AU$ gold hits new all-time highs

Since the beginning of 2016, we have observed key positive catalysts for gold including: 

1. Economic and political uncertainty following the Brexit referendum -  increasing the likelihood of other populist election victories across Europe and the USA; 

2. US Fed rate rise expectations being pushed out for the foreseeable future; and 

3. Ongoing USD weakness. 

Gold in US$/oz (grey line in the chart below) has had a solid move off its recent lows and gold in A$/oz (“A$ gold” - green line in the chart below) is hitting all- time highs. Combined with input cost deflation since the previous boom, various Australian gold producers are achieving record margins. 

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Source: Bloomberg, Paragon 

We have particular interest in the Australian gold space leveraged to A$ gold, specifically, stocks that are: 

1. Strong free cash generating mid-to-large-cap producers with self-funded growth; and/or
2. Emerging producers boasting high-margin, low capital-intensity assets with solid mine life and/or exploration upside. 

We discussed this recently in a livewire video – Positioning for strength in Aussie Dollar gold. (VIEW LINK) Following is an update on two of our gold holdings. 

St Barbara (SBM). St Barbara’s cornerstone asset is its world class Gwalia gold mine - one of the best gold operations in Australia. St Barbara is self- funding Gwalia’s 15% production increase to 300koz pa. Based on spot A$ gold Gwalia is running at outstanding ~100% margins. Bob Vassie, MD & CEO, in our view, is the best in the business. He has turned around the company’s fortunes by improving productivity at Gwalia, improving underperforming operations at Simberi, and disposing of the problematic Gold Ridge in the Solomon Islands. His execution has been extraordinary, saving the company from going into administration, by turning a previously highly geared balance sheet to what we expect to be net cash by the end of the year. Despite St Barbara’s material share price re-rating, at spot gold prices of A$1,814/oz it is still trading at an attractive proforma FY17F EV/EBITDA multiple of ~5x, compared to producing peers’ average of ~8x. Further, we expect this gold bull market to lead to an expansion in multiples - see Chart 2 below. 

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