Golden hue descends on red Pilbara, fuelled by exploration success and M&A
Calidus poised for re-rating on production growth and there’s takeover talk around De Grey. Plus, analysts see much upside in emerging mineral sands producer Strandline. But will big neighbour Iluka share their view?
19th March 2021
The beaten up gold stocks are back in town thanks to the metal clawing itself back to $US1750/oz, with US Federal Reserve chairman Jerome Powell doing his bit by pledging to keep interest rates low for years to come.
Still, the 10% fall in the gold price in the last six months has been sobering stuff for local gold equities which have also had to soak up a rise in the Aussie dollar, the net effect of which has been a $A420oz compression of margins in the period.
The good news in all is that while gold equities overshot when gold cracked $US2000/oz last August, they also overshot to the downside on gold’s retreat to as low as $1685/oz earlier this month.
No surprise then to see the return of buying support for the gold stocks, with one of the more notable gains being Bellevue (BGL) which rose 9% to 90c on Thursday in response to Powell’s commentary and gold’s return to $US1750/oz levels.
Bellevue was mentioned here on February 18 when it slumped more than 20% to 75.5c on a knee-jerk reaction to the release of a feasibility study into a stage one the development of its namesake mine in WA.
Some of the key figures were lower than some had anticipated but those “misses” will be in found in the stage two FS now in the works. But there is little doubt the release of the FS stage one against a backdrop of falling gold prices did not help.
In a sense it didn’t matter what the FS said. Bellevue was being taken down because the US dollar gold price was weakening. In a rising gold market, the pattern is being reversed.
Will Bellevue’s reversal be quick enough to see off a low ball takeover bid from one of the mill owners in the same region looking to spruce up returns with a source of high-grade feed?
Time will tell on that.
Talking about gold’s recovery and takeover chatter, it is interesting to note than De Grey (DEG) has come storming from an 84c low on March 9 to $1.16c on Thursday, a 7-day trading day gain of 38% if you don’t mind.
There has been a definite increase in takeover chatter around the stock in recent days. It is a big bite as its market cap is now $1.5 billion on the strength of its Hemi discovery in the Pilbara.
No maiden resource estimate just yet, but Hemi gets talked about in mining circles as a 5-10 million ounce find that would suit one of the gold producers looking to bolt on a likely Tier-1 scale project in a Tier-1 location to their portfolio.
The eventual development of Hemi is a big part of the golden hue that is descending on the vast redness of the Pilbara.
Today’s interest though is in Calidus (CAI), which will be producing gold well before De Grey – or its new owner – gets Hemi to the starting stalls.
Like all other gold stocks, Calidus got knocked about by gold’s retreat only to pop back on to the radar because of the appeal of near-term production at an Aussie gold price that is still good for $1000/oz plus margins.
There are others involved in bringing that golden hue to the Pilbara in the near term – Capricorn (CMM) with its Karlawinda project south-east of Newman, and Canada’s Novo Resources, with its just-returned-to-production Nullagine project south-east of Marble Bar.
But there is particular interest today in Calidus (trading at 43.5c for a market cap of $150 million) because a diary entry suggests the deal in which it picks up the high-grade Blue Spec deposit (219,000 grading 16.3g/t) from Novo is about due for completion.
The pick-up and Blue Spec’s integration into Calidus’ under-development Warrawoona gold project some 70km to north is set to prompt a significant re-rating.
On Blue Ocean Equities figures, Blue Spec has the potential to add 30,000-50,000 annual ounces at an AISC of less than $A1,200 to Warrawoona, already down as a 90,000/oz (higher in early years) annual producer at an AISC of $A1,290/oz over an initial mine life of eight years.
The fully-funded development of Warrawoona is already in full flight, with first production in the first half of next year. What is already a robust project becomes even more so with the incorporation of Blue Spec.
Compare the metrics of Warrawoona with other project developers in the Pilbara and elsewhere and there is a case for Calidus to think its market cap is underdone. That is even more so when the impact of the Blue Spec sweetener is added in.
Another point to remember is that unlike the Eastern goldfields, the Pilbara is not blessed with treatment plants.
That has meant small but sweet shows like Blue Spec have been stranded. So there is good reason to think Blue Spec will be the first of many additions for Calidus at Warrawoona.
A sort of build it and they will come thematic if you like, remembering that Warrawoona has more to give than the initial eight-year mine life suggests, both from the existing resource (1.5 million ounces) and what comes from more exploration.
The mineral sands market is so opaque it’s not funny. The average Joe hasn’t got a hope of knowing if times are good or times are bad.
Our local mineral sands king Iluka (ILU) only ever gives broad directional information on the market and we thank them for advising in February that recovery was underway in the pigment and zircon (ceramics) markets from the COVID-19 disruptions .
That was at its profit report and coincided with Iluka telling its customers that its zircon price was being increased by $US70/t from $US1,290/t in the December 2020 quarter.
It is against that backdrop that Iluka’s share price has put on 7% to $6.92 in the (calendar) year to date. It is also starting to talk up its many production growth options.
Goldman Sachs has an $8 a share price target on the stock and makes the point that by its reckoning, the zircon market will enter deficit territory in 2021 driven by a more than 10% fall in global supply on mine depletion and production cuts.
The thing for Iluka now is that it is facing competition for the investor’s dollar from new projects looking to capitalise on the rosy outlook for the sector, unless of course Iluka seeks to continue to dominate the space by taking out the new competitors with a takeover bid rather spend on its organic growth options.
One of the fast emerging competitors is Strandline (STA), which recently completed the debt funding requirements for the circa $300 million development of its zircon-rich Coburn project in a part of WA crying out for investment and jobs.
The $US60 million bond issue follows on from the conditions-friendly $A150 (the first tranche $130m specifically for Coburn) facility secured with the Northern Australia Infrastructure Facility (NAIF), and leaves a circa $100m equity funding requirement to be put away.
Strandline has already started early construction and procurement work and assuming all goes to plan, construction could start around mid-year for first cash flows in early 2023.
It’s got scale about it, with a mine life of more than 20 years and annual output accounting for about 5% of global zircon demand and 10% of demand for chloride ilmenite for the pigment market. So will Iluka sit back and let it enter the market as an independent producer?
We will see on that score. In the meantime, Strandline has developed a good following amongst the brokers that know something about the mineral sands market.
Foster Stockbroking has a 56c price target on the stock, Shaw and Partners 52c, and Morgans 44c. Strandline last traded at 26c. Shaws made the point that at current prices, Strandline is trading at just 1.2x EBITDA once Coburn is in production.
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