Here are the small cap gold stocks that RBC says could repay a little investor love
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With the gold price still trading above $1800 an ounce in Aussie dollars, investors will no doubt be looking for ways to try and capitalise on the bull run.
The gold price started 2019 with a bang, peaking at $1851.78 an ounce on January 2 before slipping back. It is currently trading around $1805.
This surge is largely due to the recent extreme sell-off in equity markets and fears of an economic slowdown in both the US and Australia.
The recent weakening of the Aussie dollar against the greenback helped push the gold price to record highs.
This has created a tailwind for Australian miners, which will see a nice cash flow boost from the better price.
And investors have responded.
“Heightened tensions around global trade, faltering US equity markets and political uncertainty in developed markets have contributed to a rally in gold over the last months, which has seen the prices of local equities rally 20-30 per cent in just 2-3 weeks,” RBC Capital Markets mining analyst Paul Hissey said in a recent research report.
Mr Hissey suggests investors looking to “trade this situation” should consider those with “stock-specific potential or the unloved juniors”.
In terms of the juniors, Mr Hissey says, “look further down the curve at those companies trading at a material discount given lower liquidity and profile but yet which stand to benefit equally from a higher gold price”.
He pointed to the likes of Ramelius Resources (ASX:RMS), which has a market value of a little over $300m at a share price of 53c.
Since the gold price started to take off just before Christmas, Ramelius’ share price has gained nearly 36 per cent.
But RBC sees the potential for more, placing a share price target of 80c on the junior and rating it as an “outperform”.
Ramelius is in the process of taking over fellow gold junior Explaurum (ASX:EXU).
After months of railing against the hostile takeover bid, the Explaurum board finally recommended shareholders accept Ramelius’ improved offer of 13.4c per share – a 57.6 per cent premium to Explaurum’s closing price of 8.5c on December 12 (the day before the higher offer was announced).
Dacian Gold (ASX:DCN) was also one of Mr Hissey’s stock picks.
The $570m miner announced this week it had reached commercial production in December at its Mount Morgans mine in Western Australia.
This increased its gold output by 30 per cent and boosted cash and gold held to $85.6m at the end of 2018.
Dacian’s share price has rallied 16 per cent to $2.52 since just before Christmas, but RBC sees potential for it to reach $3.25.
Gold Road Resources (ASX:GOR) is another of Mr Hissey’s recommendations.
The company is currently trading at 65.5c, valuing it around $575m. Its share price has added just over 10 per cent since the gold price started its bull run late last year.
Gold Road is an equal joint venture partner in the Gruyere gold project in Western Australia that is currently under construction and due to be brought online in the June quarter of this year.
The company is also carrying out gold exploration at its fully owned Yamarna project in Western Australia.
RBC has set a share price target of 80c and rated Gold Road an “outperform”.
“Smaller stocks have traded at a discount to our valuation over the last few years, given broadly less interest in the sector, and lesser influence from the passive ETF [exchange traded funds] ownership which is so prevalent in the larger cap stocks,” Mr Hissey explained.
“Companies such as DCN, GOR and RMS should all fare well if the gold price moves (and is sustained) higher.
“Additional revenue will mitigate any cash flow concerns and facilitate further exploration and growth, while alleviating any balance sheet pressure.”
RBC sees the gold price averaging around $US1300 ($1810) an ounce indefinitely.
UBS also sees the price sitting at about $1300 an ounce this year, but rising to $US1325 in 2020 and $US1350 in 2021.
Top energy picks
RBC also compared small cap oil and gas players and highlighted Australis Oil and Gas (ASX:ATS) as one of its top picks – placing an ambitious $1 share price target on the junior explorer.
Australis is currently trading at 33.5c, valuing it around $300m.
The company has restarted drilling in what RBC exploration and production (E&P) analyst Ben Wilson labels the “underappreciated” Tuscaloosa Marine Shale in Louisiana/Mississippi.
“The drilling program over the next 12-18 months is seeking to re-prove a type curve established by prior acreage holder Encana over 2014/15,” he said.
“We expect that the asset will then be packaged for sale as a proven and scalable development.
“The Australis story is bolstered by the significant premium it is achieving for its oil sales relative to Permian Basin producers.”
Its product fetches about $US15-per-barrel more than Midland crude, according to Mr Wilson.
RBC also favours conventional offshore explorer Carnarvon Petroleum (ASX:CVN), which it says “presents a rare opportunity on the ASX”.
Carnarvon’s share price is at 36c at the moment, giving it a market cap of just under $430m.
But RBC sees it going to 85c.
Carnarvon made headlines in July and August last year when its aptly-named Dorado-1 well hit oil and condensates — gas so heavy it’s liquid — in a new kind of sandstone reservoir.
Its share price surged 380 per cent to an all-time high on the news.
“Dorado stands as the third-largest oil discovery made in the North West Shelf area and the JV (Santos and Carnarvon) has firm plans for a fully funded two-well appraisal program over CY19,” Mr Wilson said.
“Carnarvon also has the low-cost redevelopment Buffalo project with a further appraisal/development well possible on Buffalo in 2H 2019.
“Both potential developments sit in shallow water with strong reservoir characteristics providing a greater level of certainty and granularity around future costs.”
RBC believes 2019 is a particularly critical year to be tracking the catalysts of oil and gas players.
“While we are broadly positive regarding an oil price recovery (from 4Q18 levels) over CY19, we do not believe a strategy of backing the commodity alone will be a winner.
“With an unpredictable and volatile oil outlook, we think a focus on catalysts in the small cap E&P space has rarely been more important.”
RBC has lowered its oil price forecast for 2019 from $US86 to $US64 per barrel for Brent and from $US76 to $US56 per barrel for West Texas Intermediate (WTI).
It sees Brent rising to $US74 per barrel in 2020 and WTI inching up to $US64 per barrel in 2020.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.