Bullion’s rising forward sales prices add to improving outlook for gold stocks
Plus, investors applaud Minerals 260’s deal to branch out with purchase of Ti Tree project in WA, Southam’s appointment as MD drives further share price gains for Canadian lithium explorer Cygnus and juniors Encounter and Alderan benefiting from farm-ins with BHP and Rio.
Interesting times for the gold producers in the hedging market. Forward sell gold for delivery in three years’ time and they are looking at a magical $A2,900 an ounce. It’s a cause for celebration.
Not that the producers are heavily hedged nowadays. But a handy de-risking tool to cover off capital commitments if so desired.
The ability to lock in $A2,900 gold three years out compares with the spot price of around $A2,640 an ounce, itself up strongly in recent days thanks to gold pushing back up through $US1,700 an ounce and the weak US exchange rate.
Stuart Tonkin, managing director of the lightly hedged number two ASX producer Northern Star Resources (NST), commented on Thursday that previously a three-year forward hedge would give a producer a $A20-$A30 ounce margin on the spot price.
Now it is approaching $A300 an ounce. It has got something to do with rising interest rates and holdings costs assumed by the counterparty to the hedge.
Whatever the reason, it is another bit of sunshine for the gold stocks which have been beaten up horribly in recent months.
Tonkin was speaking after a presentation to more than 500 mining-types at the Melbourne Mining Club yesterday.
During his presentation, Tonkin said that having the right people was one of the three requirements for a successful minding operation. The others were a decent deposit and doing the rights maths around an operation’s economics.
His reference to the importance of people comes as the industry frets about skill shortages in a post COVID world.
The result has been a lot of poaching between companies. In addition, weak gold equity values have eroded the value of existing share-based incentives designed to encourage loyalty to the firm.
Northern Star has responded by earmarking $15 million over three years to pay retention awards to its executives including Tonkin, down to the operational manager level.
“It’s not all for me,” Tonkin said. “It is key that people that are doing the work in the operations and leading those teams can see a pathway through because in these periods when equity is down, it is hard to see the conversion of those future (incentive) plans that are out there.
“This is (also) a bit of a safety net in response to a lot of inbounds chasing our talent.
“This is about keeping corporate knowledge, keeping the corporate culture how we like it and to keep driving the strategy we have.”
MINERALS 260 (MI6):
Explorers without a consistent newsflow get parked up by the market. No need to be there at the moment is the theory.
But more often than not, the lack of a consistent newsflow is not the fault of the explorer. It can be as simple as the farmers not wanting any exploration gear trundling through during cropping season.
It is a particular issue in WA. The answer is to have a mix of project locations, with some outside of the State’s extensive farming acreage.
That is just what Minerals 260 (MI6) has done by picking up a big exploration land package (the Ti Tree project) in the hot Gascoyne region from mining entrepreneur Brian Rodan for $1.3 million cash and 54.96 million shares, or 19.99% of the enlarged Minerals 260.
The market liked the deal, carrying Minerals 260 some 43% higher to 38c in the two days after it was announced earlier in the week.
Two things were behind the share price surge.
First up, the market welcomed the Ti Tree project as a source of activity and newsflow when Minerals 260’s exploration for the next Julimar PGE-nickel-copper-cobalt wonder to the north of the Chalice (CHN) discovery is impacted during cropping time.
And then there was the genuine excitement about the Ti Tree ground. There has only been cursory exploration previously but it has does have the same type and age of rocks that yielded recent discoveries and/or exploration encouragement by others and Rodan across rare earths, lithium, nickel-copper and for good measure, gold.
Last week the point was made that the James Bay region of Canada was laying down a challenge to Western Australia’s dominance of the hard-rock lithium sector.
But because the exploration industry there has been hollowed out by the flight of capital to things like marijuana and cryptocurrencies, the lithium push in the region is importing WA experience in a big way.
It was why Canada’s boom lithium stock, the soon-to-be dual listed Patriot Battery Metals (TSXV:PMET), recently secured the services of Ken Brinsden shortly after his departure from the $15 billion Pilbara Minerals (PLS).
And then there is the Perth-based explorer Cygnus (CY5) which recently exploited the Canadian knowledge void by picking up an advanced lithium project that the Canadians themselves really should have been cracking on with.
Cygnus was mentioned here last week when it was a 27c stock because of the building interest in the upside of its advanced Pontax lithium project in the James Bay region. It has since taken off to 37c for a one week gain of 37%.
The reason for the spike was simple enough – the appointment of former Mincor (MCR) boss David Southam as its managing director with effect from mid-February after he improves his handicap - his golf handicap that is.
With the help of the nickel price rise in the last couple of years, Mincor’s market cap grew from $70m to $1 billion as Southam set about returning its Kambalda nickel operation to production after first notching up major exploration success with a commitment to the drill bit.
Financing and offtakes are his speciality, which will be just what Cygnus needs as it progresses Pontax towards production.
Majors pony up with juniors:
There has been a realisation by the mining majors BHP and Rio Tinto that merger and acquisition action alone will not provide them with the next generation of copper mines they need so they can wean themselves off dependency on iron ore.
So they have both stepped up their mineral exploration efforts and to the benefit of junior explorers, it means they are more prepared than ever to strike farm-in deals over promising exploration projects held by the juniors.
Two juniors benefitting from all that at the moment are Encounter (ENR) and Alderan (AL8).
Encounter has BHP as a farm-in partner at its Elliott copper project in the Northern Territory. BHP is operator and is funding the first drilling campaign at the frontier project under a $25 million farm in agreement to earn up to a 75% interest.
BHP is keen on the region’s potential for large-scale sediment hosted copper deposits and will drill two initial holes by the end of November to check out the targeted sequence of rocks which is hidden by cover.
Encouragement with the initial drilling would see it push on with more work.
Encounter has a lot more on the go than the joint venture with BHP and it can be argued that there is nothing in its 11.5c share price ($40 million market cap) for its joint venture with the world’s biggest mining company.
The same could be said for Alderan (AL8). The former high-flyer is now back at a princely 0.9c a share for a market cap of $8 million yet it has the world’s second biggest miner Rio Tinto drilling away at its Frisco copper-gold project in Utah.
Rio Tinto can earn a 70% interest in Frisco by spending $US30 million over ten years. It first has to spend $US6 million by November 2023 to earn an initial 55% stake. A drill hole is now underway, targeting a Rio-sized porphyry copper-gold-moly target.
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One of Australia’s leading business journalists, Barry FitzGerald, highlights the issues, opportunities and challenges for small and mid-cap resources stocks, and most recently penned his column for The Australian newspaper.
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