Investors yet to be fully dazzled despite miners’ enthusiasm

THESE should be heady times for Western Australia’s gold industry.

Gold miners are by their nature an optimistic lot, yet the current high gold prices are beyond the wildest dreams of the most bullish gold mining executive.

As the gold price soars, so too should investor interest in the state’s gold players. 

Rather than there being gold miners dancing in the streets of Kalgoorlie and West Perth, however, the prevailing mood among many mining executives is frustration at the weak share price response to the strong gold price, and a determination not to repeat the mistakes the sector has made in the past.

From the bad old days of 2001, when gold was trading below $US300 an ounce, gold has reached unprecedented levels. In August it hit a record high of $US1,897.60 an ounce, capping a 35 per cent rise from September the previous year. When expressed in Australian dollars, the gold price is up more than 25 per cent since January, having reached a price of $1,890.24/oz at the time of going to press.

Based on the numbers compiled by WA Business News, the new high-price environment appears to have helped spark several changes to the ranks of WA’s gold producers.

Newmont Mining’s surge to the ranking of WA’s biggest gold producer, overhauling another North American miner in Barrick Gold, is an obvious highlight. Newmont has taken out top spot by virtue of its Boddington gold mine in the state’s South West, which has ramped up to full capacity after re-opening in 2009.

Beyond Newmont, however, the rest of the state’s big producers – Barrick, South African duo Gold Fields and AngloGold, and Australia’s gold major Newcrest Mining – have all recorded flat-to-falling gold output from their WA operations.

There is a practical explanation to that, with some operations now targeting lower-grade material made economic by the higher gold price, leading to lower overall output.

There are some mixed signals for those hoping the rising gold prices would spark a resurgence in WA’s gold industry.

While there are several new names on the WA Business News list of gold producers, many – such as Saracen Mineral Holdings’ Carosue Dam, Navigator Resources’ Bronzewing and Catalpa Resources’ Westonia – are simply old mines that have been re-opened under a new operator.

Producers such as Norton Goldfields, Navigator, Apex Minerals, Catalpa Resources and Norseman Gold have production costs of around $1,000/oz or higher, a cost base that simply wouldn’t have been sustainable until recently.

The upshot is that the big, new discoveries that show WA is still a growing gold province are still few and far between. The six largest mines in WA were all discovered more than 18 years ago.

That said, there are some promising up and comers. Regis Resources’ Moolart Well operation is an entrée to the much larger Garden Well deposit, a new find that will support a substantial 180,000oz per year mine when it comes into production next year.

Another mine not on this year’s list, but which will be a regular in years to come, is AngloGold and Independence Group’s Tropicana mine. The partners are set to spend $740 million developing the deposit, discovered in 2005, into a 400,000oz/year operation.

Alacer Gold’s Higginsville, Ramelius Resources’ Wattle Dam mine and Integra Mining’s Randalls operation are examples of other recent discoveries that have supported healthy new operations.

This should be party time for gold miners, but the executives who spoke to WA Business News were more circumspect about the health of the industry and its share market performance.

While times are no doubt good for the industry, there has been a surprising lack of new exploration in WA’s gold sector.

Whereas the surge in uranium and iron ore prices circa 2006 and 2007 spawned dozens of uranium and iron ore explorers poking around WA, there’s been no such rush of new WA gold explorers to list on the ASX.

Indeed, West Africa has emerged as a far more popular destination for Perth-based gold explorers in recent times, with the region considered more capable of producing multi-million-ounce deposits than WA.

Brian Rear is the managing director of Millenium Minerals, which has just raised $25.5 million through a rights issue to help develop its Nullagine gold mine. He said it was a strange time for the WA gold sector.

“Among the gold miners there’s disappointment that gold equities as a group haven’t matched gold itself,” Mr Rear said. 

“That’s puzzling and frustrating for a whole lot of us.”

Integra managing director Chris Cairns and Northern Star Resources managing director Bill Beament both lamented the fact Australian gold stocks have underperformed against the rising gold price.

Both executives believe investors have discounted the WA gold industry due to the number of failures in the sector, such as Sons of Gwalia and Croesus Mining, and the number of high-cost producers operating recycled gold operations.

“There’s a bit of a stigma around for investors,” Mr Beament said. 

“Only a couple of months ago, companies like Crescent Gold and Navigator Resources were on their knees. If the gold price hadn’t kicked up and their white knights hadn’t come in, they probably would have shut up shop.”

Crescent, which was hit hard by heavy rain early in the year, has been on the receiving end of a takeover offer from Focus Minerals, while Navigator went for a $32.6 million rights issue to retire debt after a weaker than expected start to the year. In addition, Mr Beament said, the failure of companies such as Gleneagle Gold, Monarch Gold and Mercator Gold were still remembered by the market.

“We had all the ones that went belly up in 2008, then this year we’ve had a lot of really bad stories in the recycled asset game, and that’s still fresh in everyone’s mind,” he said. 

“But at $1,700 [an ounce], if you can’t make money out of that in the gold game …”

Mr Cairns said the mixed reputation of WA gold miners had reached investors in New York and London, with Integra having to work hard to distinguish itself from the gold producers operating recycled mines.

“Each operation or each company that gets into difficulty does impact on the rest of the sector, whether or not our project is comparable to their project,” he said. 

“Whenever we see someone else struggling, we cringe a little bit because we know it’s going to have an impact on the overall sentiment within the market.”

With share prices failing to keep pace with the gold price, and with many miners recording strong cash flows, the prospect for mergers and acquisitions in WA’s gold sector is extremely high.

There have already been a number of deals, such as the Focus bid for Crescent and the proposed merger between Catalpa and Conquest Mining. In late August, emerging gold producer Silver Lake Resources said it had held merger discussions with a number of parties, however it had made little progress with any proposals.

Messrs Beament, Cairns and Rear are all certain that corporate activity will continue to accelerate in the gold sector, although all noted that M&A had been an easy way to erode shareholder value in the past.

Northern Star has already repaid the $40 million it borrowed to acquire its Paulsons mine from Intreprid Mines last year, and with the mine now generating healthy cash flow Mr Beament is looking for new opportunities.

“We’ve been focusing on assets that either don’t sit well inside the company that’s got it or they don’t have the team to execute it,” Mr Beament said. 

He believes deals could increasingly be used as a way of countering the lack of technical expertise in the sector.

“A lot of the smart corporate advisers are working out that there’s not enough people out there to run these companies, and there has to be consolidation,” Mr Beament said.

“You can have a good project, but unless you’ve got a team that can execute it, it’s not a very good investment.”

Mr Rear, however, warned against doing deals for the sake of it.

“There are juniors like us that are jumping into bed with other people. I don’t want to be unkind, but sometimes you’ve got to be a little careful about who you mate with,” Mr Rear said.

“If you’ve got two spotted dogs running around, all you get is another spotted dog don’t you?”

What the sector really needs in order to break the negative sentiment held by many investors is more exploration success, such as that generated by Regis at Garden Well and AngloGold and Independence at Tropicana.

The fat profits being generated on the back of the current high prices should lead to more money being pumped into exploration, which has been steadily declining in real dollar terms since the 1990s.

Integra’s Mr Cairns is adamant that more smart exploration is needed to restore the reputation of WA’s gold sector back to something resembling its former glory.

“What is exciting is that, as the juniors aggregate to form mid-tier miners, we’ll get back in this position where they have a couple of operations, good cash flows, good ground positions and can afford to spend money on sustained exploration programs,” Mr Cairns said.

Technical innovation and a willingness to persevere with drilling in untried areas were crucial to the long-term health of the industry, he said.

“There’s a very big temptation to drill in and around old deposits, and that’s not going to result in a new discovery,” Mr Cairns said.

“If they’re still doing the style of exploration as 30-40 years ago, they can only expect to be as successful as the guys behind them – which was not very.”