Gold Digger: Are ASX large cap gold stocks a screaming buy?

The valuations of major gold miners remain weak despite falling debt and record dividends, according to the latest Metals Focus Gold Peer Group Analysis.

Australia’s largest gold miners Newcrest (ASX:NCM), Northern Star (ASX:NST), and Evolution (ASX:EVN) are down 24%, 33% and 34% respectively over the past 12 months.

In the mid cap space Regis Resources (ASX:RRL), Silver Lake Resources (ASX:SLR), Ramelius Resources (ASX:RMS) and Gold Road (ASX:GOR) have dropped 60%, 44%, 38% and 21% over the same period.

Perseus Mining (ASX:PRU) is the only standout – if you can call it that — having maintained a 0% return over the past year.

This is partially sentiment driven, with the precious metal struggling to stay above $US1,800 as other commodities boom. The current price of $US1,745/oz  is down 15% from all time highs hit last year.

And yet the fundamentals for major miners are strong, Metals Focus says.

“During the last gold bull market, which ended in 2012, gold miners had increasingly been using debt to fund project development in the pursuit of higher production,” it says.

“This changed as prices began declining and margins were squeezed, which led to miners reprioritising cost and capex reduction to maximise cash flow and lower debt.”

This strategy has been largely successful.

Net debt for global large cap gold miners has fallen from a peak of $US32bn in 2013 to its present level of US$6bn, Metals Focus says.

“Improved margins, thanks also to a rising gold price, has allowed companies to boost dividends and in some cases start share buy-back programmes,” it says.

“The weighted average dividend yield for the peer group is still a modest 3.1%, but this is a new high in our records going back to 2009.”

However, despite these improving financial metrics the sector’s rating has lagged.

“The weighted average enterprise value/EBITDA and the adjusted price to earnings ratio in Q2.21 were close to their lowest levels in our records going back to 2009,” Metals Focus says.

“This suggests that these companies are undervalued relative to historic levels despite strong fundamentals.”

Former geologist and experienced stockbroker Guy Le Page said as much in his Stockhead column this week.

“With the gold index off almost 40% from its July 2020 highs I believe it is time to re-enter the mid to large cap gold stocks and I think Evolution Mining (ASX:EVN) is probably a good option,” he says.

“EVN are a little more conservative in their growth strategy, sticking to First World jurisdictions, and somewhat cautious about stretching their balance sheet, however the company provides good leverage to any bounce in gold.”
 

Winners & Losers

Here’s how ASX-listed gold & silver stocks are performing:

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WEEKLY SMALL CAP STANDOUTS

KINGSGATE CONSOLIDATED (ASX:KCN)

There’s light at the end of the tunnel for this once high-flying gold producer, with a settlement in sight to restart the flagship ‘Chatree’ gold mine in Thailand.

For much of its life Kingsgate was a success story on the ASX thanks to the prolific Chatree mine, enjoying a share-price ride from $2.37 in late 2008 to $12.15 just two years later.

Since that peak it’s been a long downhill slide – especially after the Thai government ordered the closure of Chatree in December 2016.

“A successful re-start of the Chatree gold mine combined with the sustained rise in both the gold and silver prices could give Kingsgate significant optionality with the asset, and a path forward which may include continuing operations, selling the asset or listing [Thai subsidiary] Akara Resources on the Thai Stock Exchange,” the company now says.

The $250m market cap stock is up 15% year-to-date.

METALSTECH (ASX:MTC)

The near-term gold miner is up 140% over the past month on some strong newsflow.

Recent drilling at the 1.5moz gold, 10.9moz silver ‘Sturec’ mine has hit a potentially mineralised 37m-long zone, highlighted by a big chunk of gold at 81m depth:

This follows news that $6 billion market cap Chifeng Gold Mining would buy ~5.8m shares at 34c apiece for a total investment of $2m.

This is a pretty big deal, MTC says.

“Chifeng is widely considered to be one of the most successful precious metals investors in China owing largely to the experience of their chairman Mr Wang Jianhua who before transforming Chifeng, served as CEO of $62bn capped Zijin Mining and before that, chairman of $17bn capped Shandong Gold,” MTC chairman Russell Moran says.

MTC also reminded investors that they need to finalise their shareholdings by October 7 to receive free shares in lithium spinout Winsome Resources (ASX:WR1).