse Mineral Resource on the Bushranger copper-gold exploration project in New South Wales, Australia. Executive chairman Colin Bird described the drilling results as ‘very encouraging’. Investor appetite had already been whetted by the interim results published the previous September, which had talked about the potential for significant expansion, “with the deposit broadening at depth and gold grades increasing” and “excellent upside potential for further discoveries”.
Copper deposit “significantly larger than first thought”
On 23 February, Bird added to the excitement by saying the copper-bearing deposit may be “significantly larger than first thought”. Subsequent drilling updates indicate continued progress in a region that is low-cost and mining-friendly with well-established infrastructure. In February, too, Bird bought £58,000 of shares in the company, an indication perhaps of his optimism about the company’s prospects.
Xtract’s other projects were also reported to be making progress. Its Eureka copper-gold project in Zambia had encountered high sample grades, indicating significant potential to extend the known deposit, and justifying a follow-up drilling programme. At Kalengwa, again in Zambia, Xtract has what it believes is one of the highest-grade copper mines in the country, with further drilling programmes on the way. Meanwhile, operations at Xtract’s main asset, Manica Gold Project in Mozambique, continued to provide the bulk of its revenues, and two mining contracts on its hard rock prospects at Guy Fawkes and Boa Esperanza were agreed.
Unfortunately for Xtract’s gold-based revenues, the 10-year US Treasury interest rate started rising in August last year, bringing the price of gold off its peak of £1,574 in that month down to £1,227, where it was 12 months ago. This slide will likely be short-term because it is in the interests of the US government to keep rates down, but it also needs to be seen against a long-term upward trend that has been developing since before the Great Financial Crisis broke in 2007, since when governments have printed unprecedented amounts of money, causing nervous investors to seek real assets such as gold.
Copper price hits 10 year peak in February
Fortunately for Xtract, the price of copper hit a 10-year peak of more than $9,000 per US ton in February, or 63% over the past year, benefiting from strong fundamentals in the copper market.
Xtract investors’ only interest is whether its drilling programmes strike gold, not so much its fundamentals. Just as well, as the balance sheet reflects the high-risk nature of this investment. The company is currently unprofitable but debt free, with enough assets to comfortably cover its liabilities. Last week, for the third time this year so far, they issued new shares to access more working capital and to fund its projects in Australia and in Zambia, but in the process diluting the holdings of existing shareholders. The full year results for 2020 will be out in June, though investors will be much more interested in the latest drilling updates.