Load up on gold stocks to cash-in on further rises in bullion and takeovers, says Macquarie

25th January 2019
Tim Treadgold

When in doubt, merge! That’s not quite the exaggeration it might appear because with mega-deals breaking out across the gold sector and smaller M&A proposals starting to surface, it’s beginning to look like 2019 could be the year of the mining deal.

Two of the biggest-ever gold mergers are underway, Barrick + Randgold and Newmont + Goldcorp, with a third in the official denial phase, Gold Fields + AngloGold Ashanti – and everyone knows that an official denial can sometimes be reason to believe that something’s afoot.

The point about the outbreak of gold-sector merger fever is that it does have substance and could last for some time as cash-rich producers hunt for asset-rich developers in need of cash.

Copper too is starting to be affected by an urge to grow with Sandfire suggesting to MOD Resources that a deal might be in the best interests of both companies – with more to come in that situation.

Macquarie Bank certainly believes that M&A activity could be a value-driver this year, not just from straight-forward takeover bids but from the flow of deals in the wake of the international mega mergers, with Australian gold miners likely to be at the forefront of bidding for discarded assets.

“Divestments from the recent Barrick + Randgold tie-up and the proposed Newmont + Goldcorp merger will likely deliver assets onto the market,” Macquarie said in a note on Australian goldminers headed: “The push for the summit”.

“With most Australian gold producers already sitting on substantial cash balances, an additional boost from higher gold prices over the next couple of years could set the stage for some aggressive bidding.”

The question for investors is whether they want to be on the buy or sell side of emerging deals, with sell generally the best place to be.

The other point raised by Macquarie in its “summit” gold note is that the bank seems to have picked up on a theme pursued regularly in this column – that gold in Australian dollar terms is heading into the stratosphere, perhaps above $2000 an ounce thanks to the twin effects of the US dollar gold price and a flat Australian dollar.

 

Macquarie’s revised gold price tip is for the metal to rise to $US1425/oz by this time next year (up $US145/oz or 11.3%), and with the exchange rate stuck at around US72c that price forecast implies an Australian gold price of $A1979/oz.

If correct, there is really only one way for gold miners to go:_up – which is what Macquarie reckons, with its entire universe of gold stocks expected to rise this year, with one notable exception, Newcrest, which is expected to fall by $5 to $18 (ouch).

Macquarie’s view on gold and the prospect of a deal rush was one of the high points in a week when commodity and share markets were less than exciting, burdened by the ongoing China v US trade stoush, the Brexit stalemate and the slowing US economy thanks to the partial shut-down of the government.

Worrying as the political and economic outlook might be, there was a flash of optimism during the week from another leading investment bank, UBS.

In a report headed “Stimulus starting to steady the ship”, UBS said China’s economic slowdown appeared to have bottomed with encouraging signs of a pick-up which will help drive fresh interest in Australian mining stocks.

“We were at the Greater China Conference last week and despite the cautious tone noted an improvement in sentiment on the basis of supportive policies and renewed optimism of a positive outcome to the trade war,” UBS said.

On the Australian stock market this week, major indices were largely unmoved despite the start of a hectic period of quarterly, half and full-year reports with a number noting major trends that are worth watching, especially rising costs.

The challenge of higher operating costs was noted by Northern Star and Western Areas, with both sold down after the release of their December quarterlies.

Price moves and news events of interest in a generally quiet week included:

  • MOD Resources rocketing 13c (60%) to 35c after reporting preliminary talks with Sandfire Resources about a possible merger, with that news helping MOD raise a fresh $15 million. Institutional investors paid 30c for their portion of the capital raising. Canaccord Genuity reckons MOD is heading for 85c. Sandfire added 18c to $6.88.
  • Fortescue Metals Group continued to shake off its reputation as a victim of low-grade iron ore discounting with a 29c share price rise to $4.76. Over the past six months, as the discounting problem has faded, Fortescue has risen by 35%, or $1.23 a share.
  • Alacer Gold hit a 12-month share price high of $3.14 as investors reacted to a strong December quarter production report and guidance of output rising as high as 380,000 ounces this year at a cost of between $US675/oz-and-$US725/oz. The stock closed the week at $3.09 for a gain of 29c.
  • New Century Resources continued to be sold down despite solid December quarter production numbers from its re-developed Century zinc mine in Queensland. The stock fell by 14c over the week 58c to be close to a 12-month low despite an optimistic report from Credit Suisse, which is tipping a future share price of $2.10.
  • Red 5 continued to enjoy a re-rating as investors develop greater comfort with its plans for the King of the Hills gold project in WA, trading up to a 12-month high of 11c for a gain of 1.1c over the week.
  • OZ Minerals reported 2018 copper production of 115,998 tonnes, close to the top end of guidance for the year. On the market the stock added 30c to $9.31, and
  • Lynas Corporation slipped 10c lower to $1.53 despite solid rare earth production numbers with investors cautious about waste treatment issues at its Malaysian processing plant. UBS reckons the concerns are overdone, tipping the stock to reach $2.90 over the next 12-months.

 

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