Sniffing out golden opportunities on the ASX

Tim Boreham

Independent Investment Research

Bullion’s romp beyond the record $2000 an ounce level in Aussie dollar terms has prompted investors to take a closer look at the pantheon of ASX-listed local gold producers – despite some problems in the mid tier that have tarnished the sector.

Globally gold again is living up to its status as a safe harbour and a store of value in troubled times, even though in economic and geopolitical terms the ‘troubled’ bit is not exactly new.

The plunge in global bond yields – with expectations of more interest rate cuts to come – has forced investors’ quivering hands as they seek an asset that performs reliably in a downturn the central banks seem to be anticipating.

According to the Perth Royal Mint, since 1971 gold has outperformed both stocks and bonds in periods when Australian interest rates have been below 2 per cent.

And in the five worst calendar years for shares, gold rose 9 per cent while equities fell an average 12 per cent.

In $US terms the lustrous metal has gained 10 per cent year to date and 16 per cent over the last 12 months. But at around $US1400 an ounce, gold is still well below the peak of just over $US1800 an ounce attained in September 2011.

In $A terms gold has increased 11 per cent since January and almost 20 per cent over the last year.

According RBC Capital Markets, the average share price for the producers (both small and large) gained 20 per cent in the June quarter. That’s despite producers Gascoyne Resources and Coolgardie Minerals falling into administration and other production whoopsies elsewhere.

For investors the purest proxy to having a gold bar under the bed is an established producer such as Newcrest Mining (NCM, $33.77), the biggest ASX-listed gold stock with a masculine $24 billion valuation.

Newcrest should have produced just over 2.4 million ounces in 2018-19, with broker Morgans forecasting an $US564m ($805m) profit on $US3.719 billion of revenue.

But two if Newcrest’s key mines (Telfer and Gosowong) look tired and it will be a while before its offshore growth projects (Wafi-Golpu in Indonesia and Red Chris in Canada) are advanced.

The other sectoral big bananas Northern Star Resources (NST, $13.97) and Evolution Mining (EVN, $5.01) are enjoying robust production, but their shares have run hard and arguably they are fully valued (if not are overvalued).

What about the emerging producers and the up and comers?

Gold Road (GOR, $1.40) recently cracked the $1 billion market cap barrier and an entrée into the ASX300 index after pouring the first three gold bars (1138 ounces worth a handy $2.27m) from its $620m Gruyere project near Kalgoorlie.

A joint venture with South African giant Gold Fields Ltd, the open-cut mine is slated for substantive output of 300,000 ounces over a 12 year mine life.

With a 3.92 million ounce resource, Gruyere is one of the country’s biggest mines. Yet the deposit – unearthed only six years ago – remained undeveloped for decades because it was buried under a thick overlay of sand.

Prudently, Gold Road has hedged (forward sold) 130,000 ounces – 30 per cent of output attributable to the company for the next three years – but CEO Duncan Gibbs isn’t making any rash predictions about the gold price.

“What’s to say gold won’t go to $2500 an ounce or back to $1500 an ounce,” he says. “I just don’t know”.

In the mid-tier, the market has re-rated WA producer Ramelius Resources (RMS, 84c) since the company fended off a rival bidder to acquire listed counterpart Explaurum Ltd in a scrip offer. But arguably Ramelius is still undervalued relative to its peers.

The Explauram takeover added the 485,000 ounce Tampia Hill project to the Ramelius portfolio, which includes the producing Mt Magnet and Edna May mines and the Marda project (picked up from the administrators of Black Oak Minerals for $10m).

Ramelius produced 196,000 ounces in the 2018-19 year at an all-in cost of $1175-1225 an ounce, with forecast output of 205,000 to 225,000 ounces in the current year.

The company is currently valued at $460m, including $104m of cash and gold inventories.

Another mid level play with an interesting valuation is Dacian Gold (DCN, 64c), which lost three quarters of its value after slashing June quarter production guidance and increasing its per-ounce cost estimates.

The shares have strongly recovered since after the company released a revised mine plan for the next eight years.

Dacian’s mainstay Mt Morgan operation is slated to produce an average 170,000 ounces a year over the first five years of the plan, with 150,000-170,000 ounces forecast for the current year.

Broker Citi forecasts a small loss for the 2019-20 year, rebounding to a $63m profit for the current year. On these numbers the stock is trading on an earnings multiple of a little over two times.

To capitalise on the buoyant gold price, Dacian has hedged 147,000 ounces – 13 per cent of its expected life-of-mine output, at an average $1810 an ounce.

Dacian’s current valuation stands at $246m with its cash kitty of $45m comfortably servicing $105 million of debt.

At the exploration end of the market, Chalice Gold Mines (CHN, 16c) is the talk around the saloons because of its capacious cash that’s being put to good use at its Pyramid Hill prospect in Victoria.

Chalice has also executed what looks like a handy deal to sell its tenements in Quebec to O3 Mining, an offshoot of Osisko Mining.

The deal saw Chalice receive 3.092m shares in O3 and is also entitled to a one per cent net smelter royalty.

While giving Chalice holders an ongoing exposure to the ground, the Canadian deal allows Chalice to focus on Pyramid Hill, where it is seeking to find out how far the historically fecund Bendigo Zone extends below Murray Basin sediments.

On July 8 the company said a 39,000 metre phase one aircore drilling program had identified three “strike-extensive mineralised trends” for further perusal.

Broker Patersons reckon Chalice has more than a “more than a fair chance of success” at Pyramid Hill, with the prospect (excuse the pun) of catching up with the more advanced Catalyst Metals (CYL) and Navarre Minerals (NML).

Valued at $170m, Catalyst is 14 per cent owned by St Barbara Ltd and 11 per cent by Gina Rinehart’s Hancock Prospecting.

Chalice has also acquired nickel prospects in WA’s Kimberley region. Yes, the ground is remote and hasn’t been worked, but isn’t the best chance of finding something to go where no one has looked?

Chalice’s cash of $21.7m compares with a miserly mark cap of $37m (14c a share). And don’t forget the O3 shares were worth around $11m last time we looked.

As with stories in New York, there are many ASX gold tales and these are just a few of them.

Tim Boreham edits The New Criterion

Disclaimer: 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.

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
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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