Interest rate outlook suggests beaten-up bullion could be about to bounce

Barry FitzGerald

Independent Journalist

Smashed gold stocks beckon contrarian investors. And there’s plenty of M&A fever in the mix … think Gold Road-De Grey, Red 5-Genesis-St Barbara-Bellevue-Northern Star etc.

Buying ASX gold stocks in the last six months should have come with a health warning, with leading names smashed by 30-50%.

The sell-off has been fair enough given the retreat in US dollar gold price by 14%, and a lesser 6.5% in Aussie terms.

As it is sentiment on US dollar gold prices that underpins the performance of the ASX gold stocks, the revenue protection that the fall in the US exchange rate has delivered Aussie producers has not been much of a shield.

But this week’s bump in the US gold price – or more tellingly its refusal to sink below $US1700 an oz with the help of a weaker greenback – has those investors who like to be where no one else is wondering if it is time to wade back in to the thrashed ASX sector.

Afterall, there is only so much in the way of lithium stocks you can stuff in a sock.

US interest rate hikes remain the bogeyman for gold but the pace and scale of future rate hikes looks to be easing beyond the 50-75 basis points increase expected in September, suggesting the maximum damage that could have been done to the gold price in the fight against inflation has already been done.

For Aussie gold equities in particular, the Aussie dollar price of $A2,550/oz is nothing to complain about. It is also a sector full of merger and acquisition possibilities as gold equities haven’t been this “cheap” for a long, long time.

De Grey (DEG):

There was lots of laudatory comments on Thursday from the analysts on De Grey’s (DEG) investor call for the release of its preliminary feasibility study into the development of its Mallina gold project in the Pilbara.

The figures were impressive all right – average annual output of 540,000oz over the first 10 years at an AISC of $A1,220/oz.

Total capex was 18% higher because of the industry-wide inflationary pressures at $1.05 billion but that does not matter much given the estimated payback of less than two years, thanks to the early bounty to come from the starter pit on the Brolga deposit (11,000/oz per vertical metre).

The analysts were so busy asking questions about what they liked (the stock put on 5c to 97c for a market cap of $1.35 billion) that they forgot to ask De Grey’s managing director Glenn Jardine about the implications of the recent emergence of Gold Road (GOR) as 19.9% shareholder.

Gold Road (also a $1.35 billion company and the 50% owner of the 350,000/oz a year Gruyere gold mine) did not buy into De Grey for a future dividend flow. It has said it has no immediate intention to bid, but it reserved the right to do so.

Enough you would think for lots of questions from the analysts on De Grey’s assessment of Gold Road’s intentions.

But it was left to the intrepid mining reporter at The West Australian newspaper, Stuart McKinnon, to ask for a Gold Road comment in the last question of the one hour conference call.

Jardine obliged. And given the highly strategic nature of the 19.9% stake - either to Gold Road making a bid or selling on to a gold major that wants to add Mallina to its production profile - his answer is worth recording in full, remembering De Grey is 30% cheaper than it was in mid-April.

“We are very comfortable with them being on the register. If the project needs it, it is good to have a company of that scale and quality. (And) I guess they have basically given the project a tick of approval in that they are comfortable to buy into it at 19.9%,” Jardine said.

“They have got a good balance sheet and a good cashflow, so that’s all positive.

“In terms of discussions, no, we haven’t had any formal discussions with Gold Road. (But) we are all in very close proximity here in West Perth and catch up with each other at various conferences. But apart from that, no formal discussions.

“In terms of board seats, no, there hasn’t been any push for representation.”

The comments obviously come ahead of De Grey completing a financing package for the project, as pivotal a point as there is for the company. As noted by Jardine, it will be another de-risking event that should lead to a major value uplift.

Does Gold Road simply become part of the financing solution through its support of an equity raising, or do the two companies combine in a merger to make the debt/equity financing task all that much easier? Or does an interloper with deep pockets arrive?

RED 5/BELLEVUE:

St Barbara (SBM) managing director Craig Jetson came out punching on the company’s recent profit conference call on the subject of consolidation in the Leonora gold district.

His intent was to demonstrate that St Barbara had plenty of options in the coming consolidation wave, one kicked off by Raleigh Finlayson’s Genesis (GMD) in July with its agreed takeover of Dacian (DCN).

Both St Barbara and Genesis later confirmed they were exploring getting together and because of the force of his record and personality, it was assumed that Finlayson’s Genesis had the whip hand in the talks despite being the smaller of the pair.

But Jetson late last month said Genesis was not the only “group of people we have been talking to”.

"There's more than one train at this station,” he said. "There are probably four or five that are genuine contenders, to be honest."

Red 5 (RED) has got to be one of them, and it has just strengthened its hand by announcing an increase in the ore reserves/resources at its newly developed King of the Hills operation (once owned by St Barbara).

More to the point, it has a shiny new 4.7mtpa treatment plant with expansion upside which is what you would want if you intend leading a regional consolidation. The same goes for the high-grade Bellevue (BGL) mine being developed for first production in the second half of next year.

It is a lot further away from St Barbara’s Leonora base but its high-grade makes it very truckable as a sweetener for Gwalia, or KOTH, or the closer-by Agnew operation of Gold Fields, and the Jundee and Thunderbox operations of Northern Star.

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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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