Source: The Australian Financial Review | Brendon Lau | 29th May 2012
Gold producers are accumulating cash at a faster rate than most others in the mining fraternity, and the strategic investment by Northern Star Resources offers a small taste of what is likely to come.
The bank balances of Australian-listed goldminers increased by about 11 per cent from a year ago to $2.28 billion, according to data complied by The Australian Financial Review from Bloomberg.
In contrast, the cash holdings of the sector excluding gold players actually fell by close to 30 per cent to $21.1 billion.
Gold producers are generating robust amounts of cash despite the spot gold price crashing 18 per cent to $US1575 an ounce since it hit a record high of $US1921 an ounce in September last year.
Most gold producers have cash costs that are half of where the gold price is trading, have relatively low capital expenditure requirements and are unhedged.
Their enviable positioning has left management teams with a dilemma of what is the best place to spend given that the sector doesn’t have a tradition of paying good dividends.
Northern Star resolved part of this issue by spending $11 million of its $82.8 million on stake of up to 21 per cent in copper explorer Venturex Resources. The funds will be used to complete Venturex’s feasibility study and exploration.
The deal is somewhat unusual as goldminers typically do not diversify away from the precious metal space, although copper is a mineral most goldminers are familiar with.
However, most goldminers would shun branching out into base metals, according to Argonaut director Troy Irvin.
“Where possible, goldminers will stick to gold,” he said.
“The market takes a dim view of such moves [as] gold investors are typically wary of losing the ‘gold premium’.”
This means emerging gold producers that are low on cash with promising projects and large capital expenditure requirements will make more likely targets.
Kula Gold appears to fit the bill as it needs about $80 million in 2012-13 for its Woodlark Island project in Papua New Guinea when its market capitalisation stands at about $60 million.
What could make Kula even more appealing is its depressed share price with the lightly traded stock crashing 12.7 per cent to a record low of 55¢ yesterday.
“It’s one of the best value [stocks in its class],” said Canaccord BGF analyst Warwick Grigor.
He estimates that Kula is trading on an enterprise value to resource of under $40 an ounce – which is at least a 50 per cent discount to similar explorers.
The Woodlark Island project holds about 2 million ounces of gold resources and 700,000 ounces of reserves.
The remote location of the project is probably the biggest issue as there are no land title or other regulatory challenges hanging over the project.
Canaccord BGF has a price target of $2.40 a share.
West African-focused goldminer PMI Gold also has characteristics that would make it an attractive target as Argonaut estimates its capex at $US252 million when its market cap is hovering at about $60 million.
The debt-free explorer is developing three projects in Ghana, and its flagship Obotan project has a proven and probable reserve of 2.3 million ounces of gold at 2.32 grams a tonne. That is considered relatively high grade for the region as African goldminers have an average of 1.6 grams a tonne.
As with most African-focused mining stocks, PMI Gold has been sold down following a coup in Mali, but Mr Irvin believes the pull-back is a buying opportunity regardless of PMI’s corporate appeal.
The stock fell 6.6 per cent to 78¢ on Tuesday afternoon – its lowest level since October last year. Argonaut has a price target of $1.80 on the stock.
Ramelius Resources is unlike Kula and PMI in that it has enough cash to fund its capex program.
The miner is forecast to need a little over $20 million in 2012-13 when it has more than $100 million sitting on its balance sheet.
However, the takeover of Westgold Resources by tin and nickel producer Metals X this month has fuelled speculation of further consolidation among West Australian goldminers.
“In the Central Murchison region there could be a consolidation theme happening there,” said Foster Stockbroking analyst Craig Brown.
Goldminers operating in that region include Doray Minerals, Silver Lake Resources and Ramelius, noted Mr Brown.
However, Doray has a small gold resource and Silver Lake might be a little too big for most to contemplate swallowing.
