Counter Cycle: Five gold picks that go against the grain

Welcome to Counter Cycle with Nero Resource Fund founder and co-portfolio manager Rusty Delroy, a Cottesloe-based fund manager who has developed a reputation for taking the path less travelled in his investments.

Today, Delroy offers five gold stocks he thinks are mispriced by the market.

Even contrarians have had to reason with the apparent reality that elevated gold prices aren’t going away any time soon.

Typically counter-cyclical investors are looking for value in depressed sectors, trying to make gains on plays the street is too timid, conservative or distracted to pursue.

But sometimes a bold macro bet has to be shelved to seek out the cracks lurking in the shadows of a pro-cyclical market.

Gold is very much that sort of space, and Nero Resource Fund’s founder Rusty Delroy thinks there are still ‘mispriced’ opportunities to discover that elude the mandate of most institutions.

“We’re trying to look outside the square, even in spaces that are well covered and well-owned,” Delroy told Stockhead.

“It’s obvious that gold producers are producing at good margins at the moment.

“Gold equities have reflected some of the move in the gold price, but we remain super constructive on the fundamentals of gold. So we still want to own the space.”

Finance bros are wont to slide into euphemism when talking stocks. ‘Information asymmetry’ is an example of such jargon that comes to mind for Delroy.

The economic theory normally addresses a situation where two sides of a deal have different levels of knowledge (for instance a hidden incentive) that makes a transaction inefficient.

In this case, Delroy is referring to the lack of coverage a number of gold stocks have on the sell side, which leads to missed opportunities on the buy side. That’s how, he says, even listed gold companies can slip through to the keeper.

“If you’re not likely to raise money or provide some other sort of mandate to a house, then you’re of little to no interest,” Delroy said.

“And so the sell side won’t pay you any attention. And then the buy side, in theory, should be doing all its own work, but doesn’t really.

“A lot of the buy side remains kind of reliant upon the sell side to a large degree and so if the sell side isn’t picking up a story and promoting it, then the buy side just doesn’t hear about it.”

Buy side mandates are also constricting. To find deep value, you may need to ignore your boundaries on liquidity, Delroy says.

A lack of liquidity may mean a potential ten bagger falls afoul of a fund’s investment mandate.

“You need to identify a pathway to a catalyst that unlocks that value and as the share price improves, the liquidity will come,” Delroy said.

“The irony is as the stock becomes priced closer towards something fair, or worded another way, becomes more expensive. It actually becomes more ownable for a lot of the buy-side.”

These aren’t your classic names in everyone’s portfolio, then. Which five gold stocks does Rusty Delroy think are most mispriced right now?

Centerra Gold (TSE:CG)

Toronto-listed Centerra Gold is Nero’s latest portfolio pick.

Also listed in New York, it owns the Mount Milligan copper and gold mine in British Columbia in Canada, as well as the Oksut heap leach operation in Turkiye.

The latter is shorter in life, but Centerra also holds the strategic 100,000ozpa Goldfields project in Nevada, due for first gold in 2028.

At a market cap of C$2.2bn, it’s running at a production rate of around 250,000ozpa gold and 20,000tpa copper at the moment. But the kicker is the firm is sitting on close to C$700m in cash as well, with quarterly dividends and a share buyback currently on offer.

They have some latent exposure to the molybdenum market, which Delroy admits Nero needs to do more work on.

But he thinks Centerra screens as cheap on its gold output and bank account alone.

“There just aren’t too many producers of this size trading on these sorts of metrics. In our comps table against peers, it’s a global standout,” he said.

“They trade on US$49 an ounce gold equivalency – EV to global resource.

“You can fiddle around with these numbers any which way, but as a number that’s half their next peer, which is Equinox.

“If you look at price to NAV (net asset value) – depending on what you deem a peer but certainly according to the Centerra deck – they run at 0.5 PNAV; the peer average is 0.9.”

Nero also likes the location of the bulk of Centerra’s assets in the US and Canada ‘from a geostrategic perspective’.

Warriedar Resources (ASX:WA8)

This one seemed like it was done and dusted, with Capricorn Metals (ASX:CMM) lobbing a 15.5c per share (1 for 62) scrip bid for its Mid West gold neighbour.

But it has gotten interesting in the past week, with hedge fund Trium Capital emerging with a significant shareholder stake just beyond the 5% disclosure limit, and someone represented by Goldman Sachs also popping up with a +6% stake on Monday.

It suggests some massaging may be required from Mark Clark’s Capricorn to secure the $189m bag, which includes 1.38Moz of gold and 60,000t of antimony within cooee of its Mt Gibson gold project, the next development on the cards for the Karlawinda gold mine owner.

With the hedge fund entry, Delroy sees a potential arbitrage opening up with a scheme vote approaching.

“I feel like it’s fully underwritten with the bid, so long as you’re comfortable with Capricorn – and you should be because it’s a wonderful company run by arguably the best gold miner in Australia in Mark Clark,” he said.

“At the very least, you’re gonna get that, that’s locked away. And it’s interesting with the hedge fund appearing on the register.

“This is a very strategic asset for Capricorn, it’s not expensive … Could they pay a bit more just to get it done?

“I think they could and I think that they should and I think that would be all fair and reasonable.

“And I think as a Warriedar shareholder you’d be very happy taking perhaps a little bit of a top up to the current bid and running the journey with Capricorn, because I think Mark and the team there will unlock value for you over the next three years in a really meaningful way.”

An independent expert’s report from BDO is due to be posted to shareholders in late September.

Mount Gibson Iron (ASX:MGX)

Wait, JC, these blokes are iron ore producers. IT’S IN THE GOD DAMN NAME.

You weren’t paying attention, mate. The APAC Resources backed Mt Gibson engineered a 180 into the Aussie gold scene with the $50m acquisition of Northern Star Resources’ (ASX:NST) half-stake in the 3Moz Tanami gold mine in July.

Since then, the $420m miner is up around 20%. It’s still generating cash at the high-grade Koolan Island iron ore mine off WA’s Kimberley coast, projecting 3-3.2Mt of sales of its 65% Fe iron ore at costs of $80-85/t in FY26, with a ~$480m cash pile on hand to funnel into a share buyback and work at Tanami.

Handily, its JV partner Tanami Gold (ASX:TAM) is also backed by APAC, opening the door to a potential consolidation play.

“I reckon it’s super interesting. This is arguably the sleeper of all sleepers, like when you pull up to the lights and there’s some rust bucket 1960 coupé, you think it’s just an absolute heifer, but they’ve done a great big engine underneath it and it’s running 500 horsepower to the wheels,” Delroy said, deadpan.

“It’s fully cash-backed. Arguably it hasn’t gone as well as it could’ve or should’ve over the journey with Koolan, but they’re now right into cash-harvesting mode.

“They should make very good margin for the next 12 months, it’s on a meaningful volume, the iron ore price is holding up pretty well at the moment. This thing’s gonna have a lot more, it’s gonna a lot cash that it has currently and you’re fully underwritten by the current amount of cash.”

Delroy thinks it’s “quite clear” Mt Gibson will evolve into a gold producer, with the potential asterix on it the influence wielded by APAC.

“APAC, we think they’re run by incredibly smart people, they’re not always market facing, as in they won’t go out and wave the arms. They don’t have much to say,” he said.

“But Brett Smith (former APAC executive director, and now chairman of Mt Gibson) has done an excellent job for them over a very long period of time. They often just do their thing, pay their dividends, and away they go. So I feel like this is a real sleeper in the gold space.”

Toubani Resources (ASX:TRE)

It’s bonkers that a gold project promising 162,000oz at bottom half all-in sustaining costs of US$1175/oz is off the radar for most investors.

But Mali may as well not be on the map for many, thanks to the negative press around its ruling military junta’s profit chopping Mining Code and tax disputes.

If you can handle a bit of risk, Delroy says the Toubani’s Kobada asset is still too good to ignore, with experienced African-focused fund Eagle Eye Asset Holdings also on board as a strategic partner.

“It’s a class asset, it’s kind of Karlawinda … but better, I would argue,” Delroy said.

“If that was in Australia, I think it would be thumping out margin, pumping out ounces today. The government is now aligned and motivated with the sort of financial structuring agreed and you’ve got probably the choice partner to be operating in that part of the world with.”

Delroy views the project as ‘derisked’ at least from a technical standpoint.

“We really like this setup, obviously we own a lot of it. But there’s a low risk, big, simple operation and it’s gonna spit out a lot of margin,” he said.

“We expect you’ll see good newsflow over the next six months. We expect you’ll see debt and funding solutions locked away and I just don’t think there’s many of these floating around with a $100 mil market cap and $30 mil in the bank.”

Tribune Resources (ASX:TBR)

Maybe the biggest outlier in the ASX gold space along with its cousin Rand Mining (ASX:RND), Tribune holds 75% of the shares in the non-controlling stake of the East Kundana Joint Venture.

Now part of Evolution Mining’s (ASX:EVN) Mungari operations, production has come off in recent years.

Led by enigmatic Perth businessman Anton Billis, Tribune and Rand’s share of gold production from EKJV milled by Evolution at its Mungari plant amounted to 8916oz in the June quarter.

But the cash generation is perhaps of less interest to some investors than the latent value of the gold bullion stored by the company at the Perth Mint over the years.

Its last half year report showed Tribune and Rand had credited 11,804oz to its gold bullion account at the Mint, 8853oz of that attributable to TBR.

As of June 30, Tribune reported cash of just $12.4m. But at a $250m market cap, Delroy speculates the bullion in the Mint account could underwrite the company on its own. It also owns shares in some other tenements around the Goldfields, 100% of a project in Ghana and a major share in a project in the Philippines.

“These things should be trading a lot higher but you do have to deal with some (eccentric) management,” he said.

The views, information, or opinions expressed in the interviews 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.

Nero Resource Fund holds positions in Centerra Gold, Warriedar Resources, Mount Gibson Iron, Toubani Resources and Tribune Resources.