MoneyTalks: Lion Selection Group finds pride in these four small-cap gold stocks

MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Lion Selection Group’s Hedley Widdup.

Lion Selection Group (ASX:LSX) is known for their mining clock, a concept developed and used by the small cap mining investment company to determine how close we are to the top of a new resources cycle.

As the clock moves around, money flows into the sector, driving a boom in mining equity prices.

When money moves out of the sector, it becomes harder to raise money.

Based on the invention, a crash starts at midnight which can be instantaneous like it was during the Global Financial Crisis (GFC) in 2007, or it can be more of a slow burn like it was during the downturn of 2011 that lasted through to 2015.

Markets then go through a bust and boom at 6 o’clock when activity measures really start to tick up.

“We’re currently sitting at two o’clock and that implies we’re at the start of a down cycle, so liquidity is falling which potentially leads to great opportunities,” Widdup told Stockhead.

While it can be difficult to see turning points even if we are looking out for them, from his point of view, as the market weakens opportunities begin to move into the value range that investors are happy to pay.

“The market is very defensible at two o’clock,” Widdup said.

“We’ve got $70 million in cash earmarked for investing in this space because we know, more than anything else – and without knowing the timing – that this market will turn around,” he said.

“We know roughly what it will look like when it does, we just don’t know when it will but we’re going to have a well-established portfolio of things that we bought very cheaply when the time comes.”

Which sector of the market is Widdup looking at right now?

Widdup tends to cast his eyes across all the different commodities ASX companies are exploring and trying to develop projects in but has a particular focus on gold and base metals.

“Gold is the lowest risk of all the commodities and base metals follow close behind because they’ve both got dependable fundamentals,” he said.

“We tend to understand gold and base metals better than some of the newer age things and we’re happy to take a position in those too but probably in lower volumes.”

“Gold is moving at the moment, and I think everyone has a sense of confidence in it for that reason.”

Widdup believes the depth and liquidity of the gold market has deepened, particularly from the perspective of central banks.

“The non-Western aligned central banks have become very, very interested in gold in just under a decade,” he says.

“You’ve seen the likes of the Chinese, Turkish and Russian government’s become buyers of gold in a short period of time and I think that is probably part of the catalyst that we’re seeing at the moment.”

Time for gold positioning is NOW

From Widdup’s point of view, the market has weakened and gold equities have been the most downtrodden while other headline indices in Australia have moved sideways.

“Gold has had a more robust price uplift in the last six months, but it’s been more of a tickle than a real shove,” he says.

“When you look at what’s going on in the gold market, you can subscribe to conspiracies if you like or you could just talk about the offset between a global financial market, which has got a fair bit of risk in it.

“Gold is a product which a lot of people use to try and preserve their purchasing power, so it tends to get purchasing interest when times start to wobble,” Widdup explains.

“And if there’s any sort of distrust in the US dollar, it’s a pretty reasonable play as there’s a lot of debt behind the US dollar these days.

“With all those things combined, now’s not a bad time to take a position in gold.”

Which ASX stocks is Widdup looking at?

Sunshine Metals (ASX:SHN)

“If i had to get stock specific, Sunshine Metals is trading at about a $15 million market cap and the hits from their Liontown resource in QLD have been monstrous,” he says.

“I mean stuff like 20m at 18.21g/t gold, plus they’ve realised there’s a precious metals-rich part of that deposit which has been poorly tested,” he said.

“The ability to develop a predictive model and then hit things off the back of it is rare, the managing director – Damien Keys – thrives where there’s been datasets that have been created but just haven’t been squeezed hard enough, or not squeezed at all.

“He’s got 30 years of data at his fingertips there and he’s going through it, licking his lips and finding things.”

Widdup says SHN is his top pick on the basis that it is cheap, and they’ve been able to have success off their geographical model, which sits amongst a resource.

“If they were to apply that model to other targets in the area, of which there are plenty, I see a long happy history in front of them, especially if they can get a few holes in the right places to start with,” he said.

Saturn Metals (ASX:STN)

For a bit more of a pure-gold play, Lion Selection Group also have an investment in Saturn Metals, the owners of an enormous low-grade gold resource in Western Australia at the Apollo Hill project.

“It’s about 50km from Leonora, a place where people talk about gold consolidation, but I don’t think Saturn plays a role in that at all.

“I think Saturn has a very, very individual future there given what they have done in the last 12 months, which is demonstrate that the metallurgy on this low-grade resource is exceptionally well suited to heap leach processing and that provides a very, very low processing cost,” he says.

“Saturn’s project is very interesting and if it in the North American market, it would be capitalised well over 100 million bucks but here in the Australian market, it’s a little bit misunderstood.

“That said, it’s got a register of fabulous institutions, several out of the North American market funnily enough, and a very competent team of managers.”

Alto Metals (ASX:AME)

“Alto’s Sandstone project has a resource inventory of reasonably high grade for very shallow ounces, ~832,000 ounces at roughly 1.5g/t,” Widdup says.

“I see Alto as the keystone to somebody else’s arch, there are three or four companies that could use their ounces which would obviate the need to build a process of your own.

“But in a better market, Alto would be able to raise money and drill its own resources and build their resource out to a threshold to be able to manage your own development. And I can see there is ample geology within their package to do that.”

Great Boulder Resources (ASX:GBR)

The other gold stock Lion Selection Group have invested in for over two years now is Great Boulder Resources.

“We’ve topped our investment in the company probably three or four times along the way,” Widdup said.

“Their geology (at the Side Well project) is on the regional fold on the other side of the Meekatharra Goldfield, which has been mined on and off but reasonably continuously for well over a century.

“This area has been locked in but not very thoroughly and there are some old workings, I think a lot of people have thought the old timers got the best of it and it just never took off.

“But GBR have managed to get some holes in the ground on part of this trend in a very small patch about 18 months ago and found gold each time,” he continued.

“Now that they’re the first to be able to scratch the surface, all of a sudden, we’re answering the question of ‘what does the eastern side of the Meekatharra goldfield look like’.

“That opens up a huge swath of geology, maybe a 20km strike, which could be very productive plus there’s development process infrastructure very near there so I think it’ll be exciting to see how they play out over the next two or three years.”

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At Stockhead we tell it like it is. While Sunshine Metals is a Stockhead client, it did not sponsor this article.