Emerging producers next cabs off booming gold rank

Barry FitzGerald

Independent Journalist

Calidus and Red 5 about to ramp-up new projects, positioning them up for a re-rating in hot bullion market. Plus, metal shortages stemming from Ukraine sanctions could boost sold-off juniors like Hot Chili and Sunstone.

There was nowhere to hide in equity markets when the tanks rolled into Ukraine under the orders of Russian president Vladimir Putin.

There was an exception – gold. The yellow metal demonstrated its safe haven attributes (where was Bitcoin?) by taking off to 20-month highs of more than $US1,940/oz in the Australian time zone, taking gold equities along for the ride.

Leading gold producers gained 4-6%, continuing the trend that set in a few weeks ago when the uncertainty around the Ukraine, and the western world’s response, began to hit the airwaves.

A quirk has opened up in the gold equities though – the underperformance of the ASX developers who are within a month or two of first production.

The only explanation for the underperformance is that they are not producing at the moment. But they will be soon and there is no doubt now that the gold price is going to be well supported as the Ukraine tragedy unfolds.

There are two ASX developers that are closing in on first production from new projects of scale – Calidus (CAI) from its Warrawoona gold project near Marble Bar, and Red 5 (RED) – already a gold producer - from its King of the Hills gold project near Leonora.

History shows that developers get re-rated higher as production approaches. And should the projects hit their targets in good time, the re-rating can be spectacular, as has been the case with Capricorn (CMM) with the successful start to its Karlawinda project in the Pilbara.

Beyond the gold space, the heavy treatment of the bulk commodity and base metals miners/developers in response to Russia’s aggression in Ukraine was catching comment on Thursday afternoon that it was perhaps overdone.

That’s because the equity market is not the commodity market. Commodity prices could well move higher from already elevated levels as sanctions against Russia are stepped up. It is a big producer of most metals, particularly nickel, aluminium, PGE’s, and in the energy space, oil and gas.

While the invasion of Ukraine plays out, the rest of the world keeps on consuming, at a time when, as Goldman Sach’s veteran head of commodities Jeff Currie recently commented, we’re out of everything.

“I don’t care if it’s oil, gas, coal, copper, aluminium, you name it, we’re out of it. I’ve been doing this 30 years and I’ve never seen markets like this,” Currie told Bloomberg TV.’’

The additional supply constraints that a sanctions-rather-than-bombs approach by the western world to the Russian invasion is not want anyone wants. But there is little doubt it is a positive for commodity markets.

All bets are off though if the response has to be stepped up from sanctions to bombs. Such an outcome would mess with the post-Covid economic snap back, not that that is of any solace for Ukraine.

Copper:

Strong copper earnings were a feature of the bumper interim and full year profit reports of the mining majors.

No surprise in that as the copper price remains massively ahead of the marginal cost of production at $US4.52 lb, with last (calendar) year’s annual average for the red metal of $US4.22/lb representing a 51% increase on the 2020 average of $US2.80/lb.

There are headwinds on the horizon from new supply coming on stream in the next couple of years. But then it is game on as the industry scrambles to keep up with the world’s electrification of everything in the decarbonisation push.

In its commodity outlook posted with its interim profit report, BHP had the following to say about copper:

“A ‘take–off’ of demand for copper from intensive easier–to–abate sectors (renewable power generation, the electrification of light duty transport, and the infrastructure that supports them both) is expected to be a key feature of industry dynamics from the second half of the 2020s forward: if not earlier.

“Under an optimistic but not extravagant demand case, we estimate that the cumulative industry wide capex bill out to 2030 could be close to a quarter of a trillion dollars,” BHP said. Wow!

It is little wonder then that there is an industry-wide scramble on to secure new supply. That came through loud and clear in last year’s step up in M & A activity space, with our own South32 (S32) and Sandfire (SFR) in the thick of things.

South32 paid $US2.05 billion for the acquisition of a 45% stake in the 180,000tpa Sierra Gorda mine in Chile while Sandfire spent $US1.86 billion for 100% of the MATSA 120,000tpa (copper equivalent) operation in Spain.

Then we have the likes of BHP and Rio Tinto stomping around the world cutting deals on both greenfield and advanced copper projects, as well as taking up equity positions in the owners of such projects.

Copper explorers:

Today’s interest in all that is what it means for the junior copper explorers with the potential to deliver the next generation of large-scale copper deposits required to meet that “take-off’’ in demand BHP was talking about.

Hot Chili (HCH, trading at $1.27 for a $150m market cap) is one of them. Its Costa Fuego copper super hub project will shortly release a resource update on the key Cortadera copper/gold deposit, and that will be followed by a PFS into the hub concept in the third quarter.

Hot Chili is the that attracted the interest of Glencore, now a 9.9% shareholder. Having painted that picture around copper’s outlook, and Hot Chili’s interest to Glencore, it is interesting to note it was a $1.74 stock at the start of the month.

That goes to the earlier comments that while the Russia-Ukraine situation is of a concern to all, the trashing of equity values it has brought may well be a mid to long-term opportunity for investors in the junior mining space.

Sunstone (STM) is another copper junior that has felt the chill wind of the broader equity market sell-off. It was a 10c stock a month ago and is now back at 7.1c despite its big-time gold-copper story in Ecuador getting better by the day in the same period.

First up, there was the January announcement of the discovery of a gold-copper porphyry system at its Alba prospect in the south of the country. Gold rich porphyries (in terms of porphyry systems at any rate) don’t come a long very often, so it is one to watch.

A diary entry suggests a new batch of assays results can’t be far off now. They will follow on from the 264m hit from a shallow 94m at Alba reported in January that assayed 264m grading 0.49g/t gold and 0.13% copper to the end of the hole..

Should the next batch of assays come in with results around the 0.5g/t gold/0.5% copper mark, it will be a case of being off to the races, remembering the grade at Newcrest’s fabled 3bt Cadia operation in NSW is 0.36g/t gold and 0.26% copper.

Mine it at 32mtpa like Newcrest has been doing – on its way to 35mtpa - and you make a lot of money, such is the beauty of porphyries.

There is a second leg to Sunstone’s store in northern Ecuador at its El Palmar prospect. It is the same neck of the woods (and rocks) where BHP and Newcrest have taken up equity positions in the $870m London-listed SolGold, owner of the big Alpala copper-gold porphyry.

Earlier this week Sunstone said latest assay results confirmed El Palmar is a “large” mineralised porphyry with “immense” upside remaining. It’s not hollow talk as Sunstone MD Malcolm Norris knows a thing or two about big porphyry systems.

He was involved in the discovery and development of the Tujuh Bukit gold-copper porphyry in Indonesia when working with the then owner Intrepid Mines, and he worked at SolGold in the early days of the Alpala discovery at its Cascabel project.

Sierra Nevada Gold:

Talking about porphyry explorers, a new one is making its way to the ASX-lists – Sierra Nevada Gold (SNG).

The company, spearheaded by executive chairman Peter Moore of AFL football fame at both Collingwood and Melbourne, is out to raise up to $12.5m at 50c a share. At the IPO price, the company will have a $30.5 market cap on listing.

After hanging his footy boots up, Moore was a corporate lawyer who also teamed up with his geology professor Dad, Bruce Moore, to make a business out of a high-resolution multi-spectral imaging system to map structures and associated coincident anomalies.

Bruce is now in his 90s but the family fascination with rocks, much of it in the premier US mining state of Nevada for the last 30 years, continues on under Peter and now the SNG float.

Peter and his backers – including Melbourne mining investor and former JB Were mining guru Peter Woodford, and the team from Citadel that worked up the Jabal Sayid copper-gold project in Saudi Arabia which was sold to Equinox (now part of Barrick) for $1.2b in 2010 – have privately funded SNG for 10 years.

In all, about $US10 million has been spent on working up five key projects. Four of them are gold and each of them are potential company makers. Then there is the Blackhawk porphyry/epithermal prospect that could be anything given the potential scale of the blind discovery from work to date.

So unlike most IPOs, SNG won’t be spending a couple of years working up drill targets. It is ready to go at Blackhawk, with a couple of the gold prospects to also get tested early with the drill bit.

And as Peter likes to say, the 10-year history of the projects, and the expenditure to date, means that SNG is not coming to the market with one potential company-maker and four stocking fillers. He rates them all, with Blackhawk in particular one to watch.

What is known is that half a dozen copper majors have signed confidentiality agreements to get up close to Blackhawk ahead of its big-time potential being confirmed with the drill bit. That goes to what was mentioned earlier about the scramble for more copper exposure.


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Barry FitzGerald
Principal
Independent Journalist

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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