Guy on Rocks: Gold hasn’t blown up yet and iron ore will be ‘stronger for longer’
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Guy on Rocks’ is a Stockhead series looking at the significant happenings of the resources market each week.
Former geologist and experienced stockbroker Guy Le Page, director and responsible executive at Perth-based financial services provider RM Corporate Finance, shares his high conviction views on the market and his “hot stocks to watch”.
This week gold witnessed its biggest one-day drop in over seven years, sliding 5.7 per cent.
But investors are being urged not to panic yet.
“I think the gold price had a particularly strong run and it was always going to have a pullback, but I think there’s this view that it probably ran too hard too soon, which is probably reflected in the valuations,” Guy Le Page said.
“A lot of the gold companies had gone from discount to fair value to premium to big premium, so [the pullback is] probably not unhealthy for sector.”
Le Page says this week’s news of a potential COVID-19 vaccine out of Russia and the unprecedented rate of money printing around the globe have also played a part in the gold price movement.
“I think people are running out of safe havens given interest rates are near zero,” he noted.
“So, I think the case for gold is as strong as it was last week, the week before and all this year really. And probably more so because I think the pace of that [economic] recovery is going to be a lot more disappointing than people think.”
Iron ore, meanwhile, hasn’t missed a beat, continuing to trade above $US100 ($140) a tonne.
While there is the threat the 2.5-billion-tonne Simandou mine in Guinea could still come into production – something that’s been on the cards for a long time now – and displace some Aussie supply, Le Page says iron ore shipments Down Under are continuing strongly.
“I’ve seen some commentary on Simandou potentially adding somewhere between 12 and 15 per cent of supply, which again has been coming for the last 10 years and has never eventuated,” Le Page said.
“In the meantime, Australian shipments are up 3 per cent. So that continues to be pretty strong. FMG is up 8 per cent, Rio was flat, but demand out of China is still pretty strong.
“I know the analysts have consistently got it wrong, but I think there’s the realisation that spot, which has averaged $US110 per dmt [dry metric tonne] in the September quarter, is surprisingly 15 per cent higher than the consensus earnings and a 40-50 per cent increase over last year’s forecast.
“So I think there’s the realisation it’s going to be stronger for longer.”
The strong iron ore price is good news for the likes of up and coming iron ore miner Fenix Resources (ASX:FEX), which just got the greenlight to mine its high-grade direct shipping ore (DSO) project in WA.
“That’s a major step forward,” Le Page said. “They expect to be breaking dirt in the next three months.”
The first shipment is scheduled for early 2021.
But Le Page says Fenix is undervalued and only trading, on a fully diluted basis, at about one-year’s earnings – which based on spot prices he estimates at about $70m.
“They’ve got a six to seven-year mine life and is trading at one-year’s earnings. So that I think gives us a pretty good idea of what the upside is,” he said.
“I think if they can deliver that earnings over 12 months, and it’s a long way off, but I think as we get closer to it and they start reporting quarterly figures we should see that stock move close to 30-40c.
“I think that’s a reasonable target for the next 12 months.”
Fenix’s share price is hovering around 17.5c at the moment. When Le Page first highlighted the company back in mid-May it was trading around 6c.
On the gold front, Le Page was particularly impressed with Tribune Resources’ (ASX:TBR) big news this week.
Tribune delivered its maiden resource for the Adiembra prospect in Ghana, which Le Page said was a lot higher grade than he was expecting.
“It came out at around 21 million tonnes at 2.7 grams a tonne gold for 1.8 million ounces,” he said.
“The stock is pretty tight and a little bit illiquid on occasions which probably accounted for the subdued response, and then obviously we got hit with the gold price re-rating, but I’m fairly confident we’ll see a $12-15 share price there in the next 12 months.”
Shares rose as high as $8.87, a nearly 17 per cent increase, following the news but have edged back to $8.20.
“That’s probably one of the higher grade, open pittable resources near a plant — the Edikan plant that Perseus owns only 15km away,” Le Page noted.
“So that is a very significant asset with plenty of resource upside. We’ll be looking for conversion of inferred to indicated and extensions to that resource, but a very significant asset and incredible result.
“We haven’t seen a result in the share price yet but I think that’s coming.”
A newbie on Le Page’s radar this week – and completely unrelated to gold or iron ore – is mineral sands play Sheffield Resources (ASX:SFX).
The company has been advancing its Thunderbird mineral sands project in Western Australia.
Le Page says he has been following Sheffield for a long time and it has been “very much unloved”.
“Following a feasibility study it has really struggled to find a partner to fund the project,” Le Page explained.
But Thunderbird is expected to have a 37-year mine life, producing about 130,000 tonnes of zircon each year in the first four years and 240,000 tonnes per annum from years five to 10.
“The capital expenditure around $400m was a bit of a barrier, but they’ve got a Chinese investor onboard.
“If we look at the feasibility study, I think that’s probably going to be revised. We’ve had a few movements in the exchange rate. I think they’re using a long-term exchange rate of 75 US cents.
“But if we look through the headline numbers it has a project NPV of around $1.1bn.”
Le Page says that values Sheffield at about $1.70 per share based on its share of the project.
However, because the industrial minerals don’t attract the same big premiums that gold and base metals do, Le Page believes Sheffield could climb to around 50-60c a share in the six to 12 months, pushing well over $1 as the company moves into production.
Sheffield is currently trading at just under 30c.
“I think in the high 20s that’s pretty good value,” he said.
“There is some execution risk on the development obviously and also the FIRB approval, but I think that’s pretty interesting. I think the whole thing has turned around and is looking very positive.”
At RM Corporate Finance, Guy Le Page is involved in a range of corporate initiatives from mergers and acquisitions, initial public offerings to valuations, consulting and corporate advisory roles.
He was head of research at Morgan Stockbroking Limited (Perth) prior to joining Tolhurst Noall as a Corporate Advisor in July 1998. Prior to entering the stockbroking industry, he spent 10 years as an exploration and mining geologist in Australia, Canada and the United States.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.