The three ASX gold miners Goldman Sachs sees at the top of the class
Large cap gold miners could be entering a sweet spot on higher prices, lower costs and the end of punitive hedges which could see average margins for six of the biggest Aussie players increase by a massive $300 an ounce by the 2025 financial year.
Goldman Sachs analysts Hugo Nicolaci, Paul Young and Elise Bailey have delivered new analysis looking at the green shoots for ASX-listed gold miners aiming to grow production for what appears to be a vibrant gold price environment in the years ahead.
It comes as the largest and most common gold exposure on the Aussie market is poised for a gallant departure.
$25 billion capped ASX 20 digger Newcrest Mining (ASX:NCM), also one of the largest copper producers on the ASX, is heading for the exit after agreeing to an all scrip takeover from the world’s biggest gold producer Newmont.
While Newcrest and its Cadia gold and copper mine will be going Yankee, GS has its eyes on a triumvirate of mid-tier standouts as it initiated coverage on six of Australia’s top gold stocks this week.
With the sector up 10% year to date and prices up 6% to around $2900/oz on hopes the US Fed’s interest rate rises will come to an end later this year, the investment bank’s Aussie analysts viewed it as the perfect opportunity to place them under the microscope.
Nicolaci et al say their analysis of more than 30 Aussie gold assets suggest inflation across the sector which torched margins last year is getting under control.
Average mining costs have risen 30% from $8-10/t of earth moved before Covid to $10-14/t in the March quarter.
“Underground mining costs appear to still be rising (more so for smaller producers) as specialty operator labour markets remain tighter, while open pit costs increases appear to have eased, supporting sector average costs appearing on average to have plateaued (both consistent with recent industry feedback, though subject to waste movements in any given quarter),” they said.
Processing costs have lifted similarly from $18/t to $25/t, with processed grades largely similar, though mined grades are surprisingly rising thanks to new mine developments.
GS sees gold moving higher on ‘fear’ this year, with longer term support from growing Chinese and Indian wealth.
“The team see ‘fear’ as the key medium to short-term driver for gold. While there is a close link to growth expectations, many risk factors are relevant in this context,” they said.
“In addition to real rates, debasement risks, sovereign balance sheet risks, geopolitical risk and other market tail risks matter because gold is considered a safe-haven asset.
“As uncertainty rises, preference shifts towards more gold in the portfolio, driving prices higher. Generally, our team have found in their framework that fear is a far more important driver of gold investment demand than the opportunity cost of holding gold, as measured by short-term US rates.”
Goldman Sachs thinks gold prices will rise from around US$1920/oz currently to near record levels of US$2067/oz by the fourth quarter of 2023, hitting a record average of US$2133/oz in 2024 before sliding slightly to US$2079/oz in 2025 and US$2025/oz in 2026.
Real long term prices are expected to come in at US$1700/oz, though that is US$1971/oz in nominal terms.
So who are these GS buys we speak of?
Their three picks are Evolution Mining (ASX:EVN), Regis Resources (ASX:RRL) and Gold Road Resources (ASX:GOR), the former on its copper upside and the two latter on a net asset value discount to their peers.
Initiated alongside them with neutral ratings are Northern Star Resources (ASX:NST), which will become Australia’s largest standalone gold miner once Newmont’s Newcrest takeover completes with a planned 2Mozpa run rate from 2026 on, Mark Clark’s low grade supremo Capricorn Metals (ASX:CMM) and the gold developer everyone wants or wants to be De Grey Mining (ASX:DEG).
In doing so, GS’ boffins say they prefer near term margins over long-term ounces when it comes to picking their gold stocks.
Evolution and Capricorn are typically strong on costs, with credits from Evolution’s Ernest Henry copper mine helping bring down its all in sustaining costs, while both Evolution and Regis should see margins grow as their hedges clear. Regis’, set at a time when gold prices were far, far lower than they are today and Australian to US dollar exchange rates much higher, are some of the most onerous in the market, as Reubs broke down here.
“We prefer near-term margins/returns over long-term ounces in the Australian gold sector, and assets with less execution risk. EVN has the strongest near-term EBITDA growth in the sector, supported by copper production/pricing,” Nicolaci and team say.
GS has a $3.80 price target on EVN, around 15% upside on the $6b miner’s $3.39 price yesterday. They see 20% upside with a $1.85 PT for Gold Road, which owns half of the Gruyere joint venture near Laverton in WA alongside South African major Gold Fields.
The company also holds a 19.73% stake in De Grey worth around $450m on GS estimates or 40c per share. GS sees Gold Road’s strong recent dividend paying history continuing, with a 3cps payout equivalent to 30% of anticipated free cash flow expected in 2023-24.
“On our forecasts, we see GOR continuing its dividend whilst funding the JV’s organic growth pipeline from Gruyere’s cash flow, driving a c.30% increase in EBITDA over the next 4 years,” GS thinks.
For Regis, GS thinks there is 24% upside with a 12 month PT of $2.30 per share, up from $1.92 today (nowhere near its five year high of over $6 hit in 2019).
They say the recently approved 2.2Moz McPhillamys project in New South Wales, to which no value is ascribed by the market currently, is “almost a free option” for the Duketon and Tropicana gold mine owner.
“With completion of the feasibility study, along with confirmation of the funding strategy, RRL targets FID for 1HCY24,” they said.
“We factor in FID in 2HCY24 and a ~2.5 year build to first gold in CY27 with capex of ~A$600mn in addition to remaining drilling (~A$215mn company estimate in 2017).”
Nicolaci, Young and Bailey see M&A as an ongoing theme, with a number of smaller gold names in the cross-hairs.
“We expect ongoing interest in Australian gold assets following recent activity, with increasing focus on emerging, high-margin mid-caps or synergistic opportunities as broader industry consolidation continues, with favourable near-term FCF yields (~10%) and valuations more fairly priced (~1x NAV) on our US$1,700/oz (~A$2,430/oz) LT gold price,” they said.
No one is as likely an M&A target as De Grey Mining (ASX:DEG), owner of the world class Hemi discovery in WA’s Pilbara.
The company’s undeveloped Mallina gold project now hosts over 11.5Moz, making it a larger pre-development discovery than the other top-tier Australian gold mines found this century — Tropicana and Gruyere.
No wonder there is speculation majors will be stalking, though the barbarians will be kept at the gate at least until after a DFS is delivered this quarter.
Goldman has a neutral rating and 12 month price target of $1.35 including a 30% M&A value weighting on De Grey, though with the developer trading at $1.38 and a market cap of over $2 billion currently, any bid would need to offer a major premium above that level.
Nicolaci, Young and Bailey says De Grey has a top M&A rank among its coverage universe.
“DEG has a strong strategic appeal from its potentially tier 1 gold asset at the Mallina Gold Project, and GOR already owns c. 19.7% interest in DEG along with their own nearby tenements,” they said.
“Given the recent global M&A activity in the gold sector for higher quality assets, we see DEG as a potential M&A candidate within our gold coverage, and rank it a “1” representing a 30%-50% probability of M&A.”
Goldman sees Gold Road and Capricorn the next most likely to face a takeover bid.
Northern Star has limited upside by GS’ read, with capex spend including the $1.5 billion pledge to deliver a major expansion of processing infrastructure at Kalgoorlie’s iconic Super Pit to potentially impact free cash flow over the coming years ahead of the mine’s ramp up to 900,000ozpa near the end of the decade.
Capricorn boasts around 13% upside with a 12 month PT of $4.60, with further upside from the development of the Mt Gibson gold mine to add to its high performing Karlawinda open pit from FY26 on.
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