Triple trouble takes shine off record gold price

If Charles Dickens had not coined the expression “it was the best of times, it was the worst of times” in the opening lines to his epic Tale of Two Cities about 160 years ago
7th June 2019
Tim Treadgold

If Charles Dickens had not coined the expression “it was the best of times, it was the worst of times” in the opening lines to his epic Tale of Two Cities about 160 years ago, it would be a good way of describing events this week in the Australian gold sector.

On the one hand, gold hit an all-time record of more than $A1900 an ounce, while on the other hand, three local gold miners suffered self-inflicted wounds that decimated their share prices.

Gascoyne collapsed. St Barbara copped a rap over its knuckles from stock exchange regulators over a capital raising and Dacian Gold was savaged after reporting a big blow-out in costs and downgraded production guidance at its Mt Morgans mine in WA.

Unfortunately for the rest of the gold industry, that triple-treat of trouble reverberated, rubbing the gloss off the effect of the gold price rocketing A$70/oz to be sitting around $A1905/oz early yesterday, thanks to a combination of the international price rising to US$1327/oz and the A-dollar sitting below US70 cents.

For leading local gold producers, it was case of the week that got away. Evolution had moved up sharply early from $3.81 to a 12-month high of $4.13 before being stomped down to $3.87. It was the same with Saracen and Northern Star with both hitting 12-month highs ($3.52 and $10.19 respectively) before being sold down.

What happens next in the gold sector could be quite interesting because there has been an increasing expectation that a period of corporate activity, code for takeovers and other deals, is overdue with the Canadian investment bank, RBC Capital Markets, the latest to suggest that growth by acquisition is the only way ahead for some companies.

In an exquisitely timed research report, RBC said last week that the Australian gold industry is approaching a turning point after four solid years of cost cutting and reasonable gold prices which have boosted cash balances.

“As we observe the gold sector in mid-2019 we believe the goal posts are about to move,” RBC said, with companies forced to look for growth rather than continuing to milk old and depleting orebodies.

A reasonable interpretation of RBC’s thesis is that gold companies which are unable to grow through discovery or by improving what they currently own will be forced into the M&A market either as acquirers or targets.

Stocks in other parts of resources sector also had a tough week. Rare earth companies, which had flown high on the strength of the China v US trade war retreated, led by Lynas, which lost 35c to $2.67, and Arafura, which slipped 1c to 8.3c. Northern Minerals swam against the tide, adding a fractional 0.3c to 8c.

Lithium stocks weakened as the debate continued about whether there is a shortage or glut of the battery metal developing. Galaxy was down 11c at $1.47. Orocobre lost 16c to $3.14, Pilbara was 6c weaker at 67c while Altura was steady at 11c after reporting a record monthly output in May.

The trade war also took its toll on confidence across the market, even iron ore stocks which have had a stellar run thanks to Brazil’s outage were on the backfoot as it became a little clearer that the iron ore shortfall might not be a long-term event.

Fortescue Metals, the biggest single beneficiary of Brazil’s problems, slipped back below $8, more than $1.30 less than its 12-month peak of $9.34 reached last month. Mt Gibson followed with a 17c fall to $1.08.

Macquarie Bank warned during the week that the iron ore market was correcting as extra supplies started to reach Asian steel mills with Australia, Indian and South Africa mines starting to plug the Brazilian gap.

“Week on week BHP and Rio Tinto iron ore shipments rose by 8% to 5.7 million tonnes and 7.8m/t respectively,” Macquarie said. “On a seasonally adjusted basis for the June quarter Australian iron ore majors are outperforming by 3% (BHP) and 5% (RIO) while Vale, Brazil’s biggest iron ore miner, is down 30%.”

Nickel mining companies, which had been widely expected to stage a strong upward move as global stockpiles of the steel hardening (and battery) metal continued to decline, were also on the losing side of the ledger thanks to a surprise increase in Indonesian production of nickel pig iron (NPI).

Macquarie warned investors that the amount of nickel coming out of Indonesia was easily meeting demand, offsetting: “a relentless fall in nickel exchange stocks”.

Western Areas slipped 9c lower to $2.11 and Mincor was down 2c to 42c despite an encouraging presentation by the company’s chief executive, David Southam, at the well-attended Resource Rising Stars conference on the Gold Coast.

Background noise, including the trade war, the Reserve Bank’s interest rate cut and the triple-header gold-stock setback didn’t completely muffle an otherwise positive conference, but the mood of the audience was not reflected in the share prices of company’s presenting – something that has been noted in previous years.

Unlike previous years when the RRS audience conference has seemed to be able to move the market with some members actively trading during presentations, this year saw minimal movement in the prices of presenting companies.

A call of the card showed that most stocks ended the conference where they had started while 13 slipped marginally and six rose marginally.

Other news events of interest, but with minimal share price movement either way, included:

  • Lucapa Diamond Company added 2.5c to 16.5c after reporting more high-priced sales which lifted the value of first half transactions to $US22.1 million at an eye-catching average price of $US3668 per carat.
  • Talga Resources reported a high-grade graphite discovery at its Niska prospect within the wider Vittangi project in northern Sweden with a best drill hit of 135.6 metres at 25.75% graphite. On the market, Talga added 3c to 59c.
  • First Graphene, which is developing a range of graphene-related products for the building and other trades, rose to a 12-month share-price high of 30c, before easing back to 25c for a 1c gain.
  • Alkane upgraded its gold production guidance and lowered its cost estimate for the year to June 30 but was caught in the backwash of the three gold flops to slip 2c lower to 31.5c.
  • Calidus moved up by 0.3c to 2.8c after reporting encouraging drilling at its Warrawoona project in WA with a best hit of 8m at 8.06g/t from a depth of 56m, and
  • Azure Minerals moved up by 1c to 11c after announcing plans for early-stage mining at its Oposura zinc and lead project in Mexico.

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