Aussie mid-tier gold sector stealing the show

11th May 2018
Resources Rising Stars

Despite a flat US gold price, the Australian gold sector continues to go from strength-to-strength, outperforming global peers (reports MiningNews).

Argonaut Securities believes the strong performance by the Aussie mid-tier miners could be as the result of increased North American investment.

"US names have returned roughly -3% value in FY18 whereas the average return for ASX names has been +5%," it said on Friday.

"In particular, the core group of ASX mid-tier producers has returned between 30-80% FY18 year-to-date."

Sprott's Steve Todoruk also noted this trend last month, attributing the interest in Australian producers to a drop in the local currency.

"With this windfall, many of the Australian companies elected to pay down debt and accumulated strong cash reserves - both of which were cheered by investors."

Todoruk also noted a possible Kirkland Lake effect, with the Canadian miner becoming a market darling since entering Australia in late 2016 via the takeover of Newmarket Gold.

"With a significant Australian presence and the ability to reap the benefits of a weak Australian dollar, Kirkland has seen its share price rise nearly 700% - making it the best performing big gold miner in terms of share price," he said.

"If the trend of slowly rising US gold prices and a weak Australian dollar continues, I expect the above trend to continue as well."

Argonaut crunched the numbers on March quarterly reports, pitting five Australian mid-tier producers against their North American counterparts.

It found that Evolution Mining, Northern Star Resources, Regis Resources, Saracen Mineral Holdings and St Barbara had an average all-in sustaining cost of US$749 an ounce, against Alamos Gold, Detour Gold, Eldorado Gold, New Gold and Yamana Gold's average of $978/oz.

"The result highlights the continued appeal of ASX listed gold miners for low cost production and significant cashflow generation," Argonaut said.

"In the March quarter, the core group of ASX listed mid-tier miners had production costs roughly 30% lower than their North American counterparts."

Seasonally, it is also a good time for Australian miners, with the end of the financial year and lead-up to Diggers & Dealers a period when the mid-tier space outlines growth plans for the coming year.

Meanwhile, the North American summer sees many traders pack up and head to the beach for the warmer months, with many not resurfacing again until the Colorado gold conferences in September.

RBC noted the declining interest in North American producers last week.

"Beyond a brief surge in 2016, investor interest in North American precious metal equities has once again declined," it said.

"We attribute the decline to a number of factors including those internal to the sector (operational challenges and heightened geopolitical risk) as well as those external to the sector (including flow of speculative money to sectors such as cannabis, cobalt/lithium, blockchain and base metals).

"In our view, the lower investor demand and rising influence of passive investment vehicles have reduced the natural trading flow of the sector with the impact most notable among North American senior producers."

Investors urged to look down the value curve

With Australia's mid-tier gold miners seen as fully valued, analysts are starting to turn their attention to some smaller and lesser known stocks in the gold space.

Northern Star, Evolution, Saracen, Regis and St Barbara are all trading at, or near record highs.

Argonaut and RBC view the sector as fully valued.

"Equity valuations of the mid-tier producers now look stretched and we struggle to identify significant value upside," Argonaut said.

The strong performance has led analysts to turn their attention to smaller producers and developers.

"As larger, more liquid names enjoy significant share price performance, there is value down the curve with smaller producers, such as Silver Lake Resources, which arguably offer greater leverage to the gold price and have significant resource optionality," RBC said last month.

RBC upgraded Silver Lake Resources to outperform from sector perform for that reason, and initiated coverage on Ramelius Resources at outperform.

"Smaller gold stocks with limited downside provide asymmetrical return potential and Ramelius presents an opportunity further down the investment curve," RBC said.

"This small-cap gold miner offers upside to our base valuation of A80c, a strong balance sheet ($79 million cash - no debt) and exploration potential."

Argonaut also sees value in the gold development space.

"Emerging developers have recorded only incremental gains and we argue that in the near-term, investors will look come down the curve into the emerging developer space for value," it said.

"Our key picks include Dacian Gold, Gascoyne Resources and Gold Road."

Dacian poured first gold from its Mt Morgans project in late March, Gascoyne has started commissioning its Dalgaranga project, and Gold Road is about a year away from gold production at Gruyere.

"We now also identify the next tier of potential development plays including Explaurum and Genesis Minerals with advanced studies looking to make the transition into production," Argonaut said.

A feasibility study for Explaurum's Tampia project is believed to be imminent, while Genesis is undertaking an underground feasibility study at its Ulysses project.


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