Is this mining investment company still worth holding?

Strata Investments (AU:SRT – 18¢), an Australian Stock Exchange (ASX)-listed investment company primarily focused on undervalued natural resources opportunities, has reported another year of losses in what proved to be a challenging period for both investors and operators across the mining sector.

A negative £3.9mn movement on the investment portfolio was slightly lower than in the previous year and largely reflected a similar-sized valuation reversal on Strata’s holding in ASX-listed resource company Cobre Pty (AU:CBE). The company is progressing projects in the Kalahari Copper Belt (KCB) in Botswana.

As part of a collaborative effort with ASX-listed Sandfire Resources (AU:SFR), an airborne gravity gradient survey was flown over Cobre’s Ngami Copper Project and Kitlanya West Project areas earlier this year. It identified several key parameters for large sedimentary copper deposits, including: potential sub-basins in each of the project areas; major bounding structures; and large-scale folding, which may provide trap sites for tier 1 deposits. These results provide valuable information for both area and target prioritisation ahead of drill testing.

Strata’s management has high conviction in Cobre’s potential to be a game changer for the company, so much so that they invested A$1.5mn (£0.8mn) to raise the company’s stake to 19.9 per cent during 2023 and acquired a further 5.6mn Cobre shares at a cost of £0.2mn post year-end. The resulting holding of 64mn shares is worth A$3.5mn (£1.8mn), making it Strata’s largest holding by far in the £11mn listed investment portfolio.

Valuable royalty could be sold

Strata's exposure to copper doesn’t end there, as the company holds a net smelter royalty (NSR) over Sandfire’s A4 exploration project (carrying value of £11.4mn), and a capped NSR over the T3 project (carrying value of £1mn), both of which are in the Kalahari Copper Belt. Since the year-end, Strata received a £1mn royalty payment from Sandfire on T3. The A4 royalty has not been revalued, but it should have upside given the potential for Sandfire to materially expand the defined copper resource over which the royalty sits. To put the potential upside into some context, a 25-50 per cent increase in the resource size would add £4mn-£8mn to the royalty's valuation.

Furthermore, based on expressions of interest, Strata’s management is “confident that the [A4] royalty would command an attractive price should a decision be made to sell”. The £11.4mn carrying value accounts for 77 per cent of Strata’s market capitalisation and 45 per cent of its net asset value, so it’s significant. Near-term, newsflow from Sandfire on the A4 project is the most likely share price catalyst to narrow Strata’s 41 per cent share price discount to book value.

True, Strata’s share price is flatlining on my last two buy calls (‘A change in listings could make this stock a bargain’, 9 March 2023), and (‘A cash-rich stock on a huge discount’, 7 September 2023), but the headwinds facing the mining sector should start to ease. That’s because historically the end of the US interest rate hiking cycle has boosted investor sentiment towards mining equities. Strata holds a portfolio of 40 listed resource holdings that have exposure to copper, precious metals, nickel, lithium and rare earth elements. Hold.

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