Herencia Resources - Strong Reversal

http://www.herenciaresources.com/
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This article is a follow-on from the below posts. For full context and information, read these articles first:
http://www.theel1tetrader.com/2012/08/herencia-resources.html

The blog first looked at Herencia Resources back in August 2012 when the share price stood at 0.81p/share. The share initially failed to create the medium term breakout that was possible at the time which would have led to an initial price target of 1.00p/share and thus it continued its long-term downtrend to an ultimate low around 0.6p/share. However, the share has released some significant news recently that has allowed it to climb from the low and breakout to the upside today. Consequently, the share price has completely reversed reaching a high today at the close of 1.225p/share equivalent to a healthy 51.2% increase upon the initial review price.


It will be a relief for shareholders that the long-term downtrend of the stock has been broken. This has effectively caused a share price cap that in fairness has not really been tested multiple times. However, with 1.6 billion shares in issue and a current market cap of £20.5m and no news today for the rise, it is highly likely the price will fall back, perhaps to 1p in the absence of news. This is backed by the very high relative strength index level. Thus I would not be inclined to purchase shares on the recent potential 'spike'. (Prior to this it is certainly possible that ~1.35p+ could be reached)  Despite this, in the long-term a price of 1.2p could be sustained and built on where appropriate.

The news that has been released since the first review has primarily revolved around further developments at Herencia's flagship project, Paguanta (70% WI). For those who cannot recall,  Paguanta comprises a 39km2 zone that spans across 3 separate projects. These are 'Patricia', 'Doris' and 'La Rosa' which are zinc-lead-silver-gold (of which gold is in low quantities), copper-silver and porphyry-copper prospects respectively.

The first piece of news was released shortly after the article. A geophysical anomaly (i.e. area likely to contain mineralisation and extractable metals) at Patricia was extended to 3km in length and 1km in width - this is a significant accumulation that is largely untested. The Managing Director commented: "I am very encouraged by the results of the IP survey which has allowed us to extend the Patricia anomaly to the south and east and highlights the enormous potential at Paguanta. For example, the Resource envelope for the main Cathedral vein is approximately 600 metres long, yet the Patricia anomaly now measures 3 kilometres in length and appears open to the east. Given these results, I believe Patricia has the potential to evolve into a significant zinc-silver producer".


courtesy of thejourney1972 on flickr
Following metallurgical test work, Herencia announced in September that its Patricia sub-project had the potential for zinc recoveries to exceed 80% with Silver recoveries possibly exceeding 90%. Silver concentrate grades also ranged between 2,000 and 18,000g/t.The results confirmed the high prospectivity of the undrilled deposits. Furthermore, Herencia could benefit from the likelihood of higher silver prices in 2013 which would enhance the economic viability of their Chilean projects. With Gold prices stagnating and some of this focus transferring to Silver, the median estimate by 50 top Bloomberg analysts was for silver prices to reach $40 by the end of 2013 representing around a 33% year-on-year increase.

The final drilling results from Paguanta were released in November. The company noted:  
"The final results of the surface sampling and drill hole re-logging again highlight the significant potential of the Paguanta area and the possibility of incorporating an open pit into the Mine Plan. When combined with the latest metallurgical test work on transition type ore, it will allow a final open pit mining study to be completed. Early indications from the open pit study are very encouraging. "With several new work programs added to the Feasibility Study, including the surface sampling and near-surface drill hole re-logging program, reviewing the potential for open pit mining and other associated study work, the Feasibility Study is now anticipated to be completed at the end of next quarter. Achieving this will be a tremendous result for the Company and a credit to our Chilean team."

In December the company continued its rich vein of positive news with a ~16.5% increase (or 2.2 million ounces) in its silver deposit estimates at Paguanta to 15.6 million ounces. The company confirmed that the feasibility study for the project is due by the end of Q1 2013 (i.e. before the end of March). The most recent January update on Paguanta has its main features outlined below - this has been the catalyst for the earlier share price rises.

- Potential extension of the Patricia mineralisation to over 1,600 metres
- Identifies the potential for a deeper porphyry style mineralising system at Paguanta
- Identifies six target areas, three of which are yet to be tested, others requiring deeper drill testing
- Confirms excellent correlation with the existing mineralisation (Patricia Mineral Resource

"We believe the importance of the potential for porphyry-style mineralisation at Paguanta cannot be over-stated. The Paguanta Project, which now comprises two deeper porphyry-style targets in La Rosa and Patricia, is located within the Chilean porphyry-copper belt and has the active BHP Cerro Colorado mine to the south, Codelco's Mocha Project to the west, Anglo-American's Queen Elizabeth Project to the east and Rio Tinto's Candelabro to the north. Whilst the focus rightly remains on advancing Patricia toward a mine development decision, the Company is reviewing options to realise potential value from the porphyry targets".

The events that have been released at Paguanta are clearly very positive and thus I would argue the share price rise has been warranted (albeit not in the huge rise that occurred today). It appears that Herencia has finally turned a corner and whilst without news the share price may drop back.

One problem still at large with Herencia is the lack of cash the company has. As at year-end (30th June) 2012 the company only had £1.5m in cash and cash equivalents. The next source of their income is unknown and it will be interesting to see if they capitalise upon the recent share price strength to conclude a placing with Nyrstar. Placing 150m shares at 1p/share would raise £1.5m equating to just less than 10% dilution. On the contrary, all the recent activity has been at Paguanta - Herencia does have other projects including Guamanga which could be prolific (especially since it lies on the Chilean IOCG belt).

In light of today's rise I will shift my view of Herencia from undervalued to neutral to benefit and advise that traders should lock-in profits. Look out for a regulatory news statement tomorrow - the rise could have triggered the requirement for the price movement to be explained by the company. A 'no reason' RNS will almost certainly lead to a quick share price decline.It could be argued that today's rise is part of a resurgence in a number of undervalued AIM listed resource stocks in recent months which have included SOU, LGO, BAO, SOLO and multiple others - whether the rise will be sustained in the obvious question. The geographical position of Herencia is good (as noted in the last article) not least with BHP Billiton increasing its footprint in Chile. Payable copper production at BHPs Escondida plant rose by a massive 70% in H2 2012 (over H2 2011) with this number also expected to rise a further 20% in 2013. In the long-term Herencia is well-placed to capitalise upon its resource base.

4 comments:

  1. Getting bored of saying 'Another good call!'

    thanks for all your efforts

    CraigJ

    ReplyDelete