AusThe restriction on Chinese investment in Australia’s junior miners continues to reshape the landscape for ASX-listed companies. With capital flows slowing to a trickle, miners are increasingly turning to overseas projects to attract investment, notably from China.
John Forwood, the Chief Investment Officer (CIO) of Lowell Resources Fund (ASX: LRT), highlights the stark contrast in foreign investment between Australia and other regions, where Chinese capital is still available.
Australia’s Capital Crunch
Since the boom of the 2000s, Australian junior miners have relied heavily on Chinese investment. However, heightened geopolitical tensions have significantly impacted the flow of capital. The Foreign Investment Review Board (FIRB) has introduced stringent regulations, making it difficult for Chinese companies to invest in Australian projects.
“Chinese foreign investment in Australia has been in decline,” says John Forwood, CIO of the Lowell Resources Fund. “It’s almost at zero now, despite China being our largest trading partner.”
Forwood points to CZR Resources (ASX: CZR) as a prime example. Lowell Resources Fund Holdings includes a stake in CZR, which has been struggling to close a deal with Chinese-owned Miracle Iron. The agreement, worth over $100 million, has faced months of delays waiting for FIRB approval. This highlights the slow pace at which Chinese capital now enters Australia, in stark contrast to earlier years.
The International Appeal of Chinese Capital
While Australian projects face significant hurdles, overseas miners have an edge in attracting Chinese investment. Despite being less attractive on paper, these projects offer a quicker route to funding from foreign investors, especially in Africa.
Forwood cites the recent $730 million acquisition of Tietto Minerals by Zhaojin Capital as an example of how overseas miners can unlock value with Chinese backing. “This kind of deal would not happen in Australia now,” Forwood said, emphasising the impact of FIRB regulations on local projects.
The ‘African discount,’ where African miners are undervalued compared to their Australian counterparts, has traditionally kept investors at bay. However, access to Chinese capital can offset this disadvantage, especially when it comes to securing takeover premiums.
Miners Backed by Cash
Forwood notes that many junior explorers are trading below their cash backing in the current risk-off market. Despite having strong management teams and valuable projects, investor sentiment remains low, pushing valuations down.
“Normally, cash backing signals a lack of confidence in management,” says John Forwood. “But that’s not the case here. Many of these companies have excellent management teams with successful track records.”
Solstice Minerals (ASX: SLS) is one such example. With a market cap of $17 million and cash backing of a similar value, Solstice has significant upside potential. The company, which recently sold a gold resource to Northern Star Resources for $12.5 million, has exploration projects in WA’s Carosue Dam belt.
Companies to Watch
Lowell Resources Fund Holdings includes a number of companies poised for growth, including Indiana Resources (ASX: IDA) and Kalamazoo Resources (ASX: KZR). Both companies are currently trading below cash backing, but Forwood believes they are well-positioned to unlock value.
Indiana Resources recently secured a $90 million settlement from the Tanzanian government for the expropriation of its Ntaka Hill nickel project. With $60 million already received, the company expects the final payment by March 2025. Forwood also notes the potential of Indiana’s South Australian gold projects, which could provide further upside.
Kalamazoo Resources, another company backed by cash, recently received $3 million from De Grey Mining (ASX: DEG) for an option over its Mt Olympus project. The company could net an additional $30 million if De Grey exercises its option on the Ashburton gold project.
Outlook for Junior Miners
The future for Australia’s junior miners remains uncertain. The slowdown in Chinese capital, coupled with the lingering effects of geopolitical tensions, has created a challenging environment. However, opportunities remain for miners operating in international jurisdictions, where Chinese capital continues to flow.
Forwood believes that companies with strong management and cash reserves are best positioned to weather the current downturn. “There’s money to be made in this space,” he said. “It’s just a matter of picking the right companies.”
Conclusion
The Australian resources sector faces a growing challenge as restrictions on Chinese investment weigh heavily on junior miners. However, companies operating overseas, particularly in Africa, are capitalising on the availability of Chinese capital. For investors, companies with cash backing and strong management teams, such as those in the Lowell Resources Fund, offer promising opportunities in an otherwise tough market.
As Lowell Resources CEO John Forwood notes, “The market is tough, but the right companies will find ways to thrive.”
