Shares in gold producers jump on inflation fall, now get ready for the trickle down

Gascoyne set for a resource upgrade at its high-grade WA gold discovery, Black Cat purrs on gold restart plan and Hot Chili looking spicy.

By Barry FitzGerald


Last week’s suggestion that the gold price was set for a run as investors with smartz were front-running interest rate cuts has come to pass in a big way.

The rate cuts haven’t arrived just yet but much tamer CPI figures in the US suggest a pivot to rate cuts is not far off, which is good for gold, as is the associated fall in the US dollar.

Gold has responded by marching to $US1,960/oz in Aussie trading which is up from $US1,918/oz a week ago. Gold equities responded accordingly, with leading producers stacking on gains of 3-8% on Thursday to outperform the broader market, finally.

As is usual early in gold price rallies, the producers are the first to benefit. But a sustained rally soon turns investor attention to more leveraged exposures in the developers and explorers – the so-called trickle-down effect.

Gascoyne Gold (GCY):

A resource upgrade is just what a gold stock should be looking to drop into the market now that the gold market is back on the boil.

That’s just what Gascoyne (GCY) will do soon. That is known because Gascoyne boss Simon Lawson said so on Monday.

Lawson said the resource upgrade would be out by late July.

It is also known that he is the headline act in Resources Rising Stars’ “Twilight” investors series that swings through Brisbane-Melbourne-Sydney on July 25-27. It always helps to have a good story to tell on the road.

The resource upgrade is likely to be just that, a good news story, perhaps even a game-changer for the company, something it could well be preparing for with its planned name change to Spartan Resources (SPR) in August.

Anyway, the resource update will again shine a light on last year’s Never Never discovery at the company’s Dalgaranga gold project in WA’s Murchison region (another reason for the name change, it’s not in the Gascoyne).

Never Never already has a resource estimate of 303,100oz at 4.64g/t. It sits in the shadows of the low-grade pit at the operation which was running less than 1g/t dirt through a newish 2.5mtpa treatment plant before Lawson called a halt last year.

The discovery prompted Lawson to get to work on planning a high-grade future for Dalgaranga with Never Never as the backbone. A bigger resource would be better. So there will be lots of interest in  the impending update.

It will be fed into Lawson’s “365” plan for Dalgaranga. It’s about establishing a high-grade 300,000oz reserve at Never Never, a 600,000oz high-grade resource at the deposit, and to deliver an initial high-grade five-year mine life.

There have been no clues about what the pending update may weigh in at. But drilling results suggest something around the 600,000-ounce mark.

Such an outcome would prompt a re-rating for Gascoyne. It last traded 18.5c which is up from 12c since it was last mentioned here on May 26.

It is also worth mentioning that in Monday’s announcement on latest drilling results and the pending resource update, Lawson mentioned that a “number of new high-grade structural gold prospects which represent Never Never look-alikes or repeats” had been identified.

Black Cat:

The Paulsens gold mine in WA’s Ashburton region gave a fledgling Northern Star led by Bill Beament its start as a gold producer.

Beament parlayed the early cashflows and the stripes-earning success as an operator at Paulsens into making Northern Star the $14.5 billion gold machine it is today.

Along that journey, Paulsens became inconsequential to Northern Star so the operation was parked up in care and maintenance waiting for another junior to come along and begin its journey as a gold producer.

That junior is the wonderfully named Black Cat Syndicate (ASX:BCB). It picked up Paulsens last year and has busy ever since working on a re-start plan for the operation.

As luck would have it, the restart plan - it is really a master plan given its comprehensiveness – lobbed just as the gold market was beginning to warm up in response to the interest rate bogey being removed as an impediment to the yellow metal taking off.

It has meant a mostly good reception for the restart plan, with Black Cat trading up from 35c on the day of its release to 43c on Thursday for a market cap of $115 million, a 23% gain.

Shaw & Partners reckon there is more to come, placing an 83c price target on the stock after the release of the restart plan (42,000oz per annum over an initial three year mine life at an AISC of $A1,892/oz).

Based on a $A2,900/oz gold price assumption (it is currently $A2,873/oz), the low capex for the restart of $34 million came through in the estimated 75% rate of return and 14-month payback.

The short mine life will worry some. But a 13-year production history shows mine life has never been more than 2.5 years. It is the nature of high-grade underground mines.

Not unlike Northern Star in its early days, Black Cat sees Paulsens as a starter project. Add in the development potential of its Coyote project in the Tanami and its original East Kalgoorlie flagship, and a pathway to as much as 150,000oz per annum is possible.

It is just the sort of stuff a gold stock could hope for in a rising gold market.

Hot Chili and Copper:

Continuing the trickle-down theme, the pressure on the dollar now that the heat is coming out of interest rates, and the diminishing chances of full blown recession in the major economies, is not going to hurt the copper price either.

China’s struggles with peasant-pleasing economic growth remains an issue, but it is a command economy, so there are all sorts of levers Beijing can and will pull.

As it is, the copper price has been holding up nicely anyway despite the well-founded suggestion that the price could be a bit choppy in the next few years as new production emanating from Latin America and Africa gets absorbed.

Back on June 8 it was mentioned here that the price had worked its way up from $US3.60/lb to $US3.75/lb. It has edged higher since to $US3.82lb, with the likes of Citi and UBS cheering the red metal on.

As a reminder, it is worth quoting again from Citi’s “Copper Book 2023”. Citi said the structural decarbonisation thematic could see copper at $US5.45/lb by 2025.

It is recommending consumers and long-term investors “gradually build copper exposure over the next six months of so”.

“We see increasingly attractive risk-reward with this strategy due to our expectations of 50% upside by 2025 in our base case scenario, and a near doubling in prices ($US6.80/lb) in our bull case scenario.’’

That copper-focussed column on June 8 was followed up here two weeks ago with the idea that with OZ Minerals’, now absorbed by BHP in a $9.6 billion takeover (the mining market leader agrees with the 2025 pivot point for copper), investors dollars would dribble down to the copper explorers/developers.

Once of those mentioned was Hot Chili (ASX:HCH) which was trading at $1.06 at the time. It has since taken off to $1.45 for a 37% two-week gain.

It was argued at the time that Glencore was on board with an  equity position, and a royalty deal has been struck with Osisko, the latter providing a see through value for Hot Chili’s Costa Fuego project in Chile of $US1.34 billion.

The question was asked why hadn’t the local market got on board with the story. The Osisko royalty see-through value, and the release of a scoping study into Costa Fuego’s development, has turned that around. The market is now on board.

The scoping study covered a base case long life, large scale project with a post-tax NPV8 of $US1,100m and an IRR 21% for a nominal 20Mtpa processing plant and a 12,000t heap leach copper cathode SX-EW plant with combined average annual production of 95,000t of copper and 49,000 ounces of gold at an AISC of $US1.74/lb.

Piers Reynolds at Veritas Securities (which has acted for the company in the past) reckons the re-rating of the company is not done yet. Post the Osisko royalty deal and the scoping study, Reynolds put a $3.54 a share price target on the stock. That’s not a typo.

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