KEY POINTS:
Luck plays a major role in the success or failure of listed mining companies.
Having said that, companies make their own luck - the successful ones are constantly looking for new exploration and production opportunities.
Summit Resources and Heritage Gold NZ are excellent examples of the contrasting fortunes of mining stocks. They have a great deal in common as they were both floated within months of each other during the 1980s sharemarket boom and still have their original managing directors, although one announced his resignation after the market closed yesterday.
In the past few weeks Summit's share price and market value has surged above $5 and $1.1 billion respectively while Heritage's share price is below 5c and it has a market value of less than $10 million. Is the success of Summit due to good luck or good management and why has Heritage performed so poorly?
Summit, then called Summit Gold, was listed on the NZX in July 1987 after the issue of 30 million bonus shares to existing shareholders. Colin Beyer, the Wellington lawyer, was chairman and Alan Eggers managing director and the driving force behind the company.
The company's main objective was to develop goldmining operations in Western Australia and in Central Otago near the Macraes resource.
The stock peaked at 55c shortly after listing - giving Summit a market value of $22 million - but fell sharply after the October 1987 crash.
The original gold prospects didn't meet expectations and in the mid-1990s the company began exploration work on its Mt Isa lead, zinc, copper and uranium prospects. It discovered a uranium deposit in this area but the activity was sidelined because the Queensland Labor government had a ban on uranium mining.
Earlier this decade the company had a number of share placements between 6c and 12c a share and in 2003 Auckland lawyer John Seton, the brains behind Iddison Group Vietnam (later IT Capital and now Sealegs), replaced Beyer as chairman.
Shortly after Seton became chairman, the company placed 26 million new shares at A4.6c each. The buyers of these shares have been extremely fortunate as these are now worth $127 million compared witha purchase price of just over $1 million.
Interest in Summit picked up in 2004 when the price of uranium shot up to US$20 a pound from US$7. The company started putting more emphasis on its uranium prospects but the share price was still only 18c at the end of the year.
In 2005 Summit's share price increased from 18c to 63c as the uranium rose from US$20 a pound to US$36 and last year Summit went from 63c to $3.15 as uranium surged to US$69 a pound. Earlier this week the uranium spot price was US$85 a pound.
In February Paladin Resources, a major Australian uranium company with a market value of A$4.4 billion, made a hostile takeover offer for Summit on the basis of one Paladin share for every 2.04 Summit shares. At Paladin's Thursday closing price of A$8.78 the offer is worth $4.90 per Summit share.
The takeover was not unexpected as Paladin is the other 50 per cent joint venture partner in the Valhalla and Skal uranium deposits in Mt Isa and is in dispute with Summit over a number of aspects relating to Valhalla.
The target company quickly rejected the offer on a number of grounds, including the belief that the Summit share price had better potential. Analysts believe that the bid values Summit at a uranium price between US$15 a pound and US$24, well below the present spot price of US$85.
However it will take at least three to five years to develop these mines and Australian politicians continue to ban the development of new uranium mines.
The success of Summit is due to a large dose of luck plus the determination and perseverance of Alan Eggers. The company would still be a penny dreadful if uranium had remained under US$10 a pound, but Eggers spotted an opportunity and has taken advantage of it.
He has been well rewarded as his shareholding is worth more than $50 million.
Eggers has to be careful he doesn't push his luck. Uranium prices are rising because of plans to build nearly 200 nuclear power plants around the world in the next 10-15 years.
However the political attitude towards nuclear power plants is finely balanced in Australia and throughout the world. Australian politicians may not remove the ban on new mines and a reduction in the number of planned nuclear power plants would affect the high-flying uranium price.
Unfortunately the story of Heritage Gold, which listed on the NZX in September 1986 after issuing 12.75 million shares at 50c each, is far less exciting. The company remained under the control of managing director Peter Atkinson - who owned 30.6 per cent on listing but now holds just 5.9 per cent - until he announced his resignation late yesterday.
The company's share price and market value reached $1.50 and $19.1 million respectively in 1987 after highly encouraging sampling from the Mahara Royal prospect on the Coromandel was announced. Since then it has been mainly false promises and a depressed share price.
Atkinson hasn't had much luck but his inability to develop a clear strategy and to issue large numbers of new shares to outside interests at a substantial discount has discouraged investors.
The notice of meeting for last year's AGM, dated September 14, proposed authorising the issue up to 16.7 million shares at an issue price of A2.5c to unspecified large investors.
The issue price represented a 31 per cent discount on the average weight share price over the preceding two weeks. The notice of meeting stated that this capital raising was sufficient to fund the company's financial requirements.
In September the company announced it was having a one-for-four rights issue, also at A2.5c a share and it had a binding agreement from Australian investors to take the 16.7 million share placement at the same price.
Why did Heritage announce a rights issue when it stated less than two weeks earlier that a 16.7 million share placement was sufficient to fund its financial requirements? Were the Australian investors encouraged to purchase the low-priced placement shares on the basis that they would also participate in the yet-to-be-announced discounted pro rata offer?
The other issue with Heritage was the proposed spinoff of its Waihi gold assets into a new company called Mid-Earth Minerals. A great deal of fanfare was created in August 2006 when Paul Cranny was appointed Mid-Earth's manager director but less than four months later he was gone.
In 2000 Heritage spun off E-cademy, which later became Training Solutions and is now TRS Investments. TRS has a sharemarket value of less than $1.5 million.
Shareholders are extremely frustrated with Heritage because it has reasonable gold prospects in the Waihi area but these are not operating.
The company seems to spend a great deal of time on financial issues, including placements, rights offers and spinoffs, while its mining operations make little or no commercial progress.
Now that Atkinson has announced his resignation the next important decision is to move Heritage's head office from the trendy main strip in Parnell, Auckland to Waihi or another mining town.
Parnell doesn't have the type of gold Heritage is looking for.
* Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.