Argonaut Algorithm: The big takeaways from gold’s quarterly season and a spooky Halloween buy

Argonaut Funds Management’s David Franklyn joins Stockhead to share investing secrets from the high-conviction resource sector investing fund, including his junior stock pick of the month.

Gold prices have run 30%, or to put it in more startling terms, US$1000/oz in just two months leading up to the past fortnight’s reporting season.

Equities have followed that move up and then some. With a rising tide floating all boats, how do you sort the wheat from the chaff?

Argonaut Funds Management’s David Franklyn says with relative value being squeezed, the WA stock picker is looking closely at free cash flow yield as a measure of health in Australian gold businesses.

Despite a recent pullback under US$4000/oz, the upshot is a lot of miners are sitting on a lot of cash with prices recently hitting record highs of over US$4300/oz, conditions even more profitable in Australia thanks to a favourable exchange rate.

M&A, dividend policies and share buybacks are all part of the conversation.

“In general, I think the other aspect is there’s a lot of companies now that have a shedload of cash,” Franklyn said.

“You’ve got Greatland with about $800 mil… Regis and Ramelius are up there – they’re $700, $800, $900 million. Even a Genesis has got $300 million or something like that.

“So they’ve all got a lot in cash and the question I think going forward is what are they going to do with that cash? Obviously, I think you’ll see some maybe return to shareholders through buybacks or dividends.

“I think the big question is, will they look to reignite corporate activity and grow production through acquisitions, which could make some sense. And I think there are targets out there that still look reasonably good value.”

Are gold stocks still buys?

While the bull run has taken market valuations up to record levels, that doesn’t mean upside is fully tapped, Franklyn thinks, even after last week’s pullback in bullion.

“In the context of a 30% increase in gold over two months, a 5% pullback is not the end of the world,” he said.

“But I think probably what we need to be looking at is the fact that the recent lift in gold corresponded with a lot of ETF gold buying out of the US and you’d guess a lot of that is really momentum driven and so just wondering whether that pullback has a bit of dampening impact on that momentum.

“Having said that, the tailwinds for gold are still very strong. Everything that’s driven gold over the last couple of years is still there. You’ve got the US dollar really no longer seen as a safe haven by many countries, particularly countries like China and Russia, Türkiye, Uzbekistan, et cetera.

“US debt levels continue to move higher, which is obviously increasing concern. Interest rates and US dollar are likely to trend lower and (there are) ongoing political tensions.

“I think that the tailwinds that have driven gold aren’t going to go away in a hurry and I think really what it’s increasingly demonstrating is gold’s position as a store of value and I think that only increases.”

Quarterly winners

September saw a new quarterly high for average gold prices, but not everyone took advantage.

Two established ASX gold producers impressed Franklyn in the past week, while two left something to be desired.

Genesis Minerals (ASX:GMD) remains a sector standout, according to Franklyn.

“Production was up 18% to 72,000 ounces, full year guidance maintained at 260 to 290,000oz. All in sustaining cose was at the lower end of guidance at A$2529/oz,” Franklyn noted.

“They increased cash by $106 million over the quarter and the free cash flow year for the quarter annualised was 7%.”

That is a measure of free cash flow against the enterprise value of a company, multiplied by four.

“I think the big question is, what yields should these trade on? And I think if you’re going to be around 7% or 8%, what you want to see is good production growth going forward.”

Genesis should have that, with Raleigh Finlayson’s Leonora region gold miner aiming to ramp up production from here.

“We think they can get to sort of 380,000oz by 2028. Strong balance sheet, good production growth, generating good cash, strong management team, it ticks all the boxes and it’s still relatively good value (when you look) across the sector,” Franklyn said.

Also in the good books is Greatland Resources (ASX:GGP), which put concerns about a guidance cut behind it with 81,000oz of gold and 3400t of copper production at the Telfer gold mine in WA’s Paterson Province.

“Operationally it really impressed that they increased their recoveries from 82% to 88%. That was a good effort,” Franklyn noted.

“So their guidance, they’re still on track for that, which is between 260 and 310,000oz.

“AISC was at the lower end of guidance – $2100/oz. So their cash build over the quarter after capex, where they’re spending some money on drilling, was $187 million – an annualised free cash flow yield was 17% which is enormous.

“It just shows that the benefit of the transaction they did (with Newmont) where they got the stockpiles and the ability to mine straight away, it is just generating a whole lot of cash.”

With around $750m in the bank, Franklyn thinks Greatland should be able to develop its Havieron underground with its own reserves – a study is due early December.

That development could see Greatland lift production to 400,000oz by 2029.

Quarterly losers

On the other side of the ledger, Ramelius Resources (ASX:RMS) was one of the big disappointments, sliding around 5% on Monday as lower grades at the Penny and Cue gold projects saw production at its Mt Magnet hub in WA slide.

“Production of 55,000 ounces was down 25% on the prior quarter and well below estimates and that was on the back of downgrading at Penny and Cue, which have been the sugar hits that have really supercharged Ramelius’ cash flow in the last couple of quarters,” Franklyn said.

“They’re now waiting on Never Never to come on stream in late financial year 26. All in sustaining costs were up 37% to $1836/oz. Free cash flow for the quarter was still pretty good at $104m, but the annualised free cash flow yield is 6% versus the prior quarter where it was an annualised 30%.

“So you can just see that drop-off in grade has really had an impact.”

Ramelius delivered a five year outlook yesterday, showing plans to lift ouput from 185,000-205,000oz in FY26 to 500-550,000oz from FY30, developing the Never Never mine at Dalgaranga acquired in the takeover of Spartan Resources, as well as the Rebecca-Roe project near Kalgoorlie.

The other disappointing report came from Norseman gold mine owner Pantoro (ASX:PNR), which suffered the loss of a remote-controlled bogger at the OK underground mine and lower grades at Scotia.

“That was down 28% to 19,500oz for the quarter. There was some operational issues there. The mine grade at Scotia also disappointed and the all in sustaining costs increased to $3139/oz,” Franklyn said.

“They’re still looking for production for the year of 100,000 ounces but with a market cap of $2 billion and a weak first quarter … it’s not looking particularly good value at these levels.”

Argonaut’s (spooky) stock of the month

With Halloween at hand, Franklyn is dipping into his bag of treats for this month’s horror inspired pick – the back-from-the-dead Bellevue Gold (ASX:BGL).

Operational issues at its mine of the same name near Leinster in WA saw a number of guidance downgrades last year, but it’s starting to regain a bit of favour after raising additional cash to see out the crisis and trimming its hedge book.

“We think it’s turned the corner. The September quarter result, production of 29,000 ounces, was subdued but in line with their guidance,” Franklyn said.

“We now think they’re entering a period of increasing production, lower costs, stronger free cash flow and I think as they start to deliver on that, there’ll be a rerating.”

Free cash flow yield is expected to lift from 12% in FY26 to 24% in FY27.

Bellevue has also been mooted as a potential M&A prospect after the firm launched a strategic review earlier this year.

“There’s not many good quality acquisition targets out there and if the market can get comfortable that they have turned the corner then it becomes very attractive,” Franklyn said.

Argonaut Funds Management is a high conviction resource sector investor managing the Argonaut Natural Resources Fund and the Argonaut Global Gold Fund. David Franklyn is the Fund Manager for the Argonaut Natural Resources Fund.

The views, information, or opinions expressed in  this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.