Bumper margins and market sell-off leave gold producers poised to pounce on smaller brethren

Plus, Alkane and Chalice tantalise investors with exploration trading halts, DGO ups its stake in De Grey as the Hemi gold find continues to grow, Bardoc PFS boasts strong margins and Apollo and Musgrave set for re-rating.
20th March 2020
Barry FitzGerald

Gold has not been immune from the extreme volatility that has gripped commodity and equity markets alike since the COVID-19 panic got going on January 22, in US dollar-terms at any rate.

But thanks to the collapse in the US exchange rate in the same period from US68c to US57c, the Aussie gold price has actually moved into record territory, having put on 17% to an amazing $2660/oz.

Now that hasn’t mattered much when it comes to Aussie gold equities. They are being smashed along with the rest of the market.

That is despite things having improved markedly for them thanks to the spike in the Aussie gold price and the oil price collapse coming along to enhance their already-bloated margins.

So the reality is that along with toilet paper and hand sanitiser manufacturers, Aussie gold producers stand out as one the few sectors in the market where forward earnings are not only being sustained, they are increasing.

The disconnect between record Aussie gold prices and equity values is creating opportunities in the sector.

Because the gold miners are raking it in – as long as operations are not hit with dislocation caused by the virus panic – today’s interest is in the explorers/developers.

As previously suggested, a game-changing gold discovery by a junior will trigger a strong response that is independent of the market’s immediate concerns.

And for the /explorers developers, the 50%-plus hits they have copped since January 22 obviously makes them better value propositions in what is a record Aussie gold price environment.

The gold producers are awake to all that so standby by for a flurry of acquisition activity as the producers set about lengthening their production profiles in an industry that really is enjoying the best of times.

Monday’s promise

The point about game-changing exploration results triggering a strong response regardless of the short-term noise in markets could well be on full display come Monday.

It is when Alkane (ASX:ALK) and Chalice (ASX:CHN) are due to come out of trading halts pending the release of drilling results, if not before.

Alkane has been busy sending a third hole down at its Boda porphyry gold-copper discovery in central NSW Wales.

It is the one where results from the first two holes carried Alkane from a 52-week low of 20c to as much as $1.16 in February this year. But the selling onslaught caused by the virus panic has taken Alkane back to 55c.

The first two holes were impressive enough for legitimate comparisons for Boda’s upside to be made  with Newcrest’s (ASX-NCM) Cadia mine 100km to the south.

Cadia produced 239,000oz of gold in the December quarter at an AISC of $US142/oz, with its seemingly low grade of 1.19g/t gold more than offset by the porphyry system coming with 0.4% copper a tonne and the scale of the system supporting bulk-cave mining methods.

Alkane did not go into a trading halt because it was about to report dud results from the third hole at Boda. If anything, followers of the stock are expecting more Cadia-type results, as well as hoping for a thick high-grade section to really get the blood coursing.

It is also worth mentioning that Alkane is a gold producer at its Tomingley mine 50km south-west of Dubbo in NSW where regional exploration results have also impressed recently. It also owns the shovel-ready Dubbo zirconium/rare earths project which comes for nothing in the group’s current market cap.

Meanwhile, Chalice has been making a name for itself as a gold explorer beneath cover in virgin ground north of Bendigo.

Interest in hits of up to 4g/t gold at the Karri target, part of the broader Pyramid Hill project, saw the stock get to 33c in February. It was back at 16c ahead of going in to a trading halt on Thursday pending the release of drilling results, not from the ongoing gold program in Victoria mind you.

No, the pending drill results are from its Julimar nickel project, all of 80km north-east of Perth. A series of shallow conductors pointing to the potential for sulphide nickel mineralisation were tested in a recently-completed program.

It seems unlikely that Chalice would have gone into a trading halt had there been disappointment in the program. Monday will tell, with something special set to add a third leg to Chalice’s story – Victorian gold, Julimar nickel, and its $30m in cash/investments (10c a share).

Beyond Monday

De Grey (ASX:DEG) was not in a trading halt on Thursday, but there will be a steady flow of results from its ongoing RC and diamond drilling program at its Hemi discovery, 60km from Port Hedland in the Pilbara.

The early February discovery pushed what was a 4.6c stock as high as 23.5c on March 10.

Despite Aussie gold prices taking off and there being a real shortage of quality gold discoveries to feed the hungry beast of Australia’s record production for the longer term, De Grey got as low as 17c on March 16 before working its way back on Thursday to 20c.

De Grey’s respected technical director Andy Beckwith had a bit to say on March 17 when reporting Hemi – it covers the Brolga and Aquila zones - had continued to grow in scale.

“Brolga and Aquila are developing into two very large gold systems with widths of gold never seen before in the project area nor the Pilbara region,” Beckwith said.

“The ongoing RC and diamond drilling program aims to scope the overall scale of the mineralisation on 80m-spaced sections.

“The large anomalous gold area to the south of Aquila is now our focus for AC drilling. Anomalous gold occurred in every hole above the interpreted intrusion in earlier wide-spaced aircore drilling and provides scope for further parallel discoveries.’’

No need to report much else, other than to note Ed Eshuys at DGO Gold (ASX:DGO) has been happy to increase the group’s stake in De Grey from 10.7% to 16.4% through the exercise of options with strike prices ranging of 10c and 30c, and the acquisition of De Grey shares for DGO shares and options.

Explorers/developers

Gold juniors with ounces-in the ground and a clear opportunity to have the stuff monetised by having it treated at a stand-alone plant, having it toll treated, or leaving it to someone else after a takeover, have been beaten up something shocking in the equity market selldown.

Again, that is despite the lure of production costs of $A1,000-$1500/oz for (current) margins of $A1,100-$A1,600/oz. But the disconnect won’t last long if as expected, gold holds on to its record Aussie-dollar levels.

Bardoc Gold (ASX:BDC) is one that stands to benefit. It has just released a PFS in to its Bardoc project, 35km north of Kalgoorlie. It envisages 135,000oz of annual production at an AISC of $A1,220/oz for an initial 8-years.

In the lead up to the release of the PFS, Bardoc shares drifted from 8.5c to Thursday’s 4.5c, presumably on concerns around the ability in the current turmoil to fund the $142m development cost.

Don’t worry about that. The gold price might be gyrating in $US terms but the longer the virus panic continues, the more the investors will want access to hard assets rather than currency printing presses of the world.

Elsewhere in the pre-production phase, stocks like Apollo Consolidated (ASX:AOP) and Musgrave Minerals (MGV) are likely to be beneficiaries of an Aussie gold market re-rerating in response to record prices.

They also stand as likely takeover targets for growth hungry gold producers should their share prices continue to languish for no good reason in a record Aussie gold price environment.

Apollo has just reported high-grade hits from drilling beneath the recently established 1.03m ounce mineral resource at its Lake Rebecca project, 150km north-east of Kalgoorlie. It shares have nevertheless come back from 29c in early January to 16c.

As Warren Buffett might say, the thing is half the price yet the Aussie gold price has shot 17% higher. Predator wise, Lake Rebecca is in the same neck of the woods as Saracen’s (ASX:SAR) Carosue Dam mine.

Musgrave was 11c in late February is now back at 7.8c. That’s less than the 8.07c Evolution (ASX:EVN) paid last year as part of its deal to earn up to a 75% interest in the Lake Austin portion of Musgrave’s Cue project in the Murchison region of WA by spending up to $18m.

Companies the size of Evolution don’t farm-in to gold prospects unless they see 2-3Mz potential. So it is one to watch, as is Musgrave’s drilling to expand the current 613,000 oz resource at good grade it has already outlined at the Cue project to the south.

Predator wise, regional gold producer Westgold is in the box seat with a Musgrave stake of 16%.

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