MoneyTalks: Gold is back in vogue and Argonaut's David Franklyn says these miners are going cheap

MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Argonaut head of funds management David Franklyn.

WHAT’S HOT RIGHT NOW?

Gold has been a mainstay of wealth preservation for thousands of years but recently gold equities have struggled to capture the attention of the market.

The long winter precious metals stocks have shivered through over the past couple of years could be over, with bullion prices lifting back beyond US$2000/oz last week for the first time since March 2022 and for what could be the first sustainable run at that level since hitting all time highs of around US$2070/oz in August 2020.

In Australian dollar terms that tallies around $3000/oz for our gold miners, who will be looking at healthy margins against average all in sustaining costs of around a grand an ounce, assuming they’ve cleared any nasty out of the money hedges.

David Franklyn, who heads up the $50 million Australian gold fund Argonaut launched in October last year, says there is plenty of support for gold to remain above the psychological US$2000/oz barrier, a mark the commodity hit as a banking crisis in the US and Europe sent investors running for safe haven.

While retail and jewellery demand (bucket one) have been strong for a while and central bank buying (bucket two) has hit decade-long highs as China, Russia, Turkey and more have turned away from the US dollar, Franklyn says the third pillar of gold demand — the fear factor — is returning.

“The third one, which has really lagged, has been sort of the fear trade, what you saw, which is really demonstrated by money flowing into or out of the ETF sector,” he told Stockhead

“When COVID hit you had a big inflow, and really since COVID over the last couple of years as the world’s become more comfortable with COVID, the money started to flow out.

“You’re just seeing a slowdown in that and an increase in buying in March, which is very positive, on the back of the banking crisis but also those geopolitical issues.

“We think there’s good support for gold above US$2,000 an ounce, and we think at those kinds of levels it’s going be very profitable for the gold sector.”

Why have gold miners struggled?

Since the launch of the Australian gold fund, Argonaut has seen returns, as of last week, around the 10-11% mark.

That compares to financial year to date returns for its larger Natural Resources Fund, also managed by Franklyn, of around 25%.

While there is some crossover — gold stocks make up about 15% of the NRF — around half of the portfolio is the more recently fashionable battery metals.

Gold prices were extremely volatile last year, rising above US$2000/oz in the wake of the Russian invasion of Ukraine before sagging below US$1700/oz later in the year as the US Fed tried to kill inflation with a cycle of aggressive interest rate hikes.

In that context gold prices were actually remarkably resilient.

“That was very encouraging but what it meant was that Australian gold equities in particular looked really cheap,” Franklyn said.

“They’d fallen pretty significantly during the calendar year, notwithstanding that resilience in the gold price and so there’s a real sort of value opportunity.

“And that’s why we launched the fund at that time. Since then the gold price has continued to escalate and you’ve seen a rerating of the bigger producers so far.

“But still a lot of the companies in the sector are way below their 12-month highs. So we still think there are some good opportunities in the gold space.”

Franklyn attributes the sector’s struggles to its battle with costs, margins and inflationary pressures.

“I think the big factor with the gold sector over the last 12 months (is) there’s been a lot of activity, but not a lot of cash flowing through the bottom line, because costs, particularly labour and fuel costs, have been high,” he noted.

“That’s kind of squeezed margins.

“But what we’re seeing now is costs starting to ease off, the gold price starting to go up, that’ll improve margins and see cash flows sort of rebound.

“So we’re pretty excited about the opportunities in the sector.”

Who is Argonaut tracking?

Franklyn’s top picks are not in the large caps, but the established mid-tier space, where valuations are sorely lagging those of successful newer producers and the majors.

“I think it’s at that second tier down. So it’s a Silver Lake (ASX:SLR), Ramelius (ASX:RMS), Westgold (ASX:WGX),” he said.

“One of the metrics we look at is enterprise value per ounce of production.

“What you’ve got there is you’ve got very distinct tiers. You’ve got the newer projects with strong cash flows, long mine lives — so Capricorn (ASX:CMM) and Gold Road (ASX:GOR) — trading at about $16,000 per ounce of production.

“Then you’ve got the majors, so you’ve got Evolution (ASX:EVN) and Northern Star (ASX:NST) at about $10,000, and then it drops right down.”

Westgold, up almost 68% year to date, Ramelius, up more than 50% YTD and Silver Lake, up a more tepid ~5% in 2023, are all producers in the 250,000ozpa range who struggled with costs, labour and Covid last year.

But they trade at around half of the EV/oz of the majors.

“That group of companies — Ramelius, Silver Lake, Westgold — are still between $3000 and $6000 per ounce of production. So we think that there’s a rerating there as they deliver better cash flow.”

Other opportunities in the gold sector

The All Ords gold sub-index is up over 28% YTD, most of that in the past month.

Franklyn says there are other companies in the sector Argonaut likes. It has $2b capped Gold Road, half-owner of the ~350,000ozpa Gruyere gold mine in WA, among its holdings.

Further down Franklyn likes near term developers such as the owner of the world class Hemi discovery De Grey Mining (ASX:DEG), Bellevue Gold (ASX:BGL) and Genesis Minerals (ASX:GMD), which has renowned gold boss Raleigh Finlayson at the helm and is currently halted pending what could be a restructure of a recently announced deal to merge with struggling mid-cap St Barbara (ASX:SBM).

“At the next level down the developers, we’ve also been a big supporter of De Grey, Bellevue, and I think Genesis is really interesting with its potential tie-in with St Barbara,” Franklyn said.

“I think really, it comes back to the point I was making before.

“If you’re a new project — so if you take De Grey where it’s going to be producing 550,000 ounces for 15 years plus — you can see the market is going to rate that very highly, because it’s a new project, its operating costs will be low.

“Its capex will be low, and it will be a go to in the sector.”