Barry FitzGerald: The price moves, but the golden rule of investing remains
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Investing in the leading gold producers has been something of wealth hazard as a result of the retreat in the gold price.
When gold peaked in early August at $US2,063/oz there seemed to be no stopping the likes of Newcrest, Northern Star and Evolution.
But here we are with gold 11% lower at $US1,838/oz and the leading producers are carrying share price losses of 25%, 20.5% and 17% respectively.
It does not matter that gold remains at elevated levels, particularly in Aussie dollar terms.
The current Aussie price of $2,475/oz remains comfortably ahead of the 2019 (calendar) average of $2,018/oz and the 2018 average of $1,692/oz.
So it is now up to the gold producers to win back some favour by converting their continuing bumper cash flows into strong dividend payouts for the December half year.
But over and above what they can do on the shareholder reward front, it will be sentiment around the US gold price that will drive their share prices. That has always been the case.
So where to now for the US gold price? Who knows? Garimpeiro gave up trying to forecast the gold price years ago. Investors can spend their days boning up on the subject and still be none the wiser.
That’s why Garimpeiro has always looked to gold explorers for their exposure to exploration upside which, when captured with a sexy exploration result, can be a dial moving event for the junior involved regardless of what the gold price has been doing.
Having said that, the exploration sector has not been immune to the sell-off that has dragged the producers 20% or so lower in the space of four months. The share prices of the juniors have been under pressure too.
But the ability of the junior sector on the whole to shine in coming months and well in to 2021 has never been better thanks to the (still) elevated Aussie gold price mentioned earlier enabling them to fill their coffers to fund the exploration hunt.
That came through last week in a survey by accountancy firm BDO which found the cash position of ASX listed explorers (mostly gold explorers) in the September quarter was the strongest since June 2013 (when the survey began).
“With an unprecedented cash position, the September quarter can be considered a hallmark for the exploration sector,” BDO said.
The survey found that average cash balance for the juniors increased by 30% to $8.16 million, with gold juniors leading the capital raisings.
That is plenty for the average junior to get cracking on a well thought out drilling program. And they have been, with the backlog of drilling results from assay labs around the country increasing by the day.
Increased activity levels should translate to increased discovery levels, what with all the whizz-bang remote sensing technology that comes into play nowadays.
So the hope is that the success the junior space has had in the last 12 months – like that for De Grey Mining (ASX:DEG) with its Hemi gold discovery – will continue in to 2021. A former junior. De Grey is now a $1.42 billion company, so upside potential amongst the juniors is for real.
The problem is of course finding the next one. Garimpeiro could rattle off a bunch of explorer names worth watching in the months ahead on the basis that a project is of interest, and the companies involved have the funds to put their prospects to the test with the drill bit, the ultimate lie detector test.
But as has been said many times before, successful investing in a junior explorer is all about its people – first, second and third.