For Australian gold investors, times have been good over the last five years. But for investors in gold producers and explorers, the story has been even better. While the metal itself has returned 9.7% p.a. over the last five years, the ASX All Ordinaries Gold Index has returned 20.6% p.a. over the same period.
Rising prices and larger market capitalisations have begun to attract the attention of mainstream fund managers. Strong returns and a rising index weight make the sector harder to ignore. In the midst of this, many of the largest and most liquid mining companies are seeing reserves dwindle, as a lack of investment in growing resources and ageing mines begin to bite. This provides a strong set-up for a wave of mergers and acquisitions, as miners take advantage of the increased access to funding to buy up projects from the juniors.
In the first part of this series on gold, we heard about the positive set-up for the shiny metal. In this second part, we learn all about the companies that mine (or hope to mine) that metal. Thanks to Oscar Hutchinson from Fidelity and Hedley Widdup from Lion Selection Group for providing comments for this story.
What to look for
Large, high grade deposits that are close to the surface are what most investors and geologists would love to find, but such deposits are rare indeed. Due to the highly scalable nature of large gold deposits, Widdup says that bigger is better. But it’s the shape of the deposit that interests him more than the size.
“I’m far more interested in whether a project’s shapes can be mined (narrow is hard, fat is easy) and if the amount of gold packed into those shapes looks like it will make mining worthwhile. A very broad rule of thumb to measure if gold packed in is enough is – less than 1000oz of gold per vertical meter is going to be hard work; more than 5000oz per vertical meter should be a stunner.”
Unlike most commodities, extracting the gold from the rocks that surround it is a relatively simple process – most of the time. The majority of projects mine ‘free milling’ gold, which can be easily separated using crushing, water, gravity, and cyanide leaching. However, some projects require the processing of sulphides and ‘refractory ore’, which involves expensive processing using heat or chemicals.
Hutchinson, on the other hand, stresses that a good deposit is not good enough on its own – the right team is essential too.
“Mines are very hard to run well and if you take your eye off them, they can quickly lose their way, so good management teams who are very close to the assets are very important,” Hutchinson told us.
He suggested that other factors to consider included how close the mine is to key infrastructure, and how friendly the jurisdiction is to mining.
“Combine good geology with a good management team in a good jurisdiction and you’ll be likely to avoid many of the worst performing gold mining blow ups. Gold mining companies that own a few assets also reduces the potential impact from any individual asset suffering from an ‘act of god’,” he said.
Widdup, however, is more willing to take on the challenge of a tough jurisdiction, stating that “being in a tough jurisdiction can provide wonderful rewards if the right partner is involved – this is a crucial ingredient.”
A huge boost for gold’s fundamentals
Despite the strong returns in recent years, making money has been anything but easy. For every Northern Star – which is up more than 250x over the last 10 years – there’s a list of forgotten hopefuls who never quite made it.
Looking at leading mid-tier producers – Northern Star (NST), Evolution (EVN), Saracen (SAR) and Gold Road (GOR) – Widdup noted that the first three had been grown out of single asset companies. Many of their core assets were either built or acquired during the depths of the last bear market. The hard lessons these companies learned through the process of acquiring and improving these assets are why the management teams of these companies are among the most respected in the industry.
“Easy money is probably what is to be made from a gold bull market. Gold’s shine began to return with gusto in mid-2019 when the outlook for interest rates flipped from “going to rise” to “oh no, more QE”. Then we had COVID-19, which is the biggest shot in the arm gold fundamentals have had since the 90’s. In gold bull markets, generalist investors have to own gold equities and the weight of their money can put multiples on valuations in a few short (exciting) years. So no, the easy money has not been made yet – but a lot of the hard work is done, and the foundations are all laid.”
Hutchinson was also positive about the future, saying that he expected the rally to broaden to the smaller producers, and even developers and explorers. Declining reserves among multi-national majors could also trigger a wave of mergers and acquisitions.
“If gold can hold these sorts of levels, we are probably still in the early stage of strong sector performance driven by organic value creation and consolidation,” Hutchinson said.
How investors are getting exposure
The biggest player in the sector is Newcrest Mining (NCM), cornerstoned by Cadia in Western New South Wales and Lihir in Papua New Guinea. These two assets combined produced nearly 800,000 ounces of gold in the first half of FY 2020.
Other major players in Australia include Northern Star, who own several mines in WA, plus a newly acquired asset in Alaska, and Evolution, whose Cowal asset in NSW produces over 250,000 ounces per annum. Since acquiring Cowal in 2015, Evolution has extended its mine life, expanded ore reserves, and increased throughput. Northern Star has seen similar successes at its Western Australian Assets since acquiring them during the last bear market.
Hutchinson also highlights some mid-tier producers, such as Silver Lake (SLR), Westgold (WGX), St Barbara (SBM), Regis Resources (RRL) and Gold Road (GOR), all of whom have assets in WA. For those looking to step outside Australia, Resolute Mining (RSG) and Perseus Resources (PRU) are producers with African assets.
"Investors do need to be aware of the different risk profile between buying a gold producer and a pre-production gold mine developer/explorer," Hutchinson said.
For those more comfortable with development risks, Widdup says Nusantara Resources (NUS) is set to become a long-life, 100,000+ ounce per annum producer over the coming years. Though some investors may be concerned about the risk associated with an asset in Indonesia, he points to local partner and shareholder, Indika Energy, who are earning into the project.
“This not only provides significant comfort, it also covers off most or possibly all of the equity investment required for development, so long as debt can be landed. The partnership they have positions them strongly to complete funding required for development.”
Nusantara also boasts AustralianSuper as a major shareholder. Between AustralianSuper, Indika Energy, and Lion Selection Group (of which Widdup is a Director), they own 59% of the company.
He says the company has an attractive valuation and is rich in catalysts. The company recently flagged an upgrade to its reserves, which should then be followed by an updated Definitive Feasibility Study, reflecting the increased reserve size and the higher gold price. He says that all this upcoming news flow has the company “approaching the point of a re-rate.”
Disclosure: The contributors and the author of this article own shares in some of the companies mentioned.
Note: The view provided above on Nusantara Resources (NUS) represents the opinions Hedley Widdup and Lion Selection Group, who are shareholders in NUS. They do not reflect the views of Oscar Hutichinson or Fidelity International, who provide no comments or opinion on the company.
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An excellent article. Well done.