Value in oversold gold developers as bullion gets a wriggle on

28th July 2022
Barry Fitzgerald

With last week’s prediction about an impending gold bounce starting to look well-timed, the likes of Bellevue and De Grey are offering significant upside while Gold Road is a pick of the producers. Plus, Strandline ‘keeping a lid’ on first mineral sands production as Coburn project revs up and Kairos’ eagerly-awaited Pilbara lithium assays due about now.   

There has been some joy this week for the gold stocks in response to the US dollar gold price improving from the recent lows of $1,683/oz to consolidate at prices of more than $US1,700/oz despite US Federal Reserve’s rate hike.

It was a relief rally of sorts for gold in response to the expected 75 basis points increase, the fourth consecutive hike as the war against rampant inflation – the friend of gold prices - was stepped a notch.

History shows that gold as an asset class usually outperforms after the first hike in an interest rate cycle. Now that the fourth in this cycle has arrived, gold’s recovery against an inflationary background should have been expected.

Besides, history also shows that gold usually performs best from August to December, and here we are, on the doorstep of August.

Last week it was mentioned here that given the gold price would likely trade higher on confirmation of the US rate hike, and the prospect that the US dollar was close to peaking. That led to the suggestion that the recent sell-off in the gold producers had been overdone, and that investors were beginning to nibble at the lower levels.

There was evidence of that during the week, notwithstanding confirmation in a flurry of June quarterly production reports that margins in the period were squeezed by gold’s retreat from the March peak of $US2,078/oz, and inflationary pressures on just about everything required to produce an ounce of the yellow stuff.

So what about equally – or worse – beaten up gold developers? They are also enjoying some nibbling at lower levels in response to the improved sentiment around the gold price.

But like the producers, their share prices have been reset to sharply lower levels to account for the twin hits of improving but lower gold price expectations, and the impact of industry inflation on the timing and capex estimates of their future mine builds.

The good news though is that despite the re-setting of developer share prices at lower levels, there is still plenty of share price upside to be had, more so than can be found in the producers on current gold price expectations.

All of that came through in a neat review of the developers/explorers by Canaccord this week in light of the industry’s inflationary pressures, supply chain constraints, and labour availability issues.

Given the severity of the inflationary pressures, and evidence from the June quarterlies of project delays and deferrals, Canaccord made the good point that the efficacy of development studies issued prior to 2022 was now questionable.

“In light of material cost increases highlighted by recent studies, we have revised our development capex and modelled ASICs for our ASX gold developer coverage, with capex increased on average by 22% and life-of-mine AISC up 8%,” Canaccord said.

“As a result, we cut our developer price targets by an average of 24% (26% lower for the explorers).”

Ouch!

Not to worry, because the developers have moved into oversold territory in recent times, Canaccord’s resultant reduced share price targets remain well ahead of current share prices.

Some examples (Canaccord is now using a lower $US1,826/oz price deck for 2023 and a 67.9c exchange rate assumption):

Bellevue’s (BGL) price target was reduced from $1.55 to $1.45 which compares with Thursday’s price of 80.5c. Tietto’s (TIE) target was cut from 85c to 65c compared with its 48c market price. De Grey’s (DEG) target price was cut from $2.15 to $1.80 compared with its 87c market price.

Gold Road to De Grey (DEG):

The June quarterly report from Gold Road (GOR) was the pick of the crop. It was rewarded accordingly, popping 8.5% higher in Thursday’s market to $1.34.

It reported production at its 50%-owned Gruyere mine was a record 85,676 ounces at an ASIC of just $A1,250/oz as a result of the higher grades the joint venture with Gold Fields (operator) has been working towards capturing coming to the fore.

Cash and equivalents grew to $161m, up from $138m, and it remains debt-free. It is also in the process of wrapping up its scrip bid for DGO, which apart from some other bits and pieces, delivered a 14.4% shareholding in De Grey.

It seems likely that Gold Road will not be stopping at 14.4%. An initial move to 20% would make sense, followed by discussions about a nil-premium merger. No guarantees in any of that. But it does seem the most likely course.

Gold Road’s growing cash position would make financing the $850m development of De Grey’s 10 million ounce Mallina deposit in the Pilbara easier to achieve, and while it is not the operator at Gruyere, its senior management does have deep mine development experience.

In relation to the scoping study capex cost of De Grey’s development of an initial 430,000/oz a year mine (It is expected to be upgraded to an annual rate of 500,000/ozs in the coming preliminary feasibility study), the Canaccord report mentioned above increased its capex estimate for the project to $1 billion.

STRANDLINE:

The Diggers & Dealers bash kicks off beneath Kalgoorlie’s big blue sky on Monday. Apart from the expected record attendance of more than 2,600 COVID-brave delegates, a record 70 companies will be presenting over the three days.

Attention spans will be stretched to deal with the 70 presentations, and there is always the temptation to head off to the Palace Hotel for a long session while the production line of presentations grinds on.

So it has been a smart move by Strandline’s (STA) Luke Graham to post a project update on the ASX , as well as a snappy video presentation, on pretty much all that needs to be known about the mineral sands developer ahead of the conference.

Strandline was mentioned here on July 12 when it was a 35c stock. It has since edged up to 39c as the re-rating Graham alludes to in the video presentation begins to take shape. Shaw and Partners, which is rated on its coverage of the mineral sands sector, has an 80c price target on the stock.

In a research note on Strandline’s update on Coburn to the ASX, the broker said the company continues to expect first production in the fourth quarter, but it is now possible that first production could be delivered before the end of third quarter.

“Like the coach of a good footy team heading into the September finals, CEO Luke Graham is ‘keeping a lid on it’,” Shaws said. “We also note recent positive commentary on zircon and titanium feedstock markets from Kenmare and Iluka. The markets remain tight and prices are currently about 35% ahead of Strandline’s DFS assumptions.”

KAIROS:

Talking about D & D, Kairos (KAI) said back on July 12 that it expected lithium assay results from samples taken from its recent Lucky Sump discovery in early August. And here we are, with D & D to start on August 1.

It was named Lucky Sump because the pegmatite with interpreted crystals of the lithium-bearing mineral spodumene were encountered next to the company’s Mt York gold deposit during some routine earthmoving work.

Lucky Sump is all of 4km from Pilbara’s (PLS) money-printing Pilgangoora lithium operations, so there is a fair chance interest in the assay results will be elevated. Kairos last traded at 2.6c.

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