Gold miners and explorers have been battered from pillar to post over the past 12 months, but a mining analyst says it is worth keeping patience with the sector.

Delivering the opening talk at the RIU Explorers Conference in Fremantle yesterday, Canaccord Genuity mining analyst Paul Howard said the gap between the gold price and Australian equities was creating “extremely good value” right now.

Canaccord has correctly predicted bullish conditions that have driven EV metals like nickel, copper and lithium higher over the past 12 months.

But Howard said after some near term headwinds for gold, which largely traded sideways in 2021, Canaccord’s long-term outlook is bullish.

“Since the beginning of the pandemic it’s worth pointing out that gold has been up both in US and in Aussie dollar terms yet, at least the producers that we cover at Canaccord they’re down and certainly the Aussie gold index is also down,” he told delegates.

“So there’s a clear disconnect between gold equities and the gold price.

“That’s creating some extremely good value in the gold names at the present.

“And then we add this M&A that we’re seeing in the gold space, it’s certainly spicing things up and we’re learning that local funds are quite underweight in gold and looking to get back in at the right time, there could be opportunity now.”

In the near term gold miners and investors will have their head on a swivel looking out for the timing and scale of interest rate rises promised by central banks, particularly the US Fed.

Rate rises are generally bad for gold, which is a hedge asset against inflation and volatility.

But it is also commonly piled into by investors during moments of geopolitical instability, and fears over Russia’s impending war with Ukraine have seen gold prices spike by US$50/oz to over US$1870/oz ($2620/oz) in the past two days.

 

Successful explorers aren’t built in a day

If it’s new discoveries you’re looking for, Howard says it is not the majors delivering the goods right now.

At that end of the market he said exploration spend, which has lagged price increases on a global basis, appears to have been replaced with M&A, which can provide a faster boost to reserves and quicker path to a rerating.

Evidence from recent years suggests that outside of Rio Tinto’s (ASX:RIO) Winu copper-gold discovery, most major finds were being made by junior companies whose main aim is greenfields exploration.

“If you actually look at who the companies are making these discoveries, half the time they’re all juniors with the exception of Winu from Rio in 2019,” Howard said.

“Perhaps they’re the only major that makes discoveries because they take exploration seriously, or perhaps the majors are more interested growing through M&A because it does take a long time from discovery to be making a dollar out of that, so if you want a quick turnaround, inorganic growth could be a different way to go.”

The rate of IPOs in the past year has shown there are plenty of junior explorers looking to do just that and plenty of investors willing to back them.

Such was the explosion in new resources stocks, Howard said 27% had numbers in their ASX tickers.

On average the 107 resources IPOs that listed in 2021 were up 44%, Howard said.

“I suppose it highlights the requirement for a balanced portfolio,” he said. “If people put $100 in each of these IPOs last year and had $10,700 invested, before brokerage, you’re making nearly $5000. So that’s a pretty good return on it.”

The big successes were mostly in critical minerals like lithium, copper and nickel, Howard noted, with a smattering of gold names. But a number were also laggards, most of them gold explorers.

Howard urged patience with juniors hunting for a major discovery, which could take years to be truly unearthed.

“There’s one IPO I’m thinking of that I think is a fantastic IPO, it’s in a frontier jurisdiction,” he said.

“And it takes time, you’ve got to get on the ground. And you’ve got to start with geophysics and geochem.

“These things are not going to be a 10 bagger overnight, so there just needs to be a bit of patience in that space.”

 

Stick with it

One of the best examples of the thesis that patience will be rewarded over time is De Grey Mining (ASX:DEG).

The Pilbara gold explorer has been a market hit since it made the Hemi discovery 60km south of Port Hedland in iron ore country in WA’s north in December 2019.

It took less than two years to turn that initial find into a 6.8Moz resource across multiple ore zones.

Add to that the 2.2Moz already delineated by De Grey at the broader Mallina gold project, and De Grey controls an impressive bounty of 9Moz at 1.1g/t.

A scoping study last year forecast Hemi would deliver 473,000ozpa over at least a decade of mine life, putting it in a similar class to the massive Tropicana mine found by South African gold giant AngloGold Ashanti (ASX:AGG) and IGO (ASX:IGO) in 2005.

But De Grey’s success didn’t happen overnight. De Grey has held that ground since its listing in 2002, but its fortunes have been transformed since it found Hemi in deep drilling under cover.

The $1.6 billion company’s share price has risen from 5c before the scale of the Hemi discovery began to emerge in February 2020 to $1.17 today.

“Many people believed that the Pilbara couldn’t yield a large deposit,” De Grey executive technical director Andy Beckwith said.

“And we were told that many times for four years even though we had gradually built up the resources over those four years to be at 2.2Moz already.

“So as geologists we are fundamentally looking at the rocks, it had all the right ingredients.

“So for us to then go and find Hemi and that turn into such a large deposit, it’s still surprising us, let alone the market.”

De Grey now has 200 people working on the drill out and feasibility studies, with 14 drill rigs ensuring a regular flow of news for investors.

Beckwith said the discovery had shown the value of “frontier” exploration.

“We’re certainly nowhere near the end of it,” he said.

“The work in the last six months has been heavily focused on improving the resources internally so that the PFS will be very solid, and hopefully bigger than the scoping study.

“Now we’re starting a new regime where we’re taking the blinkers off everybody.

“I think lots more work will happen not just in the Pilbara but elsewhere in the industry, new frontier zones will be looked at more critically. So there’ll be more greenfields exploration around Australia is my view.”

 

De Grey Mining share price today:

 

 

 

A coveted award

The Hemi discovery has netted De Grey a number of major mining gongs, including best emerging company at the Diggers and Dealers Mining Conference in 2020, the AMEC Prospector of the Year Award in 2021 and yesterday the Craig Oliver Award at the RIU Explorers Conference.

It was one the company had especially coveted. Oliver was a director of Sundance Resources who at age 46 died in the Congolese plane crash in 2010 that claimed the lives of 11 people, including the entire Sundance board.

But he was also a director of De Grey Mining between 2006 and 2008, making it an extra special tribute for the company’s board.

It places De Grey in vaunted company among major resources stocks like Evolution Mining (ASX:EVN), Northern Star Resources (ASX:NST) and IGO (ASX:IGO) who have previously won the prize.

The nominees De Grey went up against included some giants of the industry like copper miner Sandfire Resources (ASX:SFR), $3.5 billion lithium developer Liontown Resources (ASX:LTR) and mid-tier nickel producer Western Areas (ASX:WSA).

“I find it quite humbling, personally, I think it’s a testament for what we’ve found,” Beckwith said.

“It is a massive deposit, we’re not at the end of it, and I think for me, (the award) is for actually finding something big where nobody had really considered it.

“And so to go up against those companies just makes it probably even more rewarding.”

There aren’t too many ~500,000ozpa gold mines discovered these days.

De Grey has a pre-feasibility due in the second half of this year but results like the 128.9m at 1.5g/t Au from 340m announced yesterday in extensional drilling at Diucon, 100m below the scoping study’s open pit design, shows Hemi has plenty of growth left.

“To get 125m at one gram outside the existing resource and outside any of the Eagle and Diucon pit shells as we know them today, that’s looking pretty encouraging as well,” Beckwith said.

“And the infill results are looking pretty amazing, lots of higher grade intersects, so expect the resource to grow at Eagle and Diucon, and also probably the grade to come up.

“And that’ll obviously impact in the PFS because under the scoping study, Eagle wasn’t even included in the model.”

 

Junior market busiest since the GFC

One thing that helped Hemi reach its potential was the willingness of buoyant capital markets to tip cash into the discovery when its significance began to emerge.

De Grey was able to collect more than $131m in two returns to the market in 2020 and another $125m to support its PFS drilling in October last year.

Speaking to Stockhead on the sidelines of the conference, BDO head of global natural resources Sherif Andrawes said the resources market was the busiest he had seen since before the GFC.

“Every other day there’s a new thing that comes across my desk, whether it’s a new IPO, a new takeover or a new acquisition of some sort. And in terms of the level of work that’s on, it’s probably the busiest we’ve seen in over a decade, pre-GFC time definitely,” he said.

While gold stocks have not been in favour on the ASX in recent times Andrawes said most of the IPO capital was still going into that space.

But he expects to see more cash raised for explorers and IPOs in the critical minerals space going forward.

“I guess it’s a question over how much is being invested in the right commodities,” he said.

“We see a lot in gold, I think the largest amount that was raised … for IPOs in the last year was in the gold space.

“But the demand we’re seeing is in those that are to do with the energy transition and how much money’s been put into lithium and copper and nickel and those things is a question. I expect to see certainly more (raised) in that space.”

At Stockhead, we tell it like it is. While De Grey Mining is a Stockhead advertiser, it did not sponsor this article.

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