Sunday Roast: The small caps that lit a fire under our experts this week
A little bit of a mixed bag this week from our experts, with a smorgasbord of small, mid-tier and large cap picks on the dinner table.
Large cap gold miners could be entering a sweet spot on higher prices, lower costs and the end of punitive hedges which could see average margins for six of the biggest Aussie players increase by a massive $300 an ounce by the 2025 financial year.
Goldman Sachs analysts Hugo Nicolaci, Paul Young and Elise Bailey have delivered new analysis looking at the green shoots for ASX-listed gold miners aiming to grow production for what appears to be a vibrant gold price environment in the years ahead.
It comes as the largest and most common gold exposure on the Aussie market is poised for a gallant departure.
$25 billion capped ASX 20 digger Newcrest Mining (ASX:NCM), also one of the largest copper producers on the ASX, is heading for the exit after agreeing to an all scrip takeover from the world’s biggest gold producer Newmont.
While Newcrest and its Cadia gold and copper mine will be going Yankee, GS has its eyes on a triumvirate of mid-tier standouts as it initiated coverage on six of Australia’s top gold stocks this week.
The GS analysts’ three picks are Evolution Mining (ASX:EVN), Regis Resources (ASX:RRL) and Gold Road Resources (ASX:GOR), the former on its copper upside and the two latter on a net asset value discount to their peers.
Initiated alongside them with neutral ratings are Northern Star Resources (ASX:NST), which will become Australia’s largest standalone gold miner once Newmont’s Newcrest takeover completes with a planned 2Mozpa run rate from 2026 on, Mark Clark’s low-grade supremo Capricorn Metals (ASX:CMM) and the gold developer everyone wants or wants to be De Grey Mining (ASX:DEG).
In doing so, GS’ boffins say they prefer near-term margins over long-term ounces when it comes to picking their gold stocks.
GS has a $3.80 price target on EVN, around 15% upside on the $6b miner’s $3.39 price late in the week. They see 20% upside with a $1.85 PT for Gold Road, which owns half of the Gruyere joint venture near Laverton in WA alongside South African major Gold Fields.
The company also holds a 19.73% stake in De Grey worth around $450m on GS estimates, or 40c per share. GS sees Gold Road’s strong recent dividend-paying history continuing, with a 3cps payout equivalent to 30% of anticipated free cash flow expected in 2023-24.
“On our forecasts, we see GOR continuing its dividend whilst funding the JV’s organic growth pipeline from Gruyere’s cash flow, driving a c.30% increase in EBITDA over the next 4 years,” GS says.
For Regis, GS thinks there is 24% upside with a 12-month PT of $2.30 per share, up from $1.92 today (nowhere near its five-year high of over $6 hit in 2019).
They say the recently approved 2.2Moz McPhillamys project in New South Wales, to which no value is ascribed by the market currently, is “almost a free option” for the Duketon and Tropicana gold mine owner.
Nicolaci, Young and Bailey also have a top M&A target, seeing no-one is as likely as De Grey, owner of the world class Hemi discovery in WA’s Pilbara.
The company’s undeveloped Mallina gold project now hosts over 11.5Moz, making it a larger pre-development discovery than the other top-tier Australian gold mines found this century — Tropicana and Gruyere.
Goldman has a neutral rating and 12-month price target of $1.35 including a 30% M&A value weighting on De Grey, though with the developer trading at $1.38 and a market cap of over $2 billion currently, any bid would need to offer a major premium above that level.
Seneca Financial Solutions CEO and investment adviser
Luke Laretive’s has his eyes set on lithium at the moment, with spodumene prices having strengthened to above US$4,000/t, and ASX lithium share prices have followed suit.
Although down from their lofty ~US$6,000/t heights achieved in late 2022, prices are still well above long-term analyst consensus, Laretive says.
“Over the last few years, most brokers and analysts forecast have underestimated actual lithium prices.
“This was epitomised in January of this year when lithium ‘perma-bear’ UBS upgraded its lithium price forecasts by up to 50% admitting that they had previously underestimated demand from North Asian battery makers and electric vehicle buyers,” he explains.
Laretive says the lithium sector is running hot again and this is demonstrated by the appreciation of lithium shares in companies such as Patriot Battery Metals (ASX:PMT) – which has seen a 132% surge year to date on anticipation of a maiden resource estimate – and Delta Lithium (ASX:DLI).
“Delta Lithium is up 83% year to date and has caught investors’ attention with the prospectivity of its Yinnetharra project, in addition to their near shovel-ready Mt Ida project in the gold fields of Western Australia,” he explains.
“The other factor supporting the share price is the news, confirmed by DLI, that resources heavyweights Hancock Prospecting (Gina Rinehart) and Mineral Resources have been buying shares of DLI on market, amassing stakes of 2-3% respectively.”
But when it comes to hard rock lithium, Laretive says the Greenbushes project in Western Australia is the pre-eminent hard rock lithium deposit globally.
“Greenbushes is the largest hard rock lithium mine in terms of both scale and resource grade, and IGO Limited (ASX:IGO) owns 25% of it through a joint venture,” he says.
“Grades verging on 2.0% Li2O are up to 50% higher than the ASX peer group.
“For reference, lithium spodumene concentrate prices are currently in the ~US$4000/t range, providing a healthy margin of safety and near-term cash flow generation opportunity for IGO.
“IGO shares have appreciated 11% since 1 January 2023 and may have more upside over the medium to long term.”
Broker Taylor Collison has Speculative Buy recommendation on Maggie Beer Holdings (ASX:MBH), without a target price.
MBH produces a range of premium food products under the “Maggie Beer” brand, both through its own manufacturing capabilities and third-party contract manufacturers.
MBH’s stock price has slid by over 55% in the last 12 months, and Taylor Collison believes this may limit any further downside and provide a buying opportunity.
The share price has tanked as a lack of commercial aspiration and failed strategies resulted in $53m of impairments across $107m of acquired assets.
“As a result, MBH trades on a market cap of circa $50m with material underutilisation in its manufacturing capacity,” said the note from Taylor.
To turn this around, management has recently set an ambitious five-year sales target for MBP of $125m, up from $32.5m in FY23.
“Within Maggie Beer products portfolio, we believe there is a tangible opportunity to shift into categories with materially larger commercial offerings without compromising the existing portfolio or the premium quality philosophy.
“Cognisant of the risks associated with an unproven board and management team, on 6x our FY24 EPS estimate we move to a Speculative Buy on renewed optimism of a turnaround against heavily depressed valuations,” concluded Taylor Collision.
Ord Minnett also has a Buy recommendation on Big River Industries (ASX:BRI), with a target price of $2.77 (versus current market of $2.56).
Big River manufactures veneer, plywood and formply, as well as distributing building supplies.
Current housing approvals are experiencing a sharp reversal following the RBA’s most aggressive tightening cycle since 1989.
In contrast, the medium-to-longer term outlook continues to strengthen, driven by a chronic under-build in housing, a surge in immigration and growth in the nascent Build-to-Rent (‘BTR’) sector.
“In our view, a combination of a housing under-build and strong net overseas migration continues to strengthen the medium-to-longer term outlook,” said the note from Ord Minnett.
“We believe Big River will be able to deliver more resilient results in the short-term relative to expectations, driven primarily by its diverse end-market exposure, whilst remaining well-placed to take advantage of longer-term opportunities.
“On that basis, we maintain our Buy rating and lower our price target to $2.77 from $2.97, based on reductions to our near-term earnings profile.”
Broker Ord Minnett also has a Buy recommendation on telco stock and national carrier Aussie Broadband (ASX:ABB), with a target price of $3.58 (versus current price of $2.99).
Customer numbers rose by a net c25,000 during the March quarter, out of the c27,200 net growth in the broadband market.
Including customers on third-party networks, Ord Minnett believes the company remains on track to meet its FY23 new customer growth forecasts of c100K.
Aussie has recently acquired the customer base of Harbour ISP and Fuzenet from Uniti Group, which will provide the telco with up to 15,000 new customers.
On the NBN network, Aussie Broadband added 24,697 net subscribers during the March quarter, taking its market share to 7.19%.