Pundits’ pilgrimage celebrates gold surge

Gold’s rising stocks and role in the post-boom recovery will make this year’s Diggers & Dealers the most promising for many years. 

Nobody shouted in January that the mining crash was over, but there’s likely to be plenty of shouting in the bars of Kalgoorlie hotels at this week’s Diggers & Dealers conference as the reality of recovery sinks in.

Gold, at close to a record high price in Australian dollars, is the primary reason for this year’s event showing more promise than any of the past five years.

The metal, which has saved Western Australia’s economy in the past, is once again playing a leading role as the resources sector rebuilds after the collapse in the prices of iron ore and other minerals.

While not widely recognised, the downward price trend that stung investors and cost thousands of workers their jobs hit bottom earlier this year, with gold and zinc leading the way back up (and nickel joining the upturn in May). Even hard-hit iron ore is showing signs of stabilising at around $US55 a tonne.

Adding to the belief that the worst is over is a boom in lithium exploration and production, which is mainly a stock market event but is having the effect of boosting the activity of exploration crews and drilling rigs.

How quickly the recovery takes hold is the question no-one can answer, but even if it’s a slow crawl out of the hole into which mining has fallen, it will be better than a continuation of the decline.

Always an important gathering of miners, bankers and politicians Diggers & Dealers this year is arguably the most important in its 25-year history in Kalgoorlie (it actually started in South Perth’s Windsor Hotel) and a feature of the state’s business calendar, thanks to the leading role of mining in WA which is offsetting the slowdown in non-mining sectors.

What doesn’t yet seem to be appreciated is that while some measures of economic activity show that WA continues to slow, there are three factors driving the mining revival.

• Higher commodity prices for most minerals and metals.
• Lower costs.
• The beneficial effect of freshly raised capital finding its way into exploration and mine development.

Gold is winning on all three of those business drivers, which is why it is the hottest metal being mined in WA today; doing better even than lithium, which will almost certainly prove to be a short-term bubble.

More than half the presenters at Diggers & Dealers, which runs from August 1 to 3, are gold-related companies, including four that have been the stars of the entire Australian stock market over the past year.

Northern Star Resources, Evolution Mining, OceanaGold, and St Barbara have all risen from relative obscurity into the ranks of the top 150 of ASX-listed stocks, and all with stock market values exceeding $1 billion (more than $3 billion in case of Northern Star, Evolution and OceanaGold).

The price of gold, which briefly topped $A1,800 an ounce last month, is one reason for the rush by investors into gold mining stocks.

Another, and perhaps more important, factor is that mining costs, especially for labour and mining services, have plummeted thanks to the iron ore crash. This has liberated equipment and sent workers scurrying for jobs, often at substantially lower wage rates.

The overall result is that some of the gold miners are working on profit margins approaching $1,000/oz and with most earning more than $600/oz.

What’s even more remarkable, but also not widely recognised yet, is that some of the best-known gold miners have entered a foreign part of the investment market for them; they have become ‘yield stocks’, thanks to the dividends they’re paying from their record-breaking profits.

Yield might not seem important to speculators who traditionally dominate the small-to-mid-tier part of the market, but with expanding dividends comes a new class of investor, especially those disillusioned with lacklustre bank and property stocks.

A leading example is Northern Star, which is expected by analysts at the investment bank Credit Suisse to pay a dividend of 8.45 cents from its financial 2016 earnings of $183 million (equivalent to 30.28 cents a share) which at a share price of $5.70 puts on a yield of 1.5 per cent – which is what some banks currently pay for short-term deposits.

In the current financial year, Northern Star is expected to more than double its dividend to 18.35 cents a share, which lifts its yield to 3.2 per cent.

Regis Resources is expected to pay 15.6 cents a share this year, implying a yield of 4 per cent, rising to 24.5 cents next year for a yield of 6.3 per cent.

The reason for considering yield in gold stocks – a very rare event in the mining industry – is that gold has become the rock star of the investment world at a time of global economic uncertainty and what look likes being a prolonged period of super-low, and even long-term, negative interest rates.

So, an increasing number of gold mining companies means more exposure to gold, which is an insurance policy against more economic instability and an overdue fall in the Australian dollar exchange rate, and a bonus in the form of dividend yield.

Other reasons for ensuring the best Diggers & Dealers event in five years are the recent recovery in the price of nickel, the second most important metal produced in the area around Kalgoorlie, and the spectacular rise in the price of zinc, which is up 50 per cent since January from US66 cents a pound to its latest price of $US1/lb.

While zinc’s not a major component of WA’s minerals output, its rise should ensure an attentive audience for Alexander Burns, chairman of Energia Minerals, when he speaks on the third day of the conference. Energia is planning to re-develop historic zinc workings in northern Italy.

Heron Resources is another presenter at the conference and another zinc revival story, as it moves towards re-starting production at the historic Woodlawn project in NSW. Its chief executive, Wayne Taylor, is scheduled to speak on the opening morning of the conference.

Nickel, while missing a number of regulars from earlier years, will have three participants in Western Areas, Mincor Resources and the multi-metal producer Independence Group, which has a finger in the gold, copper and zinc pies.

The attraction of the nickel stocks is the price of the metal (up 40 per cent from a mine-destroying $US3.45/lb in early February) to a recent $US4.85/lb – a rise caused by the threat of a nickel-ore export ban being imposed by the government of the Philippines on its big nickel industry.

If the Philippines enforces the export ban, up to 20 per cent of the world’s nickel supply could be at risk, handing a get-out-of-jail card to WA’s beleaguered nickel miners.

Several other speakers are also likely to attract attention.

• Fortescue Metals Group chief executive Nev Power, because FMG is enjoying an unexpected bonus from a higher iron ore price, and because he will be a lone voice for iron ore.
• Vimy Resources chief executive Mike Young, who will try to convince investors that he can develop a uranium mine at the Mulga Rock deposit at a time of uranium trading in the short-term market at a lowly $US27/lb.
• A never-ending line of gold-company speakers such as Bryan Dixon from Blackham Resources, Rohan Williams from Dacian Gold, Bob Vassie from St Barbara, Jake Klein from Evolution Mining, Ian Murray from Gold Road Resources, John Welborn from Resolute Mining, Bill Beament from Northern Star and Luke Tonkin from Silver Lake Resources, a company that suffered a near-death experience last year but is rushing back into focus on the strong gold price.