M&A and exploration success to replace gold price as main share price drivers

1+1 really can equal 3, sometimes. Which is one way of looking at the proposed Northern Star + Saracen merger that has launched a fresh wave of interest in gold, with mergers and acquisitions (M&A) expected to take centre stage over the next 12-months.
9th October 2020
Tim Treadgold

1+1 really can equal 3, sometimes. Which is one way of looking at the proposed Northern Star + Saracen merger that has launched a fresh wave of interest in gold, with mergers and acquisitions (M&A) expected to take centre stage over the next 12-months.

Investor reaction to the Northern Star + Saracen deal has been impressively positive at what is shaping as a delicate time in the gold-price cycle as some central banks switch from buying to selling.

The change by government-owned banks means M&A (plus discovery news) will become the market drivers over the next six-to-12 months rather the gold price alone.

The switch from watching the price to looking out for M&A and discovery news was highlighted by a gold sale in central Asa when the government of Uzbekistan raised $US5.8 billion to help patch its Covid-bruised budget.

The Uzbek exit, which occurred in August, but was only reported this week, means that August was the first month in a year-and-a-half in which central bank gold sales outstripped purchases with a negative difference of 12.3 tonnes.

Central bank activity in gold is extremely important because government banks are the biggest owners of gold and in the past when they have changed direction, they took the gold price with them –either up (when buying) or down (when selling).

While impossible to prove, it is also interesting to see that the latest central bank switch occurred around the time the gold price moved above $US2000 an ounce, because since hitting a record $US2070/oz on August 6, the overall gold price trend has been down.

Stretched government budgets could see more central bank sales, which will make it hard for the gold price to move back about $US2000/oz, as some investors expect given the high level of political and economic uncertainty in major economies, especially the U.S. as it enters the final weeks of the Presidential election campaign.

But even if the gold price has stalled, that’s not going to be the case with interest in gold miners, which continue to post fat profits at the current gold price with M&A now seen as a growth option, especially if a deal can cut costs and boost profits.

It is the estimated synergy savings of up to $2 billion from merging Northern Star with Saracen which will spark other M&A deals, with investors certain to demand that management in other companies look to similar transactional value creation.

A measure of what value-accretive M&A can do to share prices can be found in the Northern Star + Saracen deal, with both companies enjoying a 12% share price boost in a week when the gold price fell by $US12/oz to $US1885/oz.

Interestingly, other gold stocks also gained a little ground at a time of a falling gold price thanks to discovery news and a growing expectation of more M&A activity. Perseus added 6c to $1.41. Resolute put on 5c to 94c and St Barbara rose by 7c to $3.07 before easing towards the close of trading yesterday.

Gold M&A, plus the news that central banks have flipped from gold buyers to sellers, will be hot topics at next week’s Covid-delayed Diggers & Dealers forum in Kalgoorlie.

Discovery news will also be closely watched as the cash raised over the past 12-months by explorers continues to produce eye-catching results such as Gibb River Diamonds impressive strike at Edjudina, north-west of Kalgoorlie, with a best hit of 3.97 grams a tonne over 36m from a depth of just 4m – good enough to give the stock a 255% boost from 4.5c to 16c.

Always a gold-heavy event, D&D this year will also be a WA-heavy event because of WA’s hard border keeping out interstate and international delegates, but that hasn’t stopped Macquarie Bank from naming a few stocks to watch.

Northern Star and Saracen, naturally, are top of the Macquarie watch list, though the bank is research-restricted because of involvement with both companies.

Top Macquarie gold pick ahead of D&D is Silver Lake (up 15c to $2.41), for its “organic” growth options while Westgold (up 26c to $2.62) has operational leverage and Bellevue (up 6c to $1.14) continues to deliver strong exploration results, including a report yesterday of a new high-grade shoot at its namesake project in WA, with a best assay of 1.9 metres at 58 grams a tonne from a depth of 380.5m.t

Other Macquarie tips include OceanaGold, which is said to have “relieved” funding pressure through a $C150 million capital raising, and West African Resources following encouraging assays in its latest round of drilling.

Nickel will also feature heavily at the forum thanks to local production of the metal, its growing role in battery technology, and a price which appears to have started moving up after a steep slide in September. Most nickel miners firmed this week. Mincor added 5c to 87c and Western Areas put on 15c to $2.20.

Iron ore stocks continued to defy predictions of a steep price fall. Fortescue rose by 90c to $16.97 with Macquarie maintaining a price target of $19.40. Minerals Resources did better with a rise of $1.30 to $25.43 (Macquarie is tipping $31), and Mt Gibson added 2c to 74c (Macquarie’s tip is 95c).

How long the iron ore boom can last is becoming an interesting question because apart from Macquarie, most other banks see a price cliff in the not-too-distant future with the latest note of caution coming from Shaw and Partners which reckons it’s time to be “long” gold, “fade” iron ore and time to take a fresh look at coal.

Morgan Stanley is also maintaining its optimistic view on coal, noting that the price of high-quality coal shipped out of the NSW port of Newcastle has risen from $US50 a tonne to $US55.5/t, with October futures contracts being written at $US59/t – a trend which helps explain why Bell Potter is sticking to its buy tip on Whitehaven Coal and price target of $2.15 – 102% higher than last sales at $1.06.

As an industry-wide comment, the top news of the week was a prediction from Jefferies, a U.S. investment bank, that a successful Covid vaccine could unleash a wave of pent-up demand which would benefit base metals such as copper and nickel.

“All things considered, we believe we’re heading into the sweet spot for the mining cycle,” Jefferies said.

Other news and market moving events this week included:

  • Yandal Resources added 11c to 36c after reporting encouraging assays from its Gordons Dam gold project near Wiluna in WA with a best intersection of 1m at 73.12g/t within an 8m zone grading 11.03g/t from a depth of 36m.
  • Musgrave reported a new gold target 400m south of its Twilight project near Cue in WA with a best result of 13.4g/t over 5m from 28m. On the market, Musgrave rose by 3c to 56c.
  • De Grey Mining continued its run of success at the Hemi project near Port Hedland in WA with the pick of the latest assays being 3.2g/t over 38.4m from a depth of 205.5m. On the market, De Grey gained 5c to $1.24, and
  • RareX continued to lead the way in a strengthening rare earth sector, adding another 5c to 16.5c, though that price was down on the 12-month high of 21c reach in early Thursday trade. Other rare earth stocks also benefited from increasing U.S. Government interest in the sector. Lynas added 30c to $2.71 and Australian Strategic Minerals was 35c higher at $2.70.

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