Gold juniors have been battered this year — here’s what’s ahead
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Unlike their large and mid-cap counterparts — who are making cash hand-over-fist — ASX-listed small cap gold miners and explorers had a rough 2018.
But things could turn around in 2019, as positivity starts to return to the gold sector in general.
After hitting a year-high of $US1365 in January it’s mostly been downhill for the gold price, which bottomed out at $US1161 in August.
It has since rebounded to just above $US1230, which has helped inject a bit life into the small cap space.
In the past 6 months, more than 82 per cent of small cap gold stocks have lost ground, with only 16 per cent making gains.
Last month, this had improved substantially — just 55 per cent lost ground, while 47 per cent had made share price gains.
Scroll down for a list of small cap gold stocks and how they have performed over the past year>>>
Entering 2018, sentiment around the gold price was pretty soft, resources expert Gavin Wendt says.
This was because the US was raising interest rates, which usually results in a stronger US dollar.
“This isn’t good for gold prices, because the US dollar and gold typically move in opposite directions,” Mr Wendt says.
“Investors didn’t have high hopes for gold on that basis alone.”
Australia’s big gold miners were big winners
But currency movements are key to the profitability of Australian gold producers, who benefit when the Australian dollar weakens relative to the US dollar gold price.
For example, while US producers may get $1300 per ounce, Australian producers will make close to $1700 for the same amount of gold.
This means a strong US dollar is great for the larger Australian gold miners, Mr Wendt says.
“What we’ve seen this year is a continuation of what we have seen over recent years – while US dollar gold prices can be somewhat up and down, the Australian gold price has been extremely strong,” Mr Wendt says.
“That has flowed through to the bottom line of many of our domestic producers – who have generated very strong margins.
“They have accumulated a lot of cash because of the strong Australian gold price.
“They have deployed that cash in various ways – given back to shareholders, organic growth, and been aggressive in takeovers and acquisitions.”
The bottom line? From a share price perspective, Australian mid-tier gold miners have been star performers.
Small caps have been doing it tough
But for the smaller gold companies it has been tough, for a few reasons.
For starters, some small cap miners have experienced issues while ramping up operations. That tends to affect sentiment at the smaller end of the market, Mr Wendt says.
“It’s a risky business, and what we have seen in the gold space is some companies ‘strike an iceberg’,” he says.
“That is something the market never likes.
“Other companies who are aspiring producers tend to be impacted by the prevailing negative sentiment.”
More broadly, the volatile market is making it hard for junior resources stocks to raise money.
A number of gold IPOs over the past few months are struggling to make headway, with many having lost ground since their debuts.
Mr Wendt said this didn’t have anything to do with gold specifically – these companies were just listing in a climate that was quite weak across the spectrum.
“Floats can be very sentiment driven. When the market is riding high, you see strong demand for IPOs — but the reverse is also true,” he said.
Argonaut analyst James Wilson agrees that in general, while mid-cap gold miners have gone up, micro-cap explorers have gone down – purely as a result of capital flight away from “more speculative investments”.
“People don’t want to wear that sort of exploration risk at the moment, they are happy to put their money into companies like [mid-cap miner] Northern Star because they can see returns,” Mr Wilson says.
“There’s less funds available to put into speculative investments at the moment.”
— Bloomberg Markets (@markets) December 3, 2018
Hedley Widdup, director of junior resources focused investment firm Lion Selection Group, believes the current market volatility has provided an opportunity for instos to take a bigger position and for new investors to join the register in junior miners more generally.
“I suspect it’s one of those things where quite a few investors who might have missed the 2016/17 run see an opportunity now and wouldn’t mind holding some positions,” he told Stockhead recently.
“Groups that are already in would definitely see it as an opportunity. Groups that weren’t in I would say almost certainly are looking at it saying, ‘well if we missed it the first time maybe now is the time’.”
And Mr Wendt is also more positive on the outlook for gold in 2019.
“While the US Federal Reserve will probably raise rates at the end of the year, they have made it very clear that they are becoming more “dovish” – that is, they are more likely to ease the pace of these interest rate increases,” he says.
This had an immediate impact on the value of gold, and junior gold stocks.
“Since those comments were made a week or two ago, gold has found significant price support,” Mr Wendt says.
“I think it will go into 2019 in a positive frame of mind.”
Here’s a list of small cap gold stocks and how they have performed over the past year:
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