Gold stocks which missed the 2020 party may be next year’s better performers

Gold Road and Breaker among those seen as having potential to play catch-up. And TNG is also chasing a re-rating as its FID looms.
11th December 2020
Barry FitzGerald

The gold stocks aren’t exactly ending 2020 in style. The retreat in the gold price from a peak of $US2,063/oz in August and the severe choppiness in the price in the last couple of weeks has made sure of that.

But the reality is that the US-dollar gold price remains some 20% higher than its starting point for the (calendar) year, leaving Aussie gold margins as strong as the industry could hope for at more than $A1,200 an oz. The cash is rolling in.

It’s why that even after the recent battering gold stocks have taken, share prices generally remain well ahead of their starting point for the year, as is the case with the 11% gain for Northern Star and Evolution’s 34% rise.

But today’s interest is in those gold stocks which for no particular reason got left behind in 2020 and potentially at least, can play catch-up in 2021 with the rest of the sector which by and large, continues to look fully priced.

On that basis, Gold Road (GOR) is an obvious candidate while among the explorers/developers, Breaker (BRB) bobs up.

GOLD ROAD:

Australia’s newest “Tier 1” gold producer, Gold Road, is trading at $1.20, or 12%, short of where it started the year.

There were some teething issues at its 50%-owned Gruyere gold mine, a joint venture with one of the best in the business, Gold Fields.

But its first year’s production of 230,590oz at an AISC of $A1,155 an oz (100%) was a good start on its way to achieving an annual average over its first 11 years of 300,000oz.

Gruyere’s 1.9Moz in reserves and 3.6Moz in resources is also hard to ignore in a market where mine life is generally on the short side of things.

Gold Road is also exploring elsewhere on the lightly-touched Yamarna belt for Gruyere Mark II on 100%-owned ground. Short of that happening, the stock has been left to drift on the basis that there wasn’t much else it can do to move the dial on its $1.05 billion market cap.

That means that on just about any metric that can be applied, Gold Road screens as cheap compared with its peers. That comes through in 12-month broker target prices on the stock being as much as double the current share price.

And that’s before optimisation of Gruyere has run its course. An example of that was this week’s announcement from the joint venture that it planned to install a renewable energy microgrid at Gruyere to lift annual treatment rates from 8.2mtpa to 10mtpa.

Warren Edney from EL & C Baillieu increased his target price on Gold Road from $2.02 to $2.36 in a research note on the microgrid. “We believe the shares look undervalued. Some exploration success delivering high grade feed should lead to a re-rating of the stock,” Edney said.

As an aside, IGO’s potential sale of its 30% stake in the 380,000oz-a-year Tropicana gold mine (4.9Moz resource) next year will provide a handy valuation yardstick for Gold Road, particularly if IGO attracts the $1.4b value suggested.

Gold Road has also advertised it will be paying a maiden dividend for the December half at a rate of 15-30% of free cashflow.

BREAKER:

A virgin gold discovery within 100km of Kalgoorlie with a 1Moz resource at good grade already under its belt might normally be considered a recipe for a premium market rating.

That hasn’t happened for Breaker and its 2016 Bombora discovery, not in 2020 at any rate.

Breaker started out the year at 29c and has drifted lower to 19.5c on Thursday in what can still be categorised as a bull gold market. It means Breaker’s enterprise value to resource ounce metric is the lowest of its peer group, by a big margin too.

The year ahead could see the stock’s low rating change in a hurry, with a resource update – the first since 2018 – due in April.

The long break between resource update and the decision not to press the button early on a PFS study in to an initial open-cut development has been a source of frustration for many with Breaker.   

But there have been no apologies from Breaker executive chairman and the company’s third biggest shareholder, veteran geologist Tom “Colonel” Sanders.

He has been content to do the Aussie thing and de-risk the project first, and then with the incoming support of US funds, make the thing bigger and better.

To that end, recent infill drilling has confirmed the continuity of high-grade mineralisation (including 9.15m grading 7g/t from 558m) below the existing open cut resource, adding to the expectation that there is an underground leg to the Bombora story.

Sanders said the latest results went to the understanding that the continuity and geometry of the mineralisation is typical of the Archean deposits seen elsewhere in WA’s Eastern Goldfields. “This augurs extremely well for the resource update we are planning for April,” he says.

The continuity and geometry reference is pointed in that it tackles the naysayers that took the deferral of a PFS and resource upgrade as a sign that the mineralisation at Bombara was not hanging together for a development.

After more than 250,000m of drilling and the experience of 22 years of living in Kalgoorlie as a rock kicker, Sanders gets to take the naysayers down in April.

TNG:

TNG is not gold but the theme is the same – a stock that has remained overlooked in 2020 but one that goes in to 2021 with the potential to break its share price shackles in a big way.

The stock opened the year at 8.8c and is currently trading at 8.6c. That weakness can be put down to COVID-19 uncertainties more than anything else.

More to the point is that the company is closing in on making a final investment decision within the next 12 months on its Mount Peake vanadium-titanium-iron project in the Northern Territory.

It is a mouthful all right and there are lots of moving parts to the story. But all that really needs to be known is that TNG is pretty much alone on the ASX in having a project with an NPV of $3b and an IRR of 40% against a market cap of all of $105m.

It’s a big project across a suite of strategic materials which can all be produced as co-products rather than by-products thanks to propriety processing technology to be employed at a plant near Darwin.

Financing for the $850m-plus project is the biggest hurdle, but Germany Inc and KPMG are on the job, with the process to heat up on the expected completion soon of a front-end engineering and design for the Darwin plant. NAIF is also in the loop for potential financing.

TNG has made no secret of the fact that the scale and long-life of the project, plus the strategic nature of its commodities suite in a greening world, makes it a likely candidate for a strategic partner(s), or a takeover for that matter.

One of the major global commodity forecasters reckons vanadium prices will climb by around 25 per cent over the coming decade driven by underlying demand from the steel industry and growing use in the renewable energy sector in grid-scale vanadium redox batteries.

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