Davids and Goliaths: Is this the year the gold sector's mid-tier wins?

Mid-tier goldies Westgold and Ramelius are seriously outperforming the GDX this year
We spoke to MDs Wayne Bramwell and Mark Zeptner on why they’ve performed so well in 2023

In the past five years the Australian gold sector has become, increasingly, defined by tiers.

As gold prices have stagnated the rising tide that floated all boats as they peaked at US$2075/oz in August 2020 has turned into an intermittent rip that has pulled many out to sea.

Since then there has been an increasing gulf placed between the three Australian gold majors — Northern Star (ASX:NST), Newcrest (ASX:NCM) and Evolution Mining (ASX:EVN) — and the trailing pack.

This year the worm has turned somewhat.

The ASX All Ordinaries Gold sub-index is up around 20%, while the Van Eck gold miners ETF is up 8.3%. Some Australian-focused mid-tier gold miners are seriously outperforming that.

Bellevue Gold (ASX:BGL) shares are 31.62% higher. Ramelius Resources (ASX:RMS) is up 45.74% YTD. Westgold Resources (ASX:WGX) has surged almost 85% YTD.

They’ve taken the mantle from companies that were previously hot, like West African producers West African Resources (ASX:WAF) and Perseus Mining (ASX:PRU), both of whom are in the red.

Northern Star is up only 6% YTD after two days hammered on its below consensus FY24 guidance, while Evolution is up around 22%. Newcrest is up 33%, something which has artificially inflated the All Ords gold sub-index given most of its gain comes from the premium in its impending takeover by Newmont.

Westgold and Ramelius’ outperformance is even more notable given gold companies are struggling for relevance in a market awash with enthusiasm for ‘green metals’ like lithium and rare earths.

“All the battery metals are still the new new kids on the block and there’s still some mystique around those commodities,” Westgold MD Wayne Bramwell said at the Noosa Mining Investor Conference.

“And look, that’s a phase like other metals, every metal in the periodic table has its moment in the sun.

“For gold at the moment that probably provides the opportunity for people. Some of the metals that are fashionable now, will many of them get mined? Possibly, maybe not.

“There are commodities now, and I’m a metallurgist, which I’m still going to look at the periodic table and go OK, what is this thing and what’s it used for? How big is the market?

“Gold for all its quirks is a very simple business. We’re a gold miner and we produce gold. As long as we can produce it and make money, that should be enough for many shareholders to have some Westgold in their portfolio.”

Getting costs under control

A chief candidate for our new monsters list if it keeps up this year’s price gains, Westgold’s market cap has surged to almost $800 million this year.

It has come off the back of a big initiative under new MD Wayne Bramwell to take costs out of the ~250,000ozpa Mid-West gold miner’s business.

“We were always at the top end of the cost curve amongst our peers. So in the last 12 months the focus has been on some of those costs that were not real, they were just sort of inefficiencies or not leveraging our scale,” he said.

“So in the last 12 months, we’ve really gone back to basics and simplified their business.

“And simplicity has been driving efficiency, whether that’s mining efficiencies or commercial efficiencies, we’re starting to see those things roll through the business and seeing our costs fall.”

Westgold swung from a $76.8m profit in 2021 to a $111.1m net loss after tax in FY22, a year punctuated by labour shortages and Covid related delays.

It’s added $33 million to its bank account over the last two quarters of 2023 in a move towards profitability.

Bramwell is hopeful of bringing costs further under WGX’s control with a new LNG and solar plant to be commissioned next week.

“Twelve months ago, we were consuming 8.5 million litres of diesel a month. And that was across our mobile fleet, and all our power stations,” Bramwell said.

“Next week we’re about to commission our first hybrid power station, which is including renewable, so that’s gas-fired gensets supported by PV and batteries.

“So what does that do for our diesel consumption as a group? We’re down now to around 5 million litres a month.

“In the next 12 months our total diesel consumption is somewhere between 2-2.5 million litres a month.

“So that’s a massive change from 8.5 million litres a month at the beginning of FY22 and the impact on the business is significant.”

Is there more upside?

After such an impressive start to 2023, a pessimist would say what goes up must come down.

Bramwell thinks there is more upside to come, saying it screens cheaply even after greatly outperforming the GDX over the first half of 2023.

“The business has traded into the mid-$2 mark in the past when the business was much more complicated,” he noted.

There are questions about growth opportunities and mine lives as well. Given their long history, there can be a perception that Westgold mines near Cue and Meekatharra like Big Bell are old stagers.

“It’s one of the things we’ve been focussing on really heavily in the last 12 months, drilling our resources,” Bramwell said.

“So assets now like Big Bell is sort of 7-10 years, Bluebird, our newest mine, is out to three years.

“Starlight, one of our older assets which when purchased seven years ago had 14 months now has between 2.5 and 3 years, Paddy’s Flat has 18 months to 2 years.

“So the focus in the last four months is very much being investing in drilling. Even today we’ve got nine rigs on surface and underground, extending our mine lives because with a longer mine life we can make better commercial decisions.”

It has had a couple of stabs in recent times to expand that resource base and operating profile with unsuccessful bids for juniors Gascoyne Resources (ASX:GCY) and Musgrave Minerals (ASX:MGV).

The latter was acquired by its mid-tier rival Ramelius, which one-upped WGX’s all scrip offer with a $201m including a small cash kicker.

After deciding not to try match, Bramwell said Westgold is keen on M & A but wants to be disciplined.

“We’ve got enough internal growth options within say the expansion of Big Bell, the expansion of Bluebird, the commencement of Great Fingall, so that’ll keep us busy, but we’re always looking outside our patch for inorganic opportunities,” he said.

“But all things where we can play to our competitive strengths, our strengths in underground mining, and if there’s assets where we can bring that strength to bear, certainly, we’d look at that.

“The intent is to make this company bigger, but more importantly, more profitable.”

Investors want to see the cash

The winner of those Musgrave assets, Ramelius MD Mark Zeptner, put the outperformance of Westgold and his company this year down to a simple thing – they’ve started generating real cash.

“We’ve probably spent the most part of FY23 sort of breaking even, going sideways on an absolute cash balance basis,” Zeptner said on the sidelines of the Noosa Mining Investor Conference.

“We put $43m in the bank in quarter four, Westgold themselves put in I think $33m in the second half after a lot of promises over a long time.

“So I think if you’re going to group up together it’s really that cash in the bank.”

Without cash in the bank things like exploration success and production forecasts lose their impact, Zeptner says.

While bigger miners are also stashing cash away at gold prices that are in excess of $2900/oz today, he said the smaller market cap of still substantial producers like Ramelius meant cashflow had a bigger impact on their share price.

“The $43 million we put in relative to our market cap, some of our bigger peers are not putting on a pro rata basis as much cash in the bank,” he said.

“And so wait a minute, for the amount of cash that these guys are producing, (investors are going) they’re undervalued.

“So that applies to us. And ultimately, it (could) apply to someone like a Red 5 (ASX:RED), if they can show that they can put cash in the bank as well, because they’ve been marked down whilst not producing cash.

“As soon as you can show the market one or two quarters of that cash production, then you’ll see them rerate also.”

Expansion dreams

Obviously the dream of most mid-tier gold miners is, like current majors Northern Star and Evolution, to get larger, bigger and better.

So far Ramelius’ M & A has added incremental ounces by consuming explorers like Musgrave, who’ve seen their market caps knocked down in a weak market for risk capital.

But Zeptner has the intention of growing larger by establishing a third production hub.

With production from its Mount Magnet and Edna May hubs now back on track, he said the aim is to grow from its current ~250,000ozpa range to over 300,000ozpa.

“We’re sort of tantalisingly close to that, but that really needs three assets in production,” he said.

“We will stick to our guns in terms of being disciplined on our DD and our approach so that when we do it — I think it’s a when, not an if — that it’s the right transformational deal to sustainably put us above that 300,000oz production rate.

“We’re not planning to sit at 250,000oz forever and a day. We think there’s another step in us yet, then we should be demanding those higher valuations that you typically get above that.”