Despite near-record gold prices, are mid-tier producers undervalued?
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We live in a time of elevated gold prices thanks to the market uncertainty caused by the trade war between the US and China and, more recently, the absolute hammering from the impact of the COVID-19 pandemic.
In fact, the current gold price that averages below $US1,700 ($2,730) might well be conservative if some industry observers are to be believed, with Kitco News quoting Natixis precious metals analysts as saying that prices could average $US1,790 per ounce in the fourth quarter.
Despite this, the panic selling caused by the virus outbreak did not entirely spare Australian mid-tier gold producers.
RBC Capital Markets said in March that the market pullback had meant the Australian gold producers it covered were trading below its base case price targets.
It added that the fundamentals for gold pricing remained strong and that the introduction of quantitative easing by central banks had strengthened the long-term investment outlook for gold, though short-term outcomes remained volatile.
Simon Popple of UK-based Brookville Capital told Stockhead that both physical gold and silver remained undervalued.
“I therefore believe that those companies that have already found a significant amount of gold and silver (a reserve or resource), could well go up in value,” he said.
“As metal prices increase, some companies may be able to make uneconomic gold or silver become economic to mine. This could have a significant impact on the amount of reserves or resources they have.”
Popple pointed to Evolution Mining (ASX:EVN) and Chalice Gold Mines (ASX:CHN) as two of his favourites, noting that Evolution was a particularly low-cost producer, while Chalice had made some exciting discoveries.
“They also have the cash to carry out a lot of further exploration.”
In the mid-tier space, Regis Resources (ASX:RRL) last traded at $3.97, well below its peak of $6.55 in July last year, though up somewhat from its one-year low of $2.91 in mid-March.
Notably, this is well below the valuation of $5.22 that RBC has estimated assuming a gold spot price of $US1,500 per ounce, marking it as decidedly undervalued by the bank’s standard given the current price of gold.
In February, Regis estimated that it could produce between 340,000 and 370,000 ounces of gold in the 2020 financial year at an attractive all-in sustaining cost (AISC) of between $1,125 and $1,195 per ounce.
Rather tellingly, the company has not withdrawn this guidance to date and is progressing the development application for its McPhillamy’s project.
Likewise, at a last traded price of $1.80, OceanaGold (ASX:OGC) is trading well below RBC’s estimate of $4.51.
By contrast, Evolution Mining is currently trading at $4.48 and while that is down from its high of $5.48, it is well above RBC’s mid-case valuation of $2.85.
Like Regis, Evolution has not withdrawn its production guidance of between 115,000 and 125,000 ounces of gold at an AISC of between $1,230 and $1280 per ounce.
At the larger end, shares in Northern Star (ASX:NST) peaked at $14.96 in late February before sinking to $9.19 in mid-March.
Since then, the company’s shares have been on a bit of a roller coaster and last traded at $11.38, just a little more than RBC’s valuation of $10.22.
Northern Star, which completed the acquisition of a 50 per cent interest in Kalgoorlie’s famous Super Pit at the beginning of this year, expects to produce between 920,000 and 1.04 million ounces of gold in the 2020 financial year.
This is expected to be done at an estimated AISC of $1,240 to $1,340 per ounce.
Shares in fellow Super Pit owner Saracen Mineral Holdings (ASX:SAR) last traded at $4.05, well up from the low of $2.91 this year it fell to in mid-March.
While the company’s shares are currently just above RBC’s valuation of $3.88, it is worth noting that Saracen expects to produce more than 500,000 ounces of gold in the 2020 financial year with a ramp up to more than 600,000 ounces in the next financial year.
Finally, St Barbara (ASX:SBM) last traded at $2.28, down from its peak of $3.95 in August 2019 and up from the low of $1.665 over the past year.
Notably, the company is trading well below the $3.29 mid-case valuation estimated by RBC.
While its production guidance of 95,000 to 105,000 ounces of gold is the lowest of its mid-cap peers, it also expects AISC to be between $900 and $955 per ounce.
By contrast, the smaller producers are for the most part trading at or below RBC’s sensitivities.
Silver Lake Resources (ASX:SLR) last traded at $1.565, not too far off its one-year high of $1.795 and well above a valuation of $1.33, while Gold Road’s (ASX:GOR) share price of $1.475 is just above RBC’s $1.46 estimate.
Going by RBC’s valuations, Ramelius Resources (ASX:RMS) still represents a cheap buy given that its last traded share price of $1.05 is still significantly lower than the bank’s $1.41 estimate.
Likewise, Resolute Mining (ASX:RSG) last traded at less than half of the RBC’s estimate of $1.79.