Ten Bagger: Gold is the new black, as thrifty juniors cash in on mini-mines

Welcome to Ten-Bagger, where Lowell Resources Fund chief investment officer John Forwood gives us his take on a sector of the ASX resources market full of value.

This month, John looks at how thrifty gold juniors are leveraging record prices to enter production early, generate quick cash and boost their share price.

It’s almost 12 years since Orange is the New Black burst onto the scene and put Netflix into pole position to become the world’s go-to TV producer.

We’ve since seen the streaming platform conquer the world of content slop before being dragged back into the mudfight by legacy rivals and bored audiences.

And just as chaotically, in that time another mining cycle has come and gone. Led initially by gold, the old-timey precious metal gave way to booms first in iron ore and coal and then in battery metals as bullion lost its lustre.

But as the energy transition faded from the front of investors’ minds amid inflation, war and a cost-of-living crisis, gold made its return. In mining, if orange was the new black, then gold is the new orange.

Rather than being consigned to history as other stores of value (like the also flying Bitcoin) emerged to satiate the tastes of a new generation of investors, geopolitical instability, de-dollarisation and eventually interest rate cuts led the metal to fresh highs.

Now gold, at over US$2700/oz and close to $4400/oz Australian, is the flavour of the month again. And plateauing costs, a weak Aussie dollar and easing labour constraints mean you don’t need to be big to make a dime.

“What we’re seeing, particularly in the WA Goldfields which is the best example in the world, is 50,000oz deposits are the new million ounce deposit – Orange is the New Black,” Lowell Resources Fund CIO John Forwood said.

“There are lots of companies with 50,000-100,000oz of gold in the ground in the WA Goldfields where they’re well positioned to realise cash from those deposits by getting into production on a toll treatment-ore purchase basis.”

Poster children

There is no shortage of companies setting an example of how to make a bit of coin and increase their attractiveness to shareholders by generating free cash in short order.

Brightstar Resources (ASX:BTR) created a nest egg last year by partnering with contractor BML Ventures to mine and produce gold from the Selkirk JV utilising excess capacity at Genesis Minerals’ (ASX:GMD) Gwalia mill.

BTR, which also progressed an aggressive M&A strategy to grow its resource base to 3Moz, doubled its value in the past year, with a market cap now of $230 million.

Auric Mining (ASX:AWJ) shares are up 171% over the past year after the minnow decided to send its Jeffrey’s Find mine into production utilising BML as a mining partner. Toll treatment was provided by Peter Bartlett-backed FMR’s Greenfields Mill and Focus Minerals’ (ASX:FML) Three Mile Hill plant in Coolgardie.

As of the company’s most recent update its stage 2 mine at Jeffrey’s has delivered 14,853oz, generating $58.7m in sales and $6.6m in interim cash distributions ex-GST. Not bad for a project bought for $1.4m.

More cash is to come, with Auric aiming to process its next mine, the Munda project, itself after announcing the conditional acquisition for $4.4m of the 180,000tpa Burbanks Mill 9km south of Coolgardie.

“There’s a bit of a disconnect where speculative companies have not seen the same joy from the market (as larger companies), but we have seen big share price gains for companies that are smaller but have been able to turn on gold production quickly,” said Forwood.

READ: ASX gold miners are printing cash – who’s in line to join them in 2025?

For whom the toll bells

Toll treatment and ore purchase deals are typically beneficial for both parties. The plant owner can guarantee a margin without incurring mining costs, fill idle milling capacity and blend ore to optimise feed for their plant infrastructure.

The supplier will give up a margin to the processor, but can avoid the cost and execution risk that comes with building your own mill, which often doesn’t stack up economically for a smaller resource with a short mine life.

If the haulage distance is long, transport costs can hurt – often expressed by euphemistically reducing the mined grade. But with diesel costs coming down and gold prices rising, longer trucking routes are becoming more tolerable.

“The fuel price is pretty important, but the gold to oil ratio now is around 31:1 – 31 barrels of oil to an ounce of gold,” Forwood said.

“The higher that ratio goes the more options open up, and you don’t have to rely on necessarily the closest mill.”

“So I think small scale, short term production is going to be a growing theme. The IRRs for these projects can be off the scale for the owners, with nil to very low capex and short times to cashflow.”

Who’s waiting in the wings?

Forwood sees plenty of candidates to join the growing cohort of producing gold companies on the ASX, including some whose plans are not quite set in stone.

Among them is Lefroy Exploration (ASX:LEX).

Lefroy generated some excitement a few years ago when it identified a low grade copper and gold porphyry with 500,000oz at Burns east of Kalgoorlie, and went on to buy the historic Mt Martin gold and Goodyear nickel deposits from major Franco Nevada. It paid no upfront cash and only offered a royalty on production for the latter.

But the run in gold prices has brought LEX’s smaller, but more advanced Lucky Strike deposit – containing a resource of 1.27 Mt at 1.95 g/t Au for 79,600oz – to the fore.

Its signed its own 50-50 profit sharing agreement with BML.

“The contract miner puts up all the capex, which is generally pretty low to start the mining depending on how big the pre-strip is,” Forwood explained.

“Then it’s a 50-50 profit share from the surplus that comes out the other end of the toll treatment agreement.

“The smaller-scale production is catalysed by the very high Australian dollar gold price and Lefroy is probably a really positive story.”

Other miners who have previously focused on larger discoveries in other commodities are also looking to follow suit.

Dreadnought Resources (ASX:DRE), whose geos won the AMEC Prospector of the Year Award in 2023 for the Yin rare earths discovery in WA’s Gascoyne, is looking to bring the high grade Star of Mangaroon resource into production after outlining a deposit containing 56,600t of ore at 12.8g/t for 23,300oz, 84% of it in the indicated category.

Once the largest producing mine in the Gascoyne region, Dreadnought’s plans and resource models at Star of Mangaroon don’t yet include the nearby Popeyes mine or hits at depth below 110m, with underground mining having halted in 1983 just 90m below surface.

Forwood also noted Rumble Resources (ASX:RTR), which made the large Earaheedy zinc discovery near Wiluna in 2021.

Rumble has signed a deal with India’s Bain Global Resources and its contractor MEGA Resources which will see MEGA pay all establishment costs up to $25 million upfront, opening the door to develop Rumble’s Western Queen South gold deposit.

An existing open pit, Rumble wants to cutback the deposit to unlock a resource of ~1.42Mt at 1.59g/t for ~72,500oz. The JV will also consider the development of smaller gold deposits at Duke and Princes once mine plans, toll treatment agreements and a final investment decision have been made.

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