Big gains in the share prices of the leading gold miners have seen the spotlight swing to the next generation of producers, which are carrying sharply lower valuations. Macquarie sees an opportunity, naming Dacian as its pick. Plus, Stavely awaits results in its hunt for a big copper-gold discovery.
Gold’s against-the-odds push through $US1,300 an ounce fuelled a massive re-rating of the gold producers in the past couple of months.
So much so that the hard-nosed types in the market reckon the leading gold producers have become too expensive on a net present value basis.
None of that means much if gold continues to build above $US1,300 an ounce. But the very same reasons why gold wasn’t meant to get there in the first place (expectations of rising US rates and a stronger US dollar from tax reform) have not gone away.
So stand by for a raft of downgrades on the producers from buys to neutral, and god forbid, the odd sell recommendation. At the same time, there will a rotation out of the established producers in to the gold mine developers.
The hefty share price gains the producers received in the last couple of months means at current prices, investors are paying around $6,000 an ounce on an EV/production basis. That’s fine if you think the gold price rise has more in it but is a bit worrying if it hasn’t.
The developers, on the other hand, have also enjoyed strong share price gains of late but are trading at around $2,000 an ounce on a (prospective) EV/production basis. Prospective is the key word there given that the developers are not yet in production.
So there are risks around things such as commissioning, confirming grades and recoveries and final capital costs to consider before abandoning the established producers.
But with equity values for the producers to trade in line with gold price moves for the time being, there is better value to be had among the developers. Macquarie is one to think so.
“The recent rally of Australian gold equities into the New Year, supported by a sector wide buoyancy over 2HCY17, in our view, has led to an erosion of value of many of the junior and intermediate Australian gold producers,” Macquarie said in a note to clients this week.
“With the erosion of value of domestic producers, our value has shifted to developers and offshore producers.”
Its preferred domestic developer was Dacian (DCN) which is trading at $2.92 for a market cap of $609m. It is storming towards first production at its 200,000 ounce-a-year Mount Morgans gold project near Laverton in Western Australia by the end of the March quarter.
An update from the company yesterday said that the treatment plant was 90% complete and is on time and budget. Underground and open-cut mining is underway.
Dacian executive chairman Rohan Williams summed things up neatly: “We remain on time and budget, which means the project is being de-risked by the day and we are getting closer to production and cash-flow by the day.”
Macquarie has a $3.80 price target on the stock. Assuming gold prices hold together, Dacian could well get there in a hurry if it proves up an oxide resource at its Cameron Well prospect, as expected.
A first resource estimate could be a couple of weeks away and holds the promise of making what is being built as 200,000 ounce-a-year producer something bigger still.
Stavely’s pitch for the fame at hand
Shares in Stavely Minerals (SVY) have done well in the past couple of months, motoring from 17c back in November to 21.5c this week.
The 26% price gain comes as the market awaits an update on Stavely’s latest drilling for a big porphyry copper-gold system beneath its Thursday’s Gossan prospect in the shadows of the Grampians in western Victoria.
A nine-hole program kicked off there late last year and is probably about half complete by now. The buzz about what might come from the drilling program reflects a couple of things.
First there is the sheer scale of the potential prize for a company like Stavely with its modest $26 million market cap.
Then there is the net result of Stavely’s methodical and highly technical exploration effort since coming to the market with the property in 2014.
All of that work has brought Stavely to the point where the latest drilling is vectoring-in to test for a copper-gold porphyry at depth which modelling suggests is the source leak of the near-surface mineralisation at Thursday’s Gossan.
Just before the latest drilling program - funded with the help of the drilling contractor and the State government – the company was as bullish as it could be about what might come.
“We have an opportunity to discover another Kalgoorlie in western Victoria, for those wanting to put it in a WA context,” Stavely boss Chris Cairns told the Melbourne Mining Club’s Cutting Edge series in September.
Porphyry systems supply the bulk of the world’s copper needs. They are characterised by being low-grade – the global average grade of copper mines is currently running at about 0.62% copper - but big tonnage.