Currency and cost factors favour gold stocks

A record high Australian dollar price in June has provided a tailwind for the state’s gold sector, and 2017 is looking to be a similarly positive year.

Western Australia’s gold miners produced nearly 6.2 million ounces of the metal in the year to June 2016, according to the latest data on the industry from the BNiQ Search Engine, bolstered by a high domestic dollar gold price and lower costs.

That has led to solid margins across the sector, with many of the state’s largest miners producing with all-in sustaining costs between $900 and $1,000 per ounce.

And that has led to some impressive returns to shareholders.

St Barbara led the way on that front, with a one-year total shareholder return of 424 per cent, according to the BNiQ Search Engine, while Ramelius Resources and Millenium Minerals both clocked gains above 300 per cent.

A dollar invested on July 1 last year with even weighting across a list of a dozen selected companies with WA operations would have almost tripled in value, with the average TSR at 177 per cent.

With higher levels of cash flow coming in the door, some miners are targeting capital investments and technological improvements, while many are set to invest large amounts into exploration.

Resolute Mining has plans to embrace innovation to lower costs, while Northern Star Resources and Saracen Mineral Holdings are two leaders in exploration spending.

Despite the activity in the sector, there were minimal changes to rankings in the BNiQ Search Engine list of the state’s biggest gold producers, with the top eight spots steady, led by Newmont.

Recent announcements will trigger changes in the year ahead, however.

Northern Star Resources has sold its Plutonic mine to Billabong Gold for $66 million, enough to drop Northern Star from third to fourth position on the list.

Barrick Gold plans to finally exit the state, with a sale of its 50 per cent share of the Kalgoorlie super pit in a bid to strengthen its balance sheet.

Timing

Blackham Resources chair Milan Jerkovic, who was appointed to the role in November last year, said the higher gold price would create an opening for smaller companies to revitalise old projects, similar to the strategy Blackham has used at Matilda, near Wiluna.

That project is in wet commissioning, which started in early September.

It has previously been managed by a number of other companies, with mixed success – one previous owner had trouble with processing facilities, for example.

Mr Jerkovic told Business News the declining exchange rate since the peak of the mining boom had been one of a few factors that made the climate better for gold hopefuls.

The low oil price, which contributed to lower costs, was another factor.

“The Australian dollar margins are probably far better than they’ve ever been,” Mr Jerkovic said.

“It’s allowing a window of opportunity (for) recycled, previously unfinished gold assets to be re-profiled.

“Nimble companies that can enter the market where they deploy capital quickly and de-risk by getting into production; Blackham is an example of that.”

One benefit of a higher gold price and lower costs was that it ‘rebased’ the economics of a mine, allowing expansion of reserves and resources, he said.

Part of Blackham’s strategy has been to prove-up deposits nearby to the Matilda mine, and the next move will be to increase capacity at the project from 100,000oz a year, perhaps as high as 200,000oz.

“The exploration we’re doing is really just improving the quality of our (deposits), doing incremental expansion,” Mr Jerkovic said.

“The main focus is to turn what we know into a believable, deliverable cash flow profile.”

Mr Jerkovic wears an additional hat as the chair of Geopacific Resources, which is earning into a joint venture with Kula Gold at Woodlark Island in Papua New Guinea.

He said timing was always a crucial factor in terms of deal making.

The Woodlark project wasn’t quite financeable three years ago, but could be brought to that point by rebasing costs to match the current climate in the industry.

“We look at opportunities that exist that for some reason are mispriced in the market or not quite finished,” Mr Jerkovic said.

“People didn't have the money, they didn’t have the patience, or they got something wrong.

“Some of these assets have been abandoned by the market.

“It’s very easy to destroy credibility and reputation in the market; it’s a lot harder to create it and hold onto it.”

Capital & projects

Mr Jerkovic said he expected more money from North America would flow into Australian companies in the next six months, particularly those with higher risk profiles.

The gold sector was a source of action for capital raisings and deals throughout FY2016, including the largest raising by a WA company.

That was by Perseus Mining, in June, with the company seeking $102 million for gold project work in West Africa.

Beadell Resources successfully raised $50 million through a placement in February to accelerate its exploration program, Eastern Goldfields raised $25 million in December, while Dacian Gold picked up $25 million in November.

Gold Road Resources announced a $74 million capital raising in April to bankroll ongoing work at the Gruyere project north-east of Laverton, which the company said included de-risking, purchase of capital items, and front-end engineering and design work.

Gruyere, and Dacian’s Mt Morgan, are two projects around the definitive feasibility stage that are among the next cabs off the rank.

Gascoyne Resources has started a feasibility study for Dalgaranga expected by the end of this year, and has recommenced drilling at Glenburgh, while Eastern Goldfields is refurbishing the processing plant at Davyhurst to recommenced production.

A group of projects has moved into production this year, too, including Saracen’s Thunderbox, KIN Mining’s Leonora Gold, and Doray Minerals’ Deflector.

Contracts

In June, MACA won a 32-month mining contract from Blackham Resources at the Matilda operation, which is currently in commissioning, valued at $115 million.

Macmahon Holdings announced in May that it had won a two-year, $60 million extension of a contract with Gold Fields for provision of open-cut mining equipment at the St Ives mine.

Watpac Civil & Mining secured a $45 million contract extension from Ramelius Resources for Mt Magnet in July.

That covered services from drilling and blasting to haulage.

The company also won a $38 million contract from Silver Lake Resources for mining services at the Imperial/Majestic project in March.

Swick Mining Services has registered a couple of victories, with a renewal of its underground drilling contract at Jundee gold mine with Northern Star Resources.

In March, the company announced it had been awarded an underground drilling contract with Independence Group at the Jaguar and Nova sites

Although both mines are base metals focused, there is some gold production at Jaguar.

Further afield, GR Engineering Services will provide engineering, procurement and construction of a $36 million copper, lead, zinc and gold concentrator to Auctus Minerals in Queensland.

Ausdrill’s African subsidiary won a $US300 million earthworks and open pit mining contract in Ethiopia from Kefi minerals in October last year.

In August of this year, it extended a contract covering drilling through to hauling with Perseus Mining at a mine in Ghana for 3.5 years, worth $157 million.

Next steps

Katana Capital portfolio manager Romano Sala Tenna said interest rates and monetary policy, particularly in the US, would likely drive the gold price in the near term.

One change that might cause the high gold price might to begin to retreat would be an increase in official US interest rates.

The chances of a rate increase were higher after the US election in November, Mr Sala Tenna said.

But with quantitative easing and loose monetary policy forecast to continue in many developed countries, the impact on gold from a US rate hike may not be substantial.

“We think the key there is, even if the gold price comes back substantially in Aussie dollar terms, it’s a ripping price,” Mr Sala Tenna told Business News.

“We see good profits to come for a number of years.

“We’ve got the highest weighting we’ve had to gold in a very long time.”