The New Criterion: finding value in the Aussie gold sector

Tim Boreham

Independent Investment Research

Despite the multitude of worries in the world, the gold price in $US terms continues to be under pressure, trading about 2.7 percent below its level of a year ago and about 10  percent off its January peak.

So much for bullion being a safe harbour investment.

The higher greenback is the obvious ‘culprit’, interlinked with higher US interest rates that mean richer investor returns are available elsewhere.

US inflation – gold’s traditional friend -- remains benign although Trump tariff barriers might change that.

But for Australian gold producers the good times continue to roll, with the $A-denominated price up about 4 percent over the 12 months.

On average, local miners can extract the stuff for $1000 an ounce, which leaves a fat margin relative to the current circa $1650 an ounce spot price.

There’s a catch, though: the big producers like Newcrest Mining (NCM, $21.60), Northern Star Mining (NST, $7.20) and Evolution Mining (EVN, $2.79) look fully or overvalued, having outperformed their global peers for some time.

 RBC Capital Markets notes investors are flocking to the majors because of their strong balance sheet and margins and consistent operating performance (which hasn’t always been the case).

They simply look expensive, although not so much relative to their global peers.

Meanwhile, most of the smaller gold plays on the ASX are trading at a discount. “It’s time for investors ... to look down the curve for value in the Australian gold space,” the firm says.

What better a place to start than in the West, where operating risks are low and the geology is generally well known?

Investment options include mid-tier extant producers such as Saracen Gold (SAR, $1.87), Ramelius Resources (RMS, 56c) and Silver Lake Resources (SLR, 55c).

For more patient investors, gold plays in the development or advanced exploration phase are an alternative gambit.

Take Dacian Gold (DCN, $2.94), which has been ramping up its underground Mt Morgan mine, in WA’s Leonora region. From the December quarter it plans to produce commercially from what would be Australia’s biggest new gold mine in six years, at a rate of 180,000-210,000 ounces a year.

Like all decent deposits Mt Morgan has been subject to pass- the-parcel ownership. Dacian bought the project from the administrators of Range River Gold, which in turn had acquired it from Barrick Gold in 2009.

As it ramps up output to commercial levels, Dacian has raised a chunky $40m via an institutional placement to bolster its reserves base, with a drilling push at its Westralia and Cameron Well sub deposits.

It’s also shelling out $12m to extinguish an obligation to pay royalties pertaining to output from its Jupiter deposit, also part of the Mt Morgan project.

The raising struck at a $2.70 a share, a 10 percent discount, was heavily oversubscribed.

 All things being equal – and they're usually not – RBC expects Dacian to generate underlying earnings of $47m in 2018-19, rising to $107m in 2019-20.

 These numbers represent earnings per share of 21c and 48c respectively, putting Dacian on a miserly earnings multiple of 12 times and then six times.

Investors are waiting for a July resource update. The current mine is predicated on an eight year life but if the drilling push delivers results this could be elongated.

Alternatively, Gold Road Resources (GOR, 67c) offers an exposure to a new mine slated for production by June next year, at its Gruyere deposit.

With a total resource of 5.88 million ounces – 3.56 m.o. in the more assured reserve category – Gruyere is of Australia’s biggest undeveloped gold deposits.

It’s a case of quick work for Gold Road, which discovered the Gruyere, on the Yilgarn Belt near Laverton, only in 2013. In late 2016 the company sold half of the project to South Africa’s Gold Fields for $350m of cash, which underpinned the $585m cost of the plant.

Construction work is well underway at Gruyere, which is slated as a 270,000 oz a year producer with a 13 year mine life. But it’s hoped that current drilling on neighbouring targets – some within the JV and some fully owned by Gold Road – will eventually provide further mill input or even justify a separate project.

With a $650m market cap, Gold Road is now far from a penny dreadful. But with expected all-in costs of $950/oz and with the path to production fully funded, Gold Road promises to be a veritable golden goose if the $A bullion price holds firm.

Macquarie Equities forecasts calendar 2019 revenue of $69m and net earnings of $8m, ramping up to serious revenue of $255m and a $69m net profit in 2020.

Sticking with the WA gold theme, minnow NTM Gold (NTM, 4c) faces an unusual dilemma as it contemplates contemplates a drilling campaign at its mainstay Redcliffe gold project.

Rather than craving institutional backers, the well-backed NTM wants more retail punters to round out the register and inject some liquidity into the stock.

The stock is 7 percent owned by Ausdrill, which earned the stake by providing drilling services.

NTM shares have gained favour since mind June, when the company almost doubled its resource base to 538,000 oz (roughly evenly split between the indicated and inferred categories).

The company aspires to double again one million ounces – enough to support a 100,000 oz a year operation – but to achieve this it has to find new deposit on the sprawling tenement.

Not wanting to die wondering, NTM is testing 30 targets along a 40 km strike zone, much of which is yet to see a drill bit. The campaign covers previous drill hits, extensions to existing deposits and “new conceptual targets”.

Should NTM get into production, mining is likely to be based on a “toll treatment” operation by which the ore is trucked to one of four nearby processing plants.

NTM chief Andrew Muir says the market is valuing NTM’s resource base at a fraction of which it values the company’s local peers. 

Criterion has heard such a lament many times before, but given NTM’s slender $12m market cap he might have a valid point.

 NTM is not only proximate to Mt Morgan, but on the same geology of other famous-name projects including Gwalia (owned by St Barbara), Thunderbox (Saracen), Darlot (Red 5) and Kin Mining’s Leonora, which is in development.

“We are a pretty simple digestible story,” Muir says.

Despite bullion’s current lack of popularity, bullion tends to react well to ballooning government deficits and debts, which is what’s been happening in the US.

On the supply side the best and biggest gold resources are also rapidly declining, leaving the next bunch of up and comers to fill the gap.

Tim Boreham edits The New Criterion

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.



Tim Boreham
Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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