The much-anticipated rebalancing of VanEck’s Junior Gold Miners ETF is creating a gulf between the valuations of those miners which will bought and the those which will be sold. Some believe this will fuel takeover fever. And the smart money is cottoning onto the low-cost potential of Explaurum’s gold project.

The gold price has survived the US Federal Reserve’s fully-expected interest rate rise decision pretty much intact.

It was a phew moment for the local gold producers and explorers. But they nevertheless are still having to contend with the in and outs of the rebalancing of the $US3.9 billion global junior and mid-tier gold sector exchange traded fund, VanEck’s Junior Gold Miners ETF (GDXJ).

The bewitching hour for the rebalancing is the close of trade of the US markets on Friday. But the truth is that the rebalancing has already triggered sales of those local stocks with a lower weighting in the new-look GDJX, and buying of those with a new or higher weighting.

It’s why there has been a disconnect of late between the relatively strong gold price and the share price performance of some of those producers which have been sold off as part of the rebalancing. It also explains why there has been outperformance by those benefiting from the changes.

So there has been both anger and joy for the goldies as VanEck shuffles the deck.

Essentially, the GDJX grew too big for its boots. A flood of money into the fund at the start of the year created structural issues for the ETF as the weight of money in a relatively small investment space like global gold equities, either big or small, swamped the actual investment openings.

With limits on how much of a stock it can own (individual weightings in the fund are capped at 8 per cent), GDXJ’s investable universe had become too small.

Its response has been to change its mandate to include the ability to channel some of the flood of funds into the larger producers (minimum market cap of $US750m), previously the preserve of another VanEck ETF, the $US12.5 billion GDX fund which mimics the NYSE Acra Gold Miners Index.

Macquarie estimates $US3.4bn of gold equity flows will result from the VanEck changes - a big liquidity event in anyone’s language.

The ETF is an index hugger and that index has announced 22 new additions to the GDJX, with no deletions. According to Macquarie, existing companies in the GDJX will effectively make way for about $1.63bn in new additions.

“The key beneficiaries in the Australian context are Newcrest, Evolution, Northern Star and OceanaGold which have been earmarked for re-inclusion in the index as the GDJX market cap eligibility band lifts,’’ Macquarie said.

Smaller stocks move to lower weightings to make room for the new additions. These smaller stocks suffer as a result. Those expected to feel the pain are Westgold, Beadell, Silverlake, Ramelius, Perseus, Saracen, Regis, St Barbara, Resolute and Independence.

There is upside in the rebalancing for those being sold down to a lower weighting, or those not included in GDJX or other gold ETFs - the potential for a takeover boom.

There has been some original-as-always thinking from Rick Rule at Canada’s Sprott on that. He suggests that one impact of the ETF’s in the gold equities space – as highlighted by the VanEck song and dance – could be a rash of takeovers at 50 per cent premiums, with those included in the funds enjoying greater buyer power thanks to their “incredible discrepancies’’ in valuations over those not included in the  ETFs.

Smarties cotton on to Explaurum

Explaurum (EXU) has struggled in recent years to attract investor interest on the strength of its Tampia gold project near the wheat belt town of Narembeen, 300km by road east of Perth.

Originally discovered by BHP Gold – yes there was one until 1990 – Tampia has long been known to be a high-grade and near-surface discovery on a new greenstone belt. But with a long-dated inferred resource of 310,000 ounces, it was considered on the small side of things.

Then there was the unfriendly attitude of the farmers on access to their private land. It wasn’t a problem to BHP Gold, and hasn’t been for Explaurum and its pre-listing backers that entered the project in 2012. But there were certainly some issues with the farmers for Tampia owners in the intervening period.

So much so that it can be said that difficulty of land access is the key issue why Tampia is yet to be mined. Land access is no longer an issue, with Explaurum’s tea and scones policy of engagement said to have won over the wheat growers.

That leaves the issue of resource size. That too is about to change for the better with a bigger and better quality (indicated) resource estimate in the works. And judging by the results being pumped out from an expanded 32,000 metre drilling program due for completion in mid-July, something well on the way to one million ounces would not surprise.

The market smarties are on to the story, pushing Explaurum from 6c a share in mid-March to 12.5c this week. Despite the increase, it can be said the group’s market capitalisation of $44m is on the light side of things, on the proviso that the coming resource upgrade comes in as strong as many suspect it will.

First production could be possible in mid-2019 from a 1.5-2mtpa mining and treatment operation which would cost no more than $120m-$130m in that part of the world. Hartleys analyst John Macdonald ran some numbers on Tampia back in mid-March which pointed to 100,000 ounces of annual production at a cost (AISC) of $A900 an ounce. In its early years, costs would likely be much lower than that, quite possibly the lowest in the country thanks to the shallow (i.e. no pre-strip to speak of) and high grade nature of the deposit.

With gold knocking on the door of $A1,700 an ounce, the prospective fat margins on what is a near-term development opportunity will be hard for the market to ignore much longer. Adding to the story is the success Explaurum has had refining a gravity signature for the known Tampia mineralisation, originally found by BHP Gold using geochemical methods.

Needless to say, Explaurum has followed up its knowledge breakthrough with ground and airborne gravity surveys generating three “major’’ new targets and 21 “other’’ exploration targets surrounding Tampia. In a geophysical sense, one of them looks like Tampia on steroids.

Given time, who knows, BHP Gold’s original 1987 discovery might well turn out to have been just the start of a new gold mining district, more than 30 years in the making.