We wrote about our top-down gold investment thesis and the companies best placed to benefit in our February 2016 update. As stated previously, gold’s investment case has merit given the unprecedented level of global QE and currency debasement, and we have become increasingly constructive on gold given the return of negative real interest rates across the globe. We also like gold as a hedge to global market volatility. We have a particular interest in the Australian gold space leveraged to A$ gold. Specifically, stocks that are: 1) Strong free cash generating mid-to-large-cap producers with self-funded growth; and/or 2) Emerging producers boasting high-margin, low capital-intensity assets with solid mine life and/or exploration upside. Read on for our view on two Australian gold stocks.
Since the beginning of 2016, we have observed key positive catalysts for gold including:
Economic and political uncertainty following the Brexit referendum - increasing the likelihood of other populist election victories across Europe and the USA;
US Fed rate rise expectations being pushed out for the foreseeable future; and
Ongoing USD weakness.
Gold in US$/oz (grey line in the chart below) has had a solid move off its recent lows and gold in A$/oz (“A$ gold” - green line in the chart below) is hitting all- time highs. Combined with input cost deflation since the previous boom, various Australian gold producers are achieving record margins.
Source: Bloomberg, Paragon
We have particular interest in the Australian gold space leveraged to A$ gold, specifically, stocks that are:
- Strong free cash generating mid-to-large-cap producers with self-funded growth; and/or
- Emerging producers boasting high-margin, low capital-intensity assets with solid mine life and/or exploration upside.
We discussed this recently in a livewire video – Positioning for strength in Aussie Dollar gold. (VIEW LINK) Following is an update on two of our gold holdings.
St Barbara (SBM). St Barbara’s cornerstone asset is its world class Gwalia gold mine - one of the best gold operations in Australia. St Barbara is self- funding Gwalia’s 15% production increase to 300koz pa. Based on spot A$ gold Gwalia is running at outstanding ~100% margins. Bob Vassie, MD & CEO, in our view, is the best in the business. He has turned around the company’s fortunes by improving productivity at Gwalia, improving underperforming operations at Simberi, and disposing of the problematic Gold Ridge in the Solomon Islands. His execution has been extraordinary, saving the company from going into administration, by turning a previously highly geared balance sheet to what we expect to be net cash by the end of the year. Despite St Barbara’s material share price re-rating, at spot gold prices of A$1,814/oz it is still trading at an attractive proforma FY17F EV/EBITDA multiple of ~5x, compared to producing peers’ average of ~8x. Further, we expect this gold bull market to lead to an expansion in multiples - see Chart 2 below.
Source: BLS, Bloomberg, Federal Reserve, Macquarie Research, July 2016
Blackham Resources (BLK). Blackham is a unique, fully-funded imminent A$ gold producer, boasting exceptionally low capital-intensity given how cheaply it acquired its resources, plant, and infrastructure. Blackham recently confirmed guidance - for its 100koz+ pa high-margin Matilda gold project - of 25koz for 4Q16 (hence a full production quarter). Despite Blackham’s share price re-rating, at spot gold prices of A$1,814/oz it is still trading on proforma FY17F EV/EBITDA multiple of <3x, half that of its producing peers. Exploration success has seen the company upgrade its resources and reserves, increasing its mine life to >8 years. In our view, BLK will surprise to the upside and de-risk a 130koz+ pa high-margin operation, while maintaining or extending its mine life. We continue to believe that once in production Blackham will have strong corporate interest from mid and large cap peers that are lacking quality growth assets.