That virus and these interest rates underpinning a strong case for gold

Northern Star, Orecorp, Silver Lake, Bellevue, Saracen and Red 5: A six-pack of the best from the sector
6th March 2020
Tim Treadgold

The old saying about gold loving a crisis has never been more true, and while that’s easy to see thanks to the turmoil triggered by fear of the China coronavirus, it is less easy to understand why gold has surged and retreated several times in recent weeks.

No-one can claim to know the reason for each upward and downward move in the gold price; the metal is exposed to so many forces that any one of them could be the driver at a particular time.

What is important to recognise when considering an investment in gold (in its many forms) is that gold is a lot more than just another commodity and that it moves in both short-wave and long-wave cycles as factors tug it in different directions.

Today, the “cyclical stars” are aligned. Short wave pressures include a worldwide flight to the safety of gold, initially from the effects of the China v US trade war and now from the threat of a global slowdown courtesy of the coronavirus leading to reduced industrial production – and that’s before getting to the issue of ultra-low interest rates which enhance gold’s appeal against interest-paying instruments – including US Treasury bonds.

The long wave pressure, which is arguably more significant than day-to-day events, is a loss of faith in the US dollar (the primary currency in which gold is traded) during the first four years of the presidency of Donald Trump, who has been working in the interests of gold by resorting to the printing press to stimulate economic activity – and the more dollars which are printed, the more debased the currency, which makes gold more appealing.

This week’s big interest rate cut by the US central bank was a classic example of the grand game of “interest rates v gold”, with the gold price jumping sharply immediately after the 0.5% cut in Federal Reserve rates.

Along with interest rates, the next best measure of long-wave positive factors working for gold is the consistent re-allocation of funds held by non-US central banks into gold, and when the world’s major owners of an asset (which is the case with central banks and gold) are buying, the greater the chance that the value of that asset will continue rising.

Analysed any way you like, the case for gold in today’s financial and economic climate is strong, but that doesn’t answer the question of what’s the best exposure to gold.

At risk of annoying some readers, my personal view is that if you want to own gold then buy physical gold – and pop it in the bank, which might sound like a silly idea of returning a metal to underground storage not long after it has been dug up.

Physical gold, however, is beyond the reach of governments and their money-printing presses and the multiple external factors which drive the domestic economy.

If physical gold sounds unappealing then look at exchange-traded gold funds or even the gold-backed instruments offered by the Perth Mint, a century-old government owned (and government guaranteed organisation) which does little more than process and market gold.

But if it’s a dash of excitement you’re after, then there is a smorgasbord of gold mining and exploration stocks to choose in a sector of the mining industry in which Australia excels.

It’s not possible to name every gold stock on the ASX, so here are my six of the best, starting with a regular favourite, Northern Star, a company which has run rings around the older players in the game by boldly buying when others were selling – a maxim of the world’s top investor, Warren Buffett (who also advises the reverse when conditions change: sell when others are buying).

Northern Star (NST):

One of Australia’s great gold success stories, and that’s saying something after more than a century of gold mining success that dates back to the Victoria and NSW rushes of the 1850s, followed by the WA rush of the 1890s.

Northern Star has played a blinder since it emerged from nowhere to snap up the small Paulsens mine in the iron country of WA’s Pilbara region in 2010, a low point in the gold-price cycle when the metal was trading at less than $US1100 an ounce – and $A1200/oz in Australian dollars.

That simple start became a marvellous example of a principle first noted by the Greek mathematician and philosopher Archimedes. who said that with a fulcrum and a lever long enough, he could “shift the world”.

Paulsens was the fulcrum for Northern Star, the lever has been a series of deals which have the word leverage all over them, with each deal a step-up from the last to the point where Northern Star has shaken off its penny dreadful tag of 2010, when it was trading at 3c, to the status of gold leader with a share price of $13.19 (and a recent high of $15.28) and stock-market value of $9.7 billion.

It’s highly unlikely that the management team at Northern Star will stop what they’ve started with annual gold production heading for the one-million-ounce mark from assets that now stretch from Kalgoorlie to Alaska.

Definitely a stock with stars in its sights and a perfect example of how leverage works.

Orecorp (ORR):

Not a widely-followed stock because it was mired for a year or so in the mess which is the politics of Tanzania, a gold-rich East African country which was passing through one of those routine “African moments” but which now appears to have clear air.

Casting aside the location risk, and everything in Africa has risk written over it, you’ll find a company with its foot on a big and rich gold deposit discovered more than a decade ago by global gold leader, Barrick but never developed because it didn’t meet Barrick’s demands for mega-projects.

Orecorp’s management team has re-interpreted the geology (and geometry) of the Nyanzaga project and found a smarter way to extract the best ore and emerge with a mine expected to yield 213,000 ounces of gold a year over an initial 12-year campaign at a highly attractive all-in cost of $US858 over the life of the mine.

Backing Orecorp, if you’re interested, is as much as backing a project ready for development as a management team as good as that in charge of Northern Star.

Silver Lake (SLR):

After a near-death experience in 2012 when it expanded too far, too fast, just as the gold price tanked from around $US1700/oz to $US1250/oz in less than 12-months, Silver Lake is a born-again gold story.

By returning to its backyard close to Kalgoorlie where it has a series of mines in the Mount Monger region, as well as the Deflector mine in the Murchison region of WA, Silver Lake has reverted to its roots – and looks a lot better for it.

Gold production in the December quarter was a record 68,519 ounces at an all-in cost of $A1223/oz, roughly half the current Australian dollar gold price.

Investors have forgiven (if not forgotten) Silver Lake’s ill-advised adventures of 2012, more than doubling the company’s share price over the past 12-month to around $1.58 which values the once-troubled business at a healthy $1.4 billion – with multiple growth options.

Bellevue Gold (BGL):

If grade really is king in mining then Bellevue is well placed to demonstrate the profit-making potential of high-grade gold at its namesake project in WA, which was once ranked as Australia’s highest-grade mine yielding more than 800,000oz at an eye-catching 15 grams a tonne.

The new-look Bellevue is poised to start life with a resource of 2.2 million tonnes of ore assaying 11.3g/t, which qualifies it as one the richest undeveloped gold assets in the world.

A busy eight-rig drilling program is underway at Bellevue, with the aim of converting a resource into a reserve in the second quarter of 2020 with an updated global resource figure expected soon, a key step in a return to mine development.

Saracen Minerals Holdings (SAR):

Rapid growth gave Saracen’s share price a dose of indigestion last year but in hindsight the fall to $2.82 in mid-December was a perfect buying opportunity with the stock now sailing along at around $4.11 and with a number of investment banks tipping $4.70 as the next target.

A gold-producer with exposure to three high-quality mines close to Australia’s gold capital, Kalgoorlie, Saracen is on track to produce 500,000 ounces this year, rising to 600,000oz in 2021 with at least 10-years of reserves in hand.

UBS and Macquarie Bank are among the latest to raise their share-price forecasts and maintain buy tips on Saracen, with UBS noting that the company offers high production growth out to 2025 with the acquisition of a half-share in Kalgoorlie’s Superpit mine representing a “step change” in the financial performance of the company.

Red 5 (RED):

Turning old gold into new money is a specialty of Red 5, which operates the historic Darlot mine in the north-east goldfields of WA while also planning to redevelop the Tarmoola mine as its King of the Hills (KOTH) project.

The net result is that Red 5 should be seen as a stock on a growth path which will lead it to the status of a multi-asset mid-tier gold producer with a large and growing gold inventory and the potential for a lot more to come from exploration around existing assets and from an extensive tenement position.

On the market, Red 5 has been a star since this time last year, rising from around 12c to 32c with the next driver being the release of a final feasibility study later this year into the development of a stand-alone processing plant at KOTH.

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