Gold’s divided market, sliding majors and rising juniors

Most of the big names in Australian gold mining have had a rough ride recently as the gold price has struggled to reclaim last year’s all-time high
18th June 2021
Resources Rising Stars

...but it’s a different story at the small end of the game where exploration success is the key to share price movement (reports Tim Treadgold on Small Caps).

The difference between producers and explorers is an interesting example of the old saying about it being better to travel than to arrive.

Dividends and yield have become the primary appeal of some big gold producers, a novel situation given the high risks associated with any form of mining and a position which will be challenged in the next interest-rate rising cycle.

While rewarding shareholders with generous payouts is an admirable management policy there is a risk that attempts to “industrialise” gold mining will inhibit the all-important drive to discover which is essential for all miners because of the unavoidable need to replace what’s extracted.

In my career of following the mining industry I can’t remember a time when a gold miner promoted itself as a yield play for the simple reason that few of them survived long enough to ever pay dividends, and those which did forgot how to explore, discover and develop.

This time, we are told, it’s different – a famous piece of advice which is as silly as it sounds because it never is different, just a variation on a never-ending theme of over-and-under supply which dictates price (school economics 101).

In the case of gold there is greater level of complexity because of its role as a form of reserve currency demonstrated by the fact that central banks are still buyers (and holders) of the metal.

But what really drives the gold price is a cocktail of pressures that include investor fear (gold is a safe haven in troubled times) and greed (is there a better return on a rival asset class?).

For gold, the ultimate rival asset is the US 10-year Treasury note (or its 30-year cousin), the financial instruments which set global interest rates and when they’re falling gold rises and when they’re rising gold falls.

It’s never quite as simple as that, but it’s worth considering how gold hit an all-time high of US$2,067 an ounce on 6 August last year, two days after the 10-year bond touched a 234-year (all-time) low of 0.5%.

Since gold peaked, it has struggled to gain ground despite a flood of government stimulus spending (and artificial paper money creation) and is now within sight of an end to the era of ultra-low interest rates that even saw a burst of negative rates.

Top gold produces such as Newcrest Mining (ASX: NCM), Evolution Mining (ASX: EVN) and Northern Star Resources (ASX: NST) are more exposed to the global interest rate cycle than small fry explorers – a point demonstrated by the big three all losing ground over the last six-months as the gold price has drifted lower and interest rates have started to creep higher.

For cautious investors, a stake in a big gold producer might provide comfort in the belief that part of the portfolio is exposed to the safe haven which is gold (with a dividend comforter), but a declining share price can quickly eat any gain.

Investors with a greater risk appetite will get more bang for their buck at the small end of the gold sector where exploration and discovery news dominate the share price with examples that include:

Calidus Resources (ASX: CAI) is one of the players in the rediscovered goldfields of the Pilbara region of WA, which is better known for its iron ore but showed flashes of riches as far back as the 1880s when prospectors moved south from the Kimberley gold rush.

Much more could have happened in the early days of Pilbara gold but the call of the Kalgoorlie discoveries in the 1890s saw the prospectors continue heading south leaving the best discoveries to the last few years, including De Grey Mining’s (ASX: DEG) rich Hemi deposit.

The new Warawoona mine is the primary interest of Calidus with first gold due early next year at a targeted production rate of 90,000 ounces a year over and initial eight-year life at an all-in life of mine cost of A$1290/oz, which is roughly half the current Australian dollar gold price.

A sweetener to the project is expected to be the addition of high-grade ore from the recently acquired and nearby Blue Spec mine, one of Australia’s the richest gold projects with the distinction of being named after the 1905 Melbourne Cup winner.

Because Warawoona is still being built, Calidus is a high-risk stock but at a price of $0.51 the company is valued at a modest $203 million with abundant upside.

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