The now daily procession of ASX gold producers reporting big quarterly cash builds in response to bumper prices for the yellow metal, particularly in Aussie dollar terms, suggests equity values have to be re-rated higher in response.
It’s well documented that gold equities have lagged the multi-year advances in the gold price, presumably in the expectation that gold couldn’t maintain its higher levels.
But with gold coming out of the blocks in the new year to hit more than $A4,300/oz in response to the same factors that have driven the multi-year advances to higher and higher levels (inflation, monetary expansion, de-dollarisation buying by central banks and rising geopolitical uncertainty), there must be an acceptance that halcyon days have indeed arrived for the gold stocks.
Having said that, the ASX producers have not exactly covered themselves in glory on the production front due to factors that should have been in their control and those that were not like cost inflation, labour tightness and the lingering impacts of COVID.
The current crop of December quarterlies indicate that those pressures are easing so that, on the whole, the gold producers are finally generating cash surpluses that better match the bumper gold price.
RBC Capital Markets reckons that while there is now greater confidence in production and earnings forecasts from the gold producers, the upside is yet to be fully reflected in equity valuations.
It noted that since the start of the December quarter, gold equities have matched the gold price moves but only after the 25% underperformance of equities versus gold in CY2024.
As a result, the gold producers it follows are showing good value given they are trading about 20% below their 3-year averages on an EV/EBITDA basis.
“Given our view of a well-supported gold price in CY2025 we expect levered equities to outperform the commodity,” RBC said this week.
Its price targets on the 10 stocks in its coverage universe reflect the implied upside.
Of the 10, only Evolution has price target downside (16%). The rest range from 3% upside (Gold Road, GOR) up to 58% for Bellevue (BGL).
Others which have price targets substantially ahead of their current market prices included St Barbara (SBM, 57%), Westgold (WGX, 54%), Ramelius (RMS, 43%) and Regis (RRL, 41%).
MINERALS 260:
Merger and acquisition activity in the gold space has naturally enough stepped up in a big way in response to the take off in gold prices.
A notable feature of the activity is that there is a growing focus on stirring the pot on known deposits which for one reason or another have yet to make it into production.
Gold at more than $A4,000 an ounce is proving to be more than enough inducement to dust off these deposits and get them on the fast track to production.
Secure a ready-made development project capable of producing more than 100,000 ounces-a-year in WA’s goldfields and, potentially at least, a $1 billion-plus market is in the offing.
It is a point arrived at during the week by Tim Goyder of Liontown-Chalice-DevEx fame and his 13%-owned and chaired Minerals 260 (ASX:MI6) thanks to its $166.5 million deal to acquire the long-hibernating Bullabulling gold project near Coolgardie from Chinese heavyweight Zijin.
It was long-thought Zijin was land banking Bullabulling as a potential ore source for its Paddington mill to the north of Kalgoorlie. But Paddington has long got by with closer ore sources than the trucking distance hurdle presented by Bullabulling.
And besides, Zijin has become a seriously big resources group, with Bullabulling increasingly being a nice to have but not a must have. It means the world to MI6 though, coming as it is at the $166.5 million acquisition from its pre-suspension market cap, pending financing and completion of the deal, of some $30 million.
Talk about seizing the moment. Bullabulling has a mining history in the 1990s under Resolute when the gold price was under the pump at $500 an ounce due to the shock sale by our own RBA of Australia’s gold reserves, and other factors.
There is a mountain of data on the deposit which MI6 and its external technical experts are now happy to rank as one of Australia’s biggest undeveloped resources at 2.3 million ounces (60Mt at 1.2g/t).
The deal is yet to complete so there was not much MI6 managing director Luke McFadyen – formerly head of strategy at OZ Minerals – could say during the week about what was in store at Bullabulling under the company’s ownership.
He gave some teasers though.
“This is an outstanding and transformational acquisition. The opportunity for us now is to develop a large-scale open pit gold mine located in the heart of WA’s Eastern Goldfields, putting us on a clear trajectory to becoming a leading mid-tier ASX gold producer,” McFadyen said.
Apart from those comments, the old Bullabulling Gold (acquired by Norton Goldfields, itself later acquired by Zijin) did lodge the results of a prefeasibility study in 2013 into a 7.5mtpa mining and processing operation producing 1.95m ounces of gold over a mine life of 10.5 years.
The study confirmed a robust enough project based on a gold price assumption of $A1,622 an ounce. There’s been lots of inflation since but here we are in a fat margins-inducing $A4,300 an ounce environment.
Goyder has been in the mining and exploration game for near on 50 years. And he is as excited as ever about the Bullabulling opportunity.
He said there was no reason why “we can’t build a substantial company, and you just look at some our peers who are actually mining now on similar deposits what market cap can be achieved.
“We know what we have got to do now. We look forward to getting on the ground and drilling and get into those studies.
“We won’t be doing a thesis. We want to do it in good time and with good people. We are just going to be doing the doing now and deliver, deliver and deliver.”
Join Managing Director Luke McFadyen at the RRS Brisbane Summer Series in February
SIPA:
The small end of the gold market is also out and about in the M&A arena looking to acquire projects with the potential to give them a shot at cashing in on what really is a gold boom.
Hardy explorer Sipa (SRI), trading at the princely price of 1.4c, got in on the action just before Xmas in a deal with Stephen Biggins of former Core Lithium fame to acquire gold exploration projects in South Australia and WA.
The three SA properties are in the same neck of the world as where Barton Gold (BGD) has been kicking goals while the WA property sits between Black Cat’s (BC8) Majestic, Fingals and Trojan gold projects.
Sipa MD Andrew Muir said this week the new assets have got a “very obvious pathway in which we can monetise them as we’ve got some obvious targets we want to go out and test. And if we find something of significance, there is infrastructure that is nearby that there are potential synergies for.
“So given we have an enterprise value of $1.5-$3m depending on where the share price is and cash in the bank, the upside is outstanding.
“If we find something of substance near Barton’s ground or near Black Cat’s ground, that can be monetised pretty quickly’’.
He said should a maiden resource be worked and grown over time, there could be some pretty rapid share price appreciation in a pretty straightforward and well understood commodity which is gold.
