Diggers and Dealers: Gold is unloved but prices are poised to scale new heights if these miners are right
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Gold producers have been lagging in interest compared to the lithium companies currently blazing a trail up the boards of the ASX.
And they are turning out cashflow numbers that would make a precious metals producer blush.
By way of comparison Pilbara Minerals (ASX:PLS) turned in a $1.24 billion profit in the first half of FY23.
Is gold dead? Not in the eyes of the industry’s leading lights, who have told the Diggers and Dealers Mining Forum a major breakout is brewing.
Chief amongst those cheerleaders is Evolution Mining executive chairman Jake Klein, whose tip last year that gold would run to between US$2000-3000/oz has not quite come to fruition.
He says a run beyond US$2000/oz and $3000/oz Australian is looking increasingly likely as US debt piles up and China’s economy shows signs of slowing.
Gold has simmered beneath the surface, threatening to cross the US$2075/oz record on three occasions since striking that mark in August 2020, when enthusiasm for gold stocks was at its apex.
“I think it’s definitely going above US$2,000 an ounce,” he said.
“I think what’s been more impressive is the Australian dollar gold price and the Australian dollar gold price is almost $3,000 an ounce, the Aussie dollar’s come down.
“I think when we spoke last year, it was probably around 73-75 (US) cents its now 66c. Australia has had this amazingly wealth creating period as a result of China’s growth, so if China does kind of stumble a bit and its growth is not as good as people expect then there’s a risk that the Australian dollar goes down.
“So I think there’s there’s downside risk on the Australian dollar and upside risk on the gold price. So I’m actually more confident saying that the Australian dollar gold price is going to be well over $3,000 an ounce.”
Evolution’s M & A has arguably been hit and miss in recent years.
It has become a serious copper player with a $1 billion deal to buy Glencore’s share of the Ernest Henry copper-gold mine and consolidated its Kalgoorlie assets by purchasing Northern Star’s Kundana mines near the Mungari mill.
But it has also struggled to ramp up its Red Lake project in Canada. Klein acknowledged EVN had an interest in some assets that may fall out of the impending merger of Newmont and Newcrest, but was less than bullish on the prospect of picking up the ageing Telfer mine and nearby Havieron asset, where Nerwcrest’s junior JV partner, LSE-listed Greatland Gold, looms as a likely, if undersized, bidder ahead of an expected dual listing on the ASX.
He says Evolution is interested in both gold and copper assets, but needs them to fit within the portfolio. While peers like Northern Star, which has an aim of becoming a 2Moz producer by 2026, have clear production growth ambitions, Klein says value for money is more important than chasing growth.
With the Cowal gold mine owner’s 11Moz reserve calculated at a conservative $1600/oz, he warned miners against using higher gold prices as an excuse to increase their cost base.
“I spoke about the correlation between the US debt and the gold price, which over a 50 year period has proven very strong and with the amount of spending that’s happening in the Inflation Reduction Act, with the level of inflation, US debt is going higher,” he said.
“And to me that is a leading indicator that gold’s going higher.
“It’s up to gold companies to control their costs. There is a tendency in that … the costs of gold companies do go up as gold price goes up, but that’s up to the gold industry to be more disciplined and focused on cost control.”
Mark Clark is the boss of Capricorn Metals (ASX:CMM), one of the industry’s top performers and a 1050% gainer over the past five years after opening its low cost Karlawinda gold mine in northern WA.
He admitted the WA gold industry, where assets are getting older, deeper and leggier, had found cash flows harder to come by.
“If you’re a cynic, you would say gold’s at US$2950/oz Aussie. I’ve been in the industry 30 years and that’s the best price we have ever had. So why isn’t the industry generating more cash flow?” Clark said.
“It is a conundrum and I suppose it’s reflective in the fact that gold is hard to find, geochemical soil sampling in the 70s and CIP processing really led to all the really easy deposits were found and then low grade deposits were suddenly able to be processed.
“I think now exploration is harder, it’s deeper, it’s more expensive. And we’re finding orebodies under, you know, 50-100 metres of cover. So it has become harder.
“I think the thing that keeps changing is that the gold price keeps going up. And then maybe next year, if interest rates start to roll over, we’ll probably see the gold price go higher again and you know all boats rise in a rising tide.”
Some companies appear to remain focused on organic growth. That includes Capricorn, which sees a pathway to roughly double its current ~120,000ozpa scale by developing the Mt Gibson gold mine, picked up on the cheap for $40m in 2021.
Over in Burkina Faso, West Africa, West African Resources (ASX:WAF) are planning to do the same, boosting production around twice over to 400,000ozpa with the construction of its Kiaka gold mine down the road from its Sanbrado asset.
Despite the fact it spat out $80 million of free cash in the last quarter, Australian miners without operating experience there continue to be gunshy about moving into the region.
Evolution’s Klein for his part said Africa’s rule of law risks and influence and competition from China made it unappealing.
Hyde, however, said WAF was remarkably undervalued, noting few operations in WA had succeeded to the extent of its Sanbrado mine.
“There’s a bunch of investors who associate, I guess, investment risk with jurisdiction risk, where it really should be project risk,” he said.
“If you can’t get the cash flow of the project first, then it doesn’t really matter where you invest.
“And history will show you that in Western Australia, probably six or seven of the last 10 developments have failed, at least once. Some of them multiple times.”
As for gold in general, Hyde says it continues to shine against competition from crypto and battery metals.
“At the peak of the market, the crypto market, it was worth like nearly half of all the gold ever mined in the world, which fits into two Olympic-sized swimming pools, just crazy sort of stats like that,” he said.
“I’ve heard a quote this morning that gold’s dead and it’s all going to be about rare earth elements.
“Well, it’s not. I can show you a photo of my dad holding a gold bar on site. Like he’d never been in mining … and it just lights you up. People who say oh yeah i don’t like gold, they’ve just never held a gold bar.”
So how well is gold set up for a rally?
Raleigh Finlayson’s Genesis Minerals (ASX:GMD) has punted around $650 million in cash and shares on the idea after buying St Barbara’s (ASX:SBM) underperforming Gwalia gold mine.
The idea is to revive the 125 year old asset by plugging it into a larger network known as the Leonora consolidation play including the Tower Hill mine, Ulysses underground owned by Genesis and the Mt Morgans mill owner by Dacian Gold (ASX:DCN), itself almost 80% owned by GMD.
It will help take pressure off the 1800m deep gold mine, Finlayson said, the deepest trucking gold mine in the world.
“We’re not coming in and saying we’re better management. We’re not saying any of those things,” he said.
“We’re just saying we’re going to take the pressure off the mine to bring our other assets on so the essence is actually bringing on Admiral and Ulysses as efficiently as we can with the and gear trying to keep that total costs as fixed as we can. And then Mt Morgans has a beautiful thing where it’s got stockpiles there.
“Obviously Jupiter reserve that’s now been quoted, excess from our deposits that don’t fit through the Gwalia mill.
“So all of a sudden, we can actually cobble those two things together and do comfortably 300,000 ounces with pretty low capital, because all that infrastructure is already in place. And I’m not trying to build a brand new mill in what is probably the worst inflationary environment that I’ve ever seen.”
A long term strategy update is due in March. But before then Finlayson says Genesis is walking into the most optimistic gold price environment he’s seen in years.
“Interest rates are going up and yet gold prices remain reasonably buoyant. I think it’s because of the expectation about what happens on the other side of that so I’m actually bullish gold in the short term,” he said.
“I think gold has a role to play as a currency more so than obviously jewellery and these other things, and I think that’ll remain constant for a long period of time.
“For my mind, I think gold’s sitting in the short term to medium term really bullish and I’m usually here really bearish on gold. Every time I’m sitting there going, oh we hope for the best but we plan for the worst.
“Genuinely now, gold’s got a pretty interesting period.
“What happens with the ‘A’ dollar I’ve got no idea, but you can’t complain about the Aussie dollar gold price at the moment so we could have a unique situation where the US dollar gold price is going up and the ‘A’ dollar is going down.”