Barry FitzGerald: Betting on gold? Here’s a couple of juniors ready for a first pour… and rerate
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Garimpeiro would be wasting everyone’s time if he tried to predict the next move in the US gold price.
It what it is, and it will be what it will be, as the tug of war between taming inflation and supporting economic growth plays out.
But what he does know is that the gold price in Australian dollar terms is actually up in the last 30 days, and at a smidge over $A2,550/oz, the Aussie industry does not have much to complain about.
Souring sentiment on gold in 2022 because of the coming interest rate hikes has nevertheless taken the shine off Aussie gold equities in recent days. But that’s not to say local gold equity opportunities have gone sour as well.
While things remain jittery in the gold space, Garimpeiro reckons a focus on Aussie developers close to making the transition to producer status – at a time of historically high local gold prices – might have its rewards. It is all about the re-rating that comes from making the transition.
RED 5 (ASX:RED): Trading at 26c for a market cap of $600m. Looming first production from its King of the Hills (KOTH) gold project near Leonora in WA stands a major re-rating event for the company.
Somewhat remarkably, given all the bleating from the WA gold industry about cost pressures and COVID-related impacts, the $226 million project is on time and budget to achieve first gold production in the June quarter.
Red 5 is already a producer from its Darlot operation (62,000-72,000oz forecast for FY2022, with the operation to eventually become a source of satellite feed ore to KOTH, some 80kms to the south).
KOTH is at another level. Its production is due to crank up to 176,000oz annually in the first six years of an initial 16-year mine life, with life-of-mine all-in sustaining costs estimated at $A1,415/oz.
The feasibility study for the project was based on a $A2,500/oz price assumption which is pretty much where things now stand.
On that basis, annual earnings (EBITDA) of $166 million were forecast. Make that $96 million if gold were to fall away to $A2,000 an oz. Either way, the earnings potential is impressive for a company with a $600m market cap.
Assuming a successful commissioning, and the production targets and cost profile being hit, Red 5 will quite rightly be putting its hand up for a major re-rating of its market value.
The market caps of Gold Road (ASX:GOR, $1.2 billion for 130,000oz annual equity apportioned production at Gruyere) and Capricorn (ASX:CMM, $1.15 billion for 120,000oz from Karlawinda) could be used as a guide to Red 5’s potential upside should things go well at KOTH.
Some of that upside is reflected in the standing 40c price target and “speculative buy’’ ratings on the stock from Ord Minnett and Canaccord following the release of the company’s December quarterly report.
At 40c, the Red 5’s market cap would be $942m. So there is a lot to play for in Red 5 getting KOTH to hum as soon as it can.
CALIDUS (ASX:CAI): Trading at 69.5c for a market cap of $278m. They breed them tough up in Pilbara, particularly out east around Marble Bar.
It was a relatively cool 41C there on Friday compared with the 16 days in December when 45C was breached.
Fear not though, Calidus has just reported that its $120 million Warrawoona gold project near Marble Bar is on time and budget for first production in the June quarter.
So like Red 5, there is a re-rating ahead of the stock as the project produces its first gold and ramps up to average annual production of 90,000oz at an all-in sustaining cost of $A1,290/oz in an initial 8-year mine life.
There is also a plan to flex production up to an annual rate of 130,000/oz by processing ore from the high-grade Blue Spec satellite deposit (16.3 grams of gold a tonne).
Garimpeiro has to add that there has been a lot of talk in Perth mining circles that Calidus’ recently formed lithium exploration joint venture could be a source of excitement.
The 50:50 joint venture is with pollster Gary Morgan’s once listed Haoma Mining, a long-timer player in the Marble Bar gold scene.
The joint venture pools the lithium rights across prospective lithium ground held by the pair in the Marble Bar region.
The region has a long history with tin-tantalum production, remembering the Pilgangoora lithium project of the $9.4 billion Pilbara Minerals (PLS) was initially a tin-tantalum play.
So the message is to watch out for first Warrawoona production to force a re-rate for Calidus, but keep an eye on what comes from the lithium joint venture as 2022 unfolds.