Thirty solid gold stocks to whet your appetite Part 2: Will they Trump Xi gold rally?

By Trevor Hoey. Published at Jun 27, 2019, in Features

Despite a mid-week retracement, the gold price has held above the US$1400 per ounce mark, and in Australian dollar terms it is approximately $2020 per ounce.

As Finfeed mentioned yesterday in part one of its 10 stock gold special, covering companies with Australian and overseas operations, this delivers outstanding margins given average all in sustaining costs (AISC) across a broad section of gold miners were estimated by Bell Potter to be in the order of $1300 per ounce in Australian dollar terms.

Before we look at the next 10 stocks though, it is worthwhile questioning why the gold price surged, and potential catalysts to either drive it higher or take the wind out of its sails.

Essentially, gold rallied on the back of fiscal and political instability with both the European Central Bank (ECB) and the US Federal Reserve delivering conservative to negative messages regarding the economy, creating doubt in the minds of investors.

This, along with the threat of military action from Iran shooting down an unmanned US drone created demand for safe haven investment opportunities, an environment tailor-made for gold.

The next event which could steady the ship or create further instability is the meeting between President Trump and President Xi at the G20 in Osaka, Japan.

This will occur on June 28/29, a significant determinant of where the gold price is heading in the short term.

Here's another view.

For those who are confident in the precious metal’s outlook we examine another 10 players in the sector with market capitalisations ranging from less than $50 million to Australia’s largest ASX listed mining group, Newcrest Mining Ltd (ASX:NCM) which is capped at about $24.7 billion.

However, what you will see across the next 10 stocks is that some have run well ahead of fair value while others possess a reasonable degree of uncertainty, underlining the fact that the sector is very much one for dedicated stock pickers, rather than those looking to make a quick buck on the back of positive market sentiment.

Evolution Mining Ltd - ASX:EVN

Evolution Mining is one of Australia’s top five gold producers by market capitalisation.

The company benefits from its dual asset approach which includes six operating assets.

Four of these are open pit operations, while its Kraków project is underground and the Mungari mine in Western Australia is a mix of open pit and underground.

Evolution generated an underlying net profit after tax of $92.2 million for the six months ended 31 December 2018.

This result was underpinned by a consistent operating performance across the group’s asset portfolio with half-year gold production of 382,214 ounces.

All-in Sustaining Costs (AISC) for the half-year of $928 per ounce (US$672/oz) rank Evolution as one of the lowest cost gold producers in the world.

Group cash generation continues to be strong with mine operating cash flow of $387.9 million.

Net mine cash flow was $237.8 million, with all operations delivering positive cash flow after meeting their operating and capital needs.

The major cash flow contributors were Ernest Henry ($108.1 million), Mt Carlton ($37.5 million) and Cowal ($36.8 million).

Analysts at Citi ran the ruler across the stock in April, noting that the company was on track to deliver fiscal 2019 production guidance in a range between 720,000 ounces and 770,000 ounces at a mid-range AISC of $875 per ounce.

Citi expects production to be at the mid-point of management’s guidance with costs to slightly exceed the upper end of the forecast range at $922 per ounce.

Consequently, the broker remains neutral on the stock with a target price of $3.60, well below the group’s current price of $4.39.

On this basis, there could be better value elsewhere.

Gold Road Resources Ltd - ASX:GOR

While shares in Gold Road aren’t trading too far shy of the group’s 12 month high of $1.15, there was a retracement to around 95 cents in June which coincided with an operational update and revised production guidance at the Gruyere Gold Project in the Laverton region of Western Australia.

The update included a significant downgrade in guidance for calendar year 2019, but management said that first gold was on track for delivery in the June quarter, in keeping with guidance.

Also, the project capital cost of $621 million appeared to be on the mark.

Gold production guidance was lowered substantially from a mid-range of 110,000 ounces to a range between 75,000 ounces and 100,000 ounces.

Mid-range AISC is $1100 per ounce, highlighting the relatively low cost nature of the project.

With 2019 clouded in uncertainty, Gold Road is best judged on its 2020 metrics.

Bell Potter analyst, Peter Arden, is forecasting an adjusted net profit of $64 million from production of 138,000 ounces, equating to earnings per share of 7 cents.

This implies a PE multiple of 16.4 relative to Arden’s valuation and price target of $1.15 which seems a stretch.

There appears to be better value and more certainty amongst other stocks we are examining.

Kingsgate Consolidated Ltd- ASX: KCN

Shares in Kingsgate Consolidated surged in March/April as the company received an $82 million settlement from its political risk insurers in relation to the alleged illegally expropriated actions of the government of Thailand that occurred in May 2016 at its Chatree Gold Mine.

This provided the company with sufficient funds to pay out its corporate debt facility.

Furthermore the group has liquidity to maximise the value of its Nueva Esperanza Project through development or sale, while considering other development opportunities.

Nueva Esperanza is a feasibility stage development project in Chile with a resource base of approximately 1.9 million ounces of gold equivalent.

However, with management having appointed an advisor to assist in the sale of this asset it may not be long before the company is working with a blank sheet of paper.

Consequently, this is another company that is cloaked in uncertainty, and while its share price is up some 60% since March, this mainly reflects the positive impact of the $82 million settlement.

Kirkland Lake Gold Ltd - ASX:KLA

In May. Kirkland Lake (TSX:KL) (NYSE:KL) (ASX:KLA) reported new high-grade drill intersections from underground exploration drilling within the South Mine Complex (SMC) at the Macassa Mine, Kirkland Lake, Ontario.

Since then its share price has performed strongly increasing from about $45.00 per share to recently hit a 12 month high of $64.40.

This is broadly in line with the price target set by Macquarie after taking into account the strong exploration results.

Consequently, the upside may be factored into the share price, although Macquarie notes that further momentum could be forthcoming from ongoing exploration and production growth.

The broker expects Kirkland to achieve the 1 million ounce per annum mark by 2020, but the real upside lies in its low AISC’s which were $560 per ounce in the March quarter.

The broker noted that the record March production from Macassa of 73,000 ounces was 15,000 ounces better than expected at an exceptional grade of 29.6 g/t.

This is part of the SMC zone development, and Macquarie expects it to be producing at a rate of 400,000 ounces per annum by 2023.

Kirkland is in a particularly strong position to fund its aggressive exploration program, boasting cash of $416 million as at March 31, 2019 with its operating activities throwing off net cash of $174 million during the March quarter.

In summation, Macquarie says, “KLA remains a top pick for its high-quality mines and organic growth in good jurisdictions.”

Indeed, Kirkland is in such a strong cash position with significant production and exploration upside, the group could not only benefit from organic growth, but could expand its portfolio through acquisitions, effectively generating earnings growth with the stroke of a pen.

Medusa Mining Limited – ASX:MML

Medusa Mining through its Philippines affiliates, Philsaga Mining Corporation (PMC) and Mindanao Mineral Processing & Refining Corporation (MMPRC), upgraded its production guidance in mid-May, prompting a strong and sustained share price surge which resulted in the company’s shares hitting a 12 month high of 64 cents.

This represented a gain of nearly 80% relative to where the group was trading prior to the production upgrade.

However, it is fair to say that the extent of the rerating could also be attributed to the spike in the gold price, and perhaps this is reflected in the retracement that has occurred this week.

Consequently, Medusa may be another one of those companies where the upside is already factored in.

Management’s initial guidance indicated production of between 90,000 to 100,000 ounces of gold, at AISC’s of between US$1,050 to US$1,150 per ounce of gold.

Based on performance to date and factoring in better than anticipated production in April, the company is upgrading its full-year gold production guidance to a range between 98,000 to 105,000 ounces.

AISC’s are expected to be at the lower end of the guidance of US$1,050 to US$1,150 per ounce of gold.

This revised guidance is based on higher than anticipated mill feed grades and mill throughput achieved year-to-date.

The real takeaway here is the margin between costs and the spot gold price which is about US$370 if AISC’s are at the extreme bottom end of guidance.

That represents a margin of $530 in Australian dollar terms, highlighting the significant advantages that Australian producers are benefiting from based on current exchange rates.

Newcrest Mining Ltd - ASX:NCM

As Australia’s largest ASX listed gold company a market capitalisation of more than $24 billion, Newcrest has received strong support in the last month with its shares increasing from approximately $26.50 to Tuesday’s seven-year high of $32.74.

However, in Macquarie’s view Newcrest has run its race and after assessing the company in April the broker maintained its underperform rating with a price target of $22.00, more than 30% below the recent high.

Macquarie still views Newcrest as a quality business based on current metrics, but the outlook is clouded by declining production which could see the current demanding forward multiples deter investors.

Assessing the group’s March quarter performance, Macquarie noted that it was particularly strong on the cost control front with AISC’s of US$738 per ounce, 14% below the broker’s expectations.

On the production front, Newcrest was in line with Macquarie’s expectations of 624,000 ounces while outperforming in terms of copper production which came in at 25,300 tonnes.

Of particular concern is the tailings dam embankment slump at the group’s Cadia operations in New South Wales.

This occurred in the southern wall in March 2018 resulting in a loss of tailings.

While the slump did not result in any injuries or environmental damage as the tailings released were captured in the abutting Southern Tailings Storage Facility, Macquarie makes the point that Newcrest is still at the concept stage in terms of considering its remediation options.

This is expected to be completed by the end of 2019, providing some clarity on the timeline and capital expenditure required to address the problem.

In the interim, there appear to be better investment propositions that offer superior value and less unknowns.

Northern Star Resources Ltd - ASX:NST

Northern Star is another one of the larger players (market capitalisation: $7.3 billion) to receive strong support over the last two months with its shares increasing 46% to hit an all-time high of $11.92.

This is well above Citi’s price target of $9.05 per share, and while the broker expects some early challenges at the Pogo Project to be offset by a strong June quarter, the numbers just don’t stack up.

Management has guided to production in a range between 850,000 ounces and 900,000 ounces from its three operating projects, Kalgoorlie, Jundee and Pogo in fiscal 2019.

Analysts at Macquarie expect production at Kalgoorlie and Jundee to be maintained out to at least 2024, and with increased output from Pogo, the broker anticipates production of more than 1200 ounces per annum is achievable by fiscal 2021.

Such a scenario would see adjusted profit increase from Macquarie’s estimated $202 million in fiscal 2019 to nearly $500 million in 2021.

However, Macquarie’s 2021 net profit estimate is well above Citi’s forecast of $408 million, and that is the rub.

If Macquarie is on the mark, its net profit would equate to earnings per share of 76.6 cents, implying a PE multiple of 15.5.

While this forward multiple appears aggressive, Macquarie’s forecasts imply adjusted earnings per share growth of 56% and 76% in 2020 and 2021 respectively.

Consequently, on a PE/growth basis the company’s share price could be justified.

However, it should be noted that Macquarie set its price target at $10.30 in April.

While this is some $1.60 shy of Northern Star’s current trading range, at that stage the gold price had dipped below US$1300 per ounce, and was about US$150 per ounce below current level.

Interestingly, Macquarie applied a gold price of US$1249 per ounce when framing its fiscal 2019 assumptions, but if you step out to 2020 and 2021 the broker is using a price of about US$1400 per ounce.

Another point of interest is the fact that Macquarie is using an Australian dollar exchange rate of US$0.74 in 2021, implying an Australian dollar gold price of $1905 per ounce.

With a number of variables in the mix, placing too much reliance on forward-looking assumptions can be dangerous.

That said, with the Australian dollar AISC’s expected to reduce to $1000 by 2021, Northern Star looks one of the better players amongst the large caps.

Oceana Gold Corporation - ASX:OGC

Shares in Oceana Gold Corporation surged from about $3.90 in mid-December to hit a 12 month high of $5.28 in early January, representing an increase of 35%.

However, some of the gloss has come off the stock since then, and it is one of the few producers to really kick in a buoyant gold environment.

In fact, in the last week its shares had fallen from $4.56 to hit a low of $4.15 on Wednesday.

While this represents a discount to the consensus valuation of $4.72, there are some uncertainties surrounding the company at the moment, and this has possibly contributed to share price weakness.

On 20 June, management released a statement relating to the Financial or Technical Assistance Agreement (FTAA) which relates to the group’s Didipio operations in the Philippines.

Though the company said that it had been working collaboratively with the Philippines government on the renewal process, the rhetoric wasn’t convincing with management saying that the company ‘expects that the Didipio operation will continue to operate during the renewal process.’

As demonstrated by Kingsgate Consolidated’s experience, some South-East Asian countries can be difficult places to do business.

Investors would be aware of the potential sovereign risk, suggesting that share price upside could be limited until this matter is resolved.

Perseus Mining Ltd - ASX:PRU

Following Perseus’ impressive March quarter which featured lower costs, particularly at the Edikan Project where a new life-of-mine plan was implemented, analysts at Macquarie highlighted the group’s promising outlook.

The broker also noted that the Sissingué Project in Côte d’Ivoire continued to perform to plan with quarter-on-quarter increased movements driven by the bringing forward of a cut-back in preparation for the wet season.

Macquarie is of the view that group guidance is now likely to be met on both costs and production.

However, the real takeaway for Macquarie was news that development approval for the Yaouré gold mine in Côte d’Ivoire had been received.

The broker sees this as an important step in Perseus organically growing its production to its aspirational target of more than 500,000 ounces per annum, noting that the group has a good history of developing assets in Côte d’Ivoire, having commissioned Sissingué, its second operation, ahead of time and on budget.

While quarter on quarter AISC’s were impressive, declining from US$1151 per ounce to US$900 per ounce, Sissingué is also a standout performer when it comes to producing high margins.

Averaging AISCs of US$731 per ounce in the nine months to March 31, 2019, the margin at Sissingué is now about US$700 per ounce or $1000 per ounce in Australian dollar terms.

Perseus tends to fly under the radar, but the burgeoning gold price along with acknowledgement of these impressive metrics has seen the company undergo a significant rerating in the last fortnight with its shares increasing 44% to a high of 64 cents, a level it hasn’t traded at since 2016.

However, unlike many of the larger producers it could be argued that the rerating was overdue.

Canaccord analyst, Reg Spencer only ran the ruler across the stock yesterday, applying updated commodity price assumptions, the impact of Yaouré, decreasing costs of production and enterprise value/EBITDA metrics.

Spencer is forecasting a near doubling in net profit to $101.4 million in fiscal 2021.

This represents earnings per share of 8 cents, implying a PE multiple of eight relative to the group’s recent high.

Based on these revised assumptions, Spencer increased his price target from 90 cents per share to $1.00 per share, implying upside of 75% relative to Wednesday’s closing price of 57.5 cents.

On balance, of the ten stocks we have covered today, Perseus appears the most compelling in terms of value for money.

Prodigy Gold NL - ASX:PRX

Shares in Prodigy Gold NL (ASX:PRX) surged more than 30% in May, hitting a high of 11 cents after the company signed a binding Exploration Farm-in and Joint Venture Agreement (JV) with Newmont Exploration Pty Ltd, a wholly owned subsidiary of Newmont Goldcorp Corporation.

As the world’s largest gold miner, Newmont’s entry will assist Prodigy in advancing its exploration program at the Tobruk Project in the Tanami province of the Northern Territory.

Under the agreement, Newmont Goldcorp is to sole fund up to $12 million in exploration expenditure to earn up to a 70% interest in the Tobruk Project, and provide a total of $2.5 million in cash payments to Prodigy Gold.

The agreement covers Prodigy Gold’s tenements and tenement applications at the Tobruk Project, adjacent to Newmont Goldcorp’s Callie Gold Mine.

Importantly, Newmont Goldcorp has a long and successful history in the Tanami area including the development of the nearby Callie Gold Mine into a world-class gold deposit.

Exploration work at Tobruk will commence in the June quarter.

Prodigy Gold now has more than $33 million in funding agreements from JV partners to accelerate discovery across the company’s entire exploration portfolio, including JV’s with Independence Group (70/30) and Newcrest Mining (earn-in stage) that have already generated high-quality targets which are currently being drilled.

Key logistical advantages include the 450 kilometre gas pipeline to the recently constructed Newmont Goldcorp Granites Plant and the Federal Government’s commitment to upgrade the Tanami Track, which will improve the economics of any future discoveries.

With near-term exploration to be conducted at Tobruk, as well as Prodigy’s Lake Mackay joint venture project with Independence Group (ASX:IGO) there are a number of potential share price catalysts on the horizon.

Check Part 3 where we examine whether gold has transitioned from a safe haven to a growth play.

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

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