Winners and winners in the rush to gold

IT might not feel like it, but there are early signs of boom conditions forming in some parts of the state’s mining industry, with two sectors in particular benefiting from events in the markets for commodities, labour, and capital equipment.

Gold is the obvious beneficiary of a near-record price in Australian dollars thanks to global economic uncertainty. That’s why the share prices of most gold companies have rocketed up over the past 12 months.

Engineering and construction services exposed to gold are riding on the metal’s coat-tails, which is why most stock exchange-listed engineering firms have followed the gold stocks with sharp share price rises.

The gold rush has attracted some critical headlines, because shares prices appear to have overshot the underlying gold price – something that always happens in a boom.

The engineering rush has produced its own group of winners, with some rising at a faster pace than those of their clients, the gold miners, largely because they fell further in the crash.

How far this return to buoyant conditions lasts is unknown, and it could be a case of making hay while the sun shines. But even if that’s true, anything is better than a prolonged period of no growth.

Examples of the gold rush include Northern Star Resources’ remarkable run, from less than $1 just two years ago to a peak of almost $6 in July. Evolution Mining has also ridden the wave, from around 60 cents to more than $3 over the same time.

Less obvious, but even more spectacular, has been the recovery in the engineering sector. A number of contractors have risen by 500 per cent, and more, over the past six months after speculators realised that companies once thought to be on the brink of collapse are actually starting to post strong profits.

The share price of NRW Holdings, a contractor with mining and civil engineering operations, fell to just 4 cents in February, a collapse of monumental proportions from the stock’s 2012 peak price of $4.24.

However last week, after NRW reported better than expected financial results for the 2016 financial year (including a pre-tax profit of $47.4 million and an order book swollen to $1 billion), the company’s share price hit a 12-month high of 63 cents – a price 1,475 per cent higher than that February low.

Other contractors are joining in what is starting to look like a stampede to build new gold mining projects. Specialist gold plant builder Lycopodium last week hit a 12-month share price high of $2.60 after announcing a contract to develop the Sissingue processing plant in the West African country of Ivory Coast for the Perth-based miner Perseus Mining.

The revival in gold and engineering services is producing conflicting views about where both industries are heading, and whether the boom of the past six to 12 months has passed its ‘best by’ date.

Macquarie Bank is top of the optimists. In a research report this month, it noted that current conditions in the gold and engineering market meant that there was ‘never a better time to build a mine’.

Rival investment bank Morgan Stanley looked at what’s happening from a different perspective, noting that the rush into gold mining shares had produced one of the fastest ever rallies and that a big disconnect had developed between the gold price and mining company share prices.

“We estimate that equities (mining companies) are discounting a gold price that is more than 20 per cent above the spot (gold) price,” Morgan Stanley said.

In other words, Northern Star’s latest share price is based on a gold price of $US1,546 an ounce, close to $US200/oz higher than the latest price for the metal, while Newcrest Mining, the Australian gold-sector leader is trading at a share price that assumes a gold price of $US1,710/oz.

Those calculations have ‘boom’ written all over them and imply that either share prices have got well ahead of the gold price and will fall, or investors believe the gold price will continue to rise because of deep-seated problems in the global economy.

Macquarie’s view of the Australian gold mining sector, which is dominated by miners based in Western Australia, is that conditions have not been this good for at least 20 years.

“The US dollar gold price is at a post-global financial crisis high, at an all-time-high in Australian dollars, and global monetary policy looks like it will be supportive of gold for some time,” Macquarie said.

“With the completion of major resource projects in the country’s north-west (WA iron ore and LNG), skills abound and contract rates for services have come back to earth.

“Capital items (plant and equipment) are going cheap and access to capital for gold companies has rarely been better.”

The Macquarie view of a boom, which it reckons has further to run, is distilled in two stocks. Gold Road Resources and Dacian Gold, both of which it believes could move much higher than their already strong prices. Gold Road is tipped to rise from 68 cents to $1.20 and Dacian could rise from $3.51 to $4.90.

To put those forecast prices into a boom-market perspective, Gold Road was at 4 cents three years ago and Dacian was trading at 17 cents.