Guy on Rocks: The gold junior that’s looking like a hot takeover target
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Guy on Rocks is a Stockhead series looking at the significant happenings of the resources market each week.
Former geologist and experienced stockbroker Guy Le Page, director and responsible executive at Perth-based financial services provider RM Corporate Finance, shares his high conviction views on the market and his “hot stocks to watch”.
There’s been a little bit of a pullback in the gold price to under $US1,800 ($2,437). Some believe that is driven by the 10-year US yields that have troughed, and what they see is a more bearish outlook for gold.
However, I think with the amount of money printing and debt being built up, while there is a significant gap between cash rates and equities yields, there is a strong case for the broader market going up. However, when looking for alternative safe havens there is perhaps the US dollar (that will remain under pressure with the current stimulus), gold and Bitcoin, with the latter not being an option for sovereign governments.
I still think you might see a bit of a pullback further in gold. I noticed that the exchange traded funds (ETFs), the aggressive buyers up until one month ago have dropped around 2.2 million oz over the last month, which is not surprising after the highs it reached in October.
I think there’s some short selling amongst that as well. We’ve seen a bit of an uptick in the futures open interest.
We might not get to our $US2300 target by the end of the year, but I’m still optimistic of it going well over $US2000 early next year. Two things were going to happen in mid-early October this year, either the gold price was going up or gold equities would come off because the producers were trading at a 30 to 40 per cent premium to their valuation (more in some cases).
I think in a lot of the stocks we’ve mentioned, it represents a reasonable buying opportunity. We possibly haven’t seen the trough — you may see that around December and maybe mid-January. After that I’d expect a bit of an improvement.
On the China front, it’s more of the same. There’s been continued strong industrial production, up 6.9 per cent year on year in October, close to the increase in September.
PMI expansion is 51.4 against 51.5 in September, so again pretty strong. The outlook for the property market could be constrained with the regulations impacting land purchases, but that’s about the only negative there.
Steel consumption still remains strong — 14.6 per cent in September, up from 14 per cent year on year in October. Net steel imports were down 44 per cent and there was an increase in iron ore imports — 15 per cent year on year. So all those numbers are pretty consistent.
On the iron ore front, there’s still a lot of dissatisfaction in Brazil with the way the Vale compensation is playing out. There was an offer of $3.97bn on the table which was rejected. Minas Gerais is asking for about $10.3bn. That’s the state where the Brumadinho tailings dam wall failure happened.
In other news, copper has reached new highs. That’s looking very strong into next year as I think is nickel.
We noticed a bit of sovereign risk rearing its head again, with Mongolia formally complaining about Rio Tinto’s (ASX:RIO) performance at Oyu Tolgoi in Mongolia. There’s been a lot of cost blowouts and delays. So I don’t know what the ramifications of that are going to be.
On some of the companies we’ve been talking about, a lot of their share prices have come back – Traka Resources (ASX:TKL), Great Southern Mining (ASX:GSN) and most notably Tribune Resources (ASX:TBR).
Tribune is on track to make about $80m this year and it’s currently trading around $1 dollar below the value of its gold bullion, Rand shares and cash. That comes to about $7.20.
It closed at $6.35 on Friday, which means Tribune’s 1.8 million oz resource at the Japa project in Ghana is valued by the market at zero. As is the Diwalwal project in the Philippines and the East Kundana joint venture in Western Australia, which we valued at approximately $570m.
I’d have to say that’s a screaming buy even in the declining gold price market.
Estrella Resources (ASX:ESR) had a fantastic run up to 18.5c, it was probably a bit overcooked.
The stock has been held back a bit by the in-the-money options. Chris Daws, who has joined the board, holds a few options but he’s a long-term holder. He’s also a major shareholder, so it’s a bit of a vote of confidence that he wants to get involved and drive the company.
What is interesting is there will be the results of the recent step out hole from the discovery hole at the Carr Boyd project.
Estrella hit a 25.7m wide zone of nickel-copper sulphides, about 25m north of the discovery hole. I think the results will be eagerly awaited.
It seems to be consistent with another anomaly the company had already drilled. Estrella is drilling about 40m apart either side of this discovery zone. I think that’s going to be pretty exciting.
One that I mentioned back in April at about 10c and ran up to 34.5c is Greenland Minerals (ASX:GGG), which just raised $30m via a combined placement and share purchase plan led by Ashanti Capital.
The company is very close (in my opinion) to having the mining licence granted for its 100 per cent owned Kvanefjeld rare earths project in southern Greenland granted.
China’s Shanghe holds just under 10 per cent of Greenland Minerals and has all the downstream infrastructure to assist in bringing this project online.
Kvanefjeld is one of the largest rare earths deposits in the world. It’s strategic and the economics are compelling.
This move from 30c back to the high 20c is one of a number of moves I think will happen this year.
What we’re not sure about is if there will be a joint venture formed between Shenghe and Greenland Minerals, what that would actually look like. But I would expect Greenland Minerals would retain a fairly significant interest in the project, which has got a net present value of well over $1.5bn.
I think even at the current levels, with a market cap around $320m, there’s still plenty of upside there.
It will be one of the lowest cost producers in the world. Capital costs have come down under $600m. I think the stars are lining up there.
One we’ve been following for a while is Apollo Consolidated (ASX:AOP). Argonaut had a target on the company in mid-September of around the mid-40c. The stock has pulled back to the high 20c range.
It owns 100 per cent of the Lake Rebecca gold project in the Eastern Goldfields.
I think the potential there is in the order of 1.5 million oz with a potential reserve or indicated resource in the range of 800,000 to 1 million oz at around 1.4-1.5 grams per tonne (g/t).
That could potentially deliver 100,000oz a year at a mined grade in the order of 1.2-1.3g/t – that’s my back-of-the-envelope economic model for this project. The thing I like about the project is Lake Rebecca is quite an attractive shape for mining – quite concentrated mineralisation.
Lake Rebecca is 150km east-northeast of Evolution Mining’s (ASX:EVN) Cowal gold operation and about 50km from the Carosue Dam mine owned by Saracen Mineral Holdings (ASX:SAR), which is obviously going to be merging with Northern Star Resources (ASX:NST).
Along strike and down to the south is the Duchess Gold deposit at 180,000oz. So between the Duchess and Lake Rebecca there’s quite a bit of resource upside.
Apollo has about $20m in cash and is trading at an enterprise value (market cap + debt – cash) of around $60/oz.
I think it’s a potential takeover target. Apollo has low jurisdictional risk and a pretty good team running it.
You might see its share price fall back a bit, but I think next year is looking pretty good and I’m pretty optimistic the company will upgrade its resource inventory.
At RM Corporate Finance, Guy Le Page is involved in a range of corporate initiatives from mergers and acquisitions, initial public offerings to valuations, consulting and corporate advisory roles.
He was head of research at Morgan Stockbroking Limited (Perth) prior to joining Tolhurst Noall as a Corporate Advisor in July 1998. Prior to entering the stockbroking industry, he spent 10 years as an exploration and mining geologist in Australia, Canada and the United States.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.