Gold developers in sights of hungry producers as lower bullion price hits their stock

Federal Reserve Chair Jerome Powell did a neat job of hosing down expectations that interest rate cuts were on the horizon after pausing on another increase after 15 months of hikes.

“Considering how fast and high we moved, we judged a pause was appropriate," Powell told reporters on Wednesday. But don’t read into that that cuts were on the way was the follow up message.

"Not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate. If you think about it, inflation has not really moved down,” he said.

"It will (only) be appropriate to cut rates at such time as inflation is coming down really significantly, and again, we're talking about a couple years out.”

Maybe so, but there is plenty of commentary by heavyweight investment banks in the US that rates will hold for the rest of 2023 ahead of the first 25 basis point cut in March 2024.

All that is by way of explaining why the gold price is in the doldrums. Having punched through $US2,000/oz earlier in the year, it has fallen away to $US1,925/oz as expectations for a near-term cut in rates has faded.

There is some good news in that – the gold stocks are a lot cheaper than they were, and the key reason holding back the gold price - interest rates – is closer to fading as an issue than it was last week, or last month.

The producers with cashflows are generally down from their peak in mid-April when the gold price was more than $US2,000/oz by some 10-20% (Northern Star -12%, Evolution -10% and Capricorn -18%).

Today’s interest though is in the developers. They have been particularly hard hit for no other reason than sentiment around the gold price, even if improved sentiment in the form of $US2,000-plus gold prices when US interests back-off is potentially close at hand.

Are the developers bargains? Depends on what the individual investor’s view of the gold price is, as always. But it can be said they are a lot cheaper than were back in April.

And apart from anything else, it has got to be wondered if at these lower levels, the better quality developers could be swept up in a wave of acquisition activity by the established producers looking to lock in some sure fire growth for when the US interest rate bogey in the gold market is removed.

Bellevue:

The owner of its namesake mine in WA is an example of a developer hit hard by the recent weakness in the gold price.

Since mid-April, the stock has tumbled 23% to $1.16 for a market cap of $1.3 billion. Macquarie has a $1.70 price target on the stock and RBC Capital a $1.50 price target.

Neither price target is based on heroic gold price assumptions.

They are all about Bellevue coming into production from its high-grade mine reserve of 6g/t in the December quarter, on its way to annual production of 200,000oz at an all-in sustaining cost of $A1,000-$1,100/oz.

Resources Rising Star’s chief podcast interviewer asked Bellevue managing director Darren Stralow recently if the company was a takeover target for a producer. Northern Star (NST), where Stralow earned his stripes, and Gold Road (GOR) are the most often mentioned.

“The answer is it should be. But you can’t focus on that and we have not focussed on that,” Stralow said.

“We have a really clear and simple plan ahead of us to create value through bringing the asset into production in the fourth quarter (which) is closing in really fast . . and we’re really comfortable where we sit on that stretch.

“The most important thing for us is hitting the production run-rate, hitting those numbers we have promised to the market.”

OreCorp:

OreCorp (ASX:ORR) is another developer that has been hit hard. Its share price is off by 20% since mid-April to 39c, giving it a market cap of $155m.

That’s not a lot given the scale and quality of the company’s Nyanzaga project in Tanzania. Yes, it is Africa, but BHP has ticked off the country as okay to invest in through its $US100m commitment to the Kabanga nickel mine development.

Nyanzaga sits in the Lake Victoria goldfield and is surrounded by gold mines owned by others, including AngloGold and Barrick. So if there is M & A activity around this one, it will likely come from one of the existing producers in the goldfield.

Despite its modest market cap, Nyanzaga would be some catch for any of the big gold producers – 242,000ozpa over the first 10 years at an AISC of $US954/oz, allowing for a payback of capital ($US474m in pre-production capital) of three years, based on a modest gold price assumption of $US1,750/oz.

First production is possible (subject to completion of financing) in the second half of CY2025 by which time the interest rate bogey for the gold price is hopefully long gone.

Nick Giorgetta of Regis/Equigold fame and newly minted mining billionaire Tim Goyder (Liontown, Chalice etc etc) have taken a shine to the company. Giorgetta is on the register with 12.3% while Goyder recently took advantage of the lower share price to tickle up his interest from 5.04% to 6.1%.

Patriot Battery Metals:

More super thick and high-grade hits by Patriot Battery Metals (PMT:ASX, TSX-V:PMET) at its Corvette discovery in Quebec’s James Bay region.

More important though was confirmation that a maiden resource estimate (based on exploration results to April 17) is on track for release next month.

A world-class 150mt grading 1.2% lithium – as a start - is the rough expectation, putting Corvette right up there with Pilbara’s (ASX:PLS) Pilgangoora deposit and Liontown’s (ASX:LTR) undeveloped Kathleen Valley. Those two have market caps of $14.6 billion and $6.3bn respectively.

Patriot’s head Canadian stock has a value of $1.53bn and the stock has been nice and strong of late thanks to the rebound in the lithium market, and a growing recognition that project’s like Corvette are rare beasts.

All the more interesting then that Rio Tinto has made a decisive move into the James Bay region for lithium in a potentially big spending farm-in deal with a Toronto-listed project generator across 10 properties clustered around Corvette, and projects owned Allkem, Nemaska and others some 300km or so to the south-east.

It has been mentioned here before that Rio has been tipped as a potential bidder for Corvette once the maiden resource estimate release is out of the way. Pilbara, Mineral Resources (ASX:MIN), US giant Albemarle, Gina Rinehart, and a bunch of others have been mentioned as well.

Rio has a big aluminium presence in Quebec and likes the idea of whatever it does there comes with green hydropower backing. As for its farm-in deal in the James Bay region, it is what the super-majors do if they think about taking the plunge into a region.

The idea is that you secure all of the exploration ground you can before showing your hand, say in this instance with a bid for Patriot.

Patriot is well prepared for what may come from Rio or any other group. Earlier this week it announced Pierre Boivin to the board. He is a bit of legend in the Canadian M & A mining space as a legal eagle.