Money Talks: The WA goldies with the keys to success
Money Talks is Stockhead’s regular drill down into the sectors and companies that investors have their eye on right now.
Today, we hear from Roger Breuer, investment analyst at Arlington Group Asset Management.
“I’m a big believer that gold will stay higher for longer,” Breuer told Stockhead from London last week.
That sentiment is definitely shared by many. For example, at last week’s Mines and Money APAC virtual conference gold explorers and capital markets advisers predicted the Aussie-dollar price of gold would hit $3,000 by Christmas.
Meanwhile, in April Bank of America raised its 18-month gold price target to $US3,000/oz, which at today’s exchange rate would be about $4,366.
Pierre Lassonde, chairman of major Canadian gold miner Franco Nevada, is even projecting $US20,000/oz gold prices in two to five years.
That may be a bit out there, but the broad consensus seems to be that gold still has plenty of steam.
One of the key catalysts, according to Breuer, is the low interest rate environment, which is expected to persist for at least the next 18 months.
“Low/negative real interest rates have a strong correlation with higher gold prices,” he explained.
“All of this quantitative easing as well I just think bodes very well for a strong gold environment.”
At the time of writing, the gold price was sitting around $US1,775/oz or $2,583 Aussie an ounce.
While these strong gold prices have meant the producers are cashed up and prime targets for investors, it has also landed several of the juniors on investors’ radars.
“Mining is a very cyclical industry and so a lot of the explorers can be very capital starved for many, many years,” Breuer said.
“Then as the gold price moves higher, as the commodity prices move higher, all of a sudden that capital moves from the producers to the developers up to the explorers, and they get the ability to get hold of some cash to actually go and drill these projects that they’ve identified and that they’re trying to move forward.
“So it really does feel like this high gold price has really shone a light on the explorers.”
And for Breuer, it’s a relatively simple strategy when it comes to which junior gold explorers to back.
“The first thing I’m looking for are some really great old historic mines that have the potential to go further by looking along strike and by drilling deeper, keeping things simple,” he explained.
“Because you’re really lowering that risk profile.
“There have been some wonderful examples where this has been successfully done. Notably, Kirkland Lake (ASX:KLA) with Fosterville and how they drilled deeper and along strike and it’s just a phenomenally cash generating business now.”
Breuer also pointed to Northern Star Resources’ (ASX:NST) success at its Jundee gold mine.
“They looked deeper and they discovered the Zodiac deposit there and they grew reserves and resources,” he said.
The other key thing to look closely at, according to Breuer, is the economics of a project.
“It’s all about economic geology, because if they keep drilling out an orebody and it doesn’t look like it’s going to ever become a mine, then it really is a bit of a dead end for investors,” he noted.
In a recent research report, Arlington Group Asset Management decided to take a closer look at juniors with projects in Western Australia, given the state is “arguably the epicentre of a developing global exploration boom”.
And the ones to look at are those that are pursuing mineralised districts, committing to drilling, aiming for simple large targets and balancing greenfields (new discoveries) and brownfields (surrounding mines) exploration.
“You need to think a little more carefully about those explorers that really are lowering that risk profile,” Breuer said.
Market Cap: $732.5m
Arlington is a fan of Bellevue because of its high-grade 2.2-million-ounce resource and the experience behind the company.
The Bellevue gold mine produced 800,000oz at 15 grams per tonne (g/t) of gold between 1986 and 1997.
Steve Parsons joined Bellevue, formerly Draig Resources, as executive director in March 2017 and a new management team was appointed.
“A new geological interpretation of the Bellevue gold project was undertaken, looking for ‘repeat and offset structures capable of hosting a significant orebody similar in size and grade to the historic Bellevue mine’,” Arlington said.
“By October 2017 geophysical surveying had identified a number of high priority shallow targets.
“In November 2017, a new gold discovery called the Tribune Lode was announced after drilling assays showed 7m at 27.4g/t gold from 92m down hole.
“The mineralisation appeared similar in style and nature to the previously mined Bellevue Lode.”
Since January 2017, Bellevue’s share price has rocketed from 2.5c to $1.04 per share.
The company has now defined 2.2 million ounces grading 11.3g/t gold — making it one of the fastest and highest-grade gold discoveries in the world.
Market Cap: $311.6m
Since Arlington’s report was released in mid-June, Pantoro’s share price has continued to climb. It’s currently trading at around 28c.
The gold producer had cash and gold worth $25.8m at the end of March.
Pantoro is producing from its flagship Nicolsons deposit, where its goal is 50,000oz a year, but the company recently picked up a 50 per cent stake in the high-grade Norseman project.
The Norseman gold mine produced over 5.5 million ounces of gold since operations began in 1935, and Arlington noted that it was one of, if not the highest-grade fields in the prolific Yilgarn Craton.
“Pantoro is focused on establishing a clear production development plan and has commenced drilling and other works required to convert mineral resources to ore reserves,” Arlington said in its report.
Market Cap: $1.04bn
Arlington expressed what most investors are probably thinking: “we wish we had bought this one at the start of 2020!!”
De Grey is one of the most successful gold explorers this year. Now a $1bn market cap company, since the start of the year it has rocketed over 2000 per cent to a 52-week high of 97c last week.
“De Grey’s Hemi discovery is a wonderful exploration success that can keep going as long as the drill bit keeps showing the way,” Arlington said.
“The shares have certainly captured the investing public imagination with market chatter of 5-10 million ounces compared to current resources at 2 million ounces of gold.”
Arlington said De Grey’s shear-zone hosted gold deposits resembled many of the gold deposits mined throughout the Kalgoorlie to Wiluna region.
“The regional scale shear zones extend over 200km in strike length in total within the project area,” the firm said.
“Detailed RC (reverse circulation) and diamond drilling is estimated to have tested less than 10 per cent of these prospective shear zones.”
Market Cap: $139.4m
Arlington says Wiluna Mining’s combination of an “un-demanding valuation, aggressive drilling program, with an established mining camp and infrastructure make Wiluna attractive”.
Wiluna Mining’s ‘enterprise value per resource ounce’ is the cheapest at around $US14 per resource ounce of gold, according to Arlington.
It is worked out by dividing a company’s total resources by its enterprise value (market cap + debt – cash).
At the time Arlington released its report, Wiluna Mining had a market cap of $160m, $20m in cash, no debt and 6.4 million ounces in resources and reserves.
The Wiluna mine previously produced about 4 million ounces of gold, giving it an endowment of over 10 million ounces.
The mine is located within the Yilgarn Craton and covers a significant mineralised district with large structurally controlled gold targets, Arlington says.
“The Wiluna region itself has seen the bulk of the historical production and currently production comes from free milling ore,” the firm said in its report.
Wiluna Mining is working to leverage the higher-grade sulphide resources in its stage one expansion plan. This is expected to boost annual production to 110,000-120,000oz.
Market Cap: $401.6m
Gold miner Red 5, meanwhile, is looking to expand production at its King of The Hills mine substantially within the next couple of years.
“What we’re looking to do is be able to build a standalone mill at King of The Hills, which is in the order of about a 4-million-tonne mill, and have two standalone operating mines producing somewhere between 250,000-300,000oz of gold on an annual basis,” managing director Mark Williams said on mine site visit earlier this year.
“We saw the opportunity to be able to fill the mill at Darlot by restarting King of The Hills and being able to truck high-grade ore from here to Darlot.”
Darlot is one of WA’s iconic gold mines. It has been mined continuously for 30 years by majors including Canada’s Barrick Gold, Gold Fields and US-based Homestake Mining. So far it has produced about 3 million ounces of gold.
Red 5’s resource inventory at King of The Hills currently stands at 4 million ounces (open pit and underground).
A final feasibility for the standalone plant and integrated bulk mining operation is due out in the September quarter.
Arlington said Red 5 was estimated to spend about $25m on drilling in FY2020.
“Currently we estimate approximately $15m spent on drilling in FY2021,” the firm said.
“Of this, $10m is likely spent on drilling at Darlot to extend the mine life and $5m spent at King of the Hills, potentially on regional exploration.”
Arlington says it is pretty partial to Bellevue, Wiluna and Pantoro in particular due to potentially high-impact drilling programs over the next 18 months.
“In addition, Wiluna Mining and Pantoro screen particularly cheaply on EV/resource metrics at $US14/resource ounce and $US28/resource ounce respectively,” the investment firm said.
“Bellevue Gold trades on a much higher $US196/resource ounce but extraordinary high-grade resource growth looks set to continue, guided by down hole electromagnetics and early regional drilling success.”
Roger Breuer is an investment analyst with Arlington Group Asset Management, based in London, and has over a decade of experience analysing the Natural Resources sector.