Buy Hold Sell: 4 undiscovered gems as gold prices hit record highs

There are a couple of hot commodities right now, including uranium, cocoa, and gold. The latter exploded higher in February this year after being stuck in a range for the best part of five years.

Several reasons have been offered for gold's renaissance, the primary being that investors who expect the Fed to cut rates have been buying the commodity. 

A low-interest rate environment reduces the opportunity cost of holding non-yielding gold and weighs on the US dollar, making bullion cheaper for non-US buyers. 

One of the other reasons has been the buying of central banks - led by the People's Bank of China - to ease reliance on US dollars. Central banks have always viewed gold as a store of value and a haven in times of economic volatility - the type that might be precipitated by dramatically changing rate expectations. 

Whatever the reason for the rally, gold is hot and investors have been keenly focused on the opportunities presented by the rich assortment of gold stocks available on the ASX. 

To help you sort the wheat from the chaff, we sat down with Lowell Resources’ John Forwood and Acorn Capital’s Rick Squire for their top picks and outlook on the gold sector.

Note: This episode was recorded on Wednesday, 10 April 2024. You can watch the video, listen to the podcast, or read an edited transcript below.

Edited transcript

Chris Conway: Hello and welcome to Livewire's Buy Hold Sell. My name is Chris Conway. The gold price has soared more than 14% over the last six months and is now trading at all-time highs but many gold stocks are yet to play catch-up. So today, we're joined by two small resources specialists in Lowell Resources, John Forwood, and Acorn Capital's Rick Squire for their top picks and outlook on the small cap gold sector. John, I'll come to you first. Gold prices, all-time highs, as we said in the intro. Can prices stay at these levels and where are we at in the cycle?

Where are we in the cycle?

John Forwood: Look, it's a fascinating time, Chris. I saw a comment yesterday that analysts are dumbfounded by the gold price. I traditionally have looked at interest rates, particularly out of the US, and the outlook for interest rates as a real driver or inverse correlation to the gold price. But we're seeing inflation expectations rising - good data out of the US in terms of employment, etc. And that would normally feed through to higher for longer in terms of interest rates which should be bad for gold. But the fact that we're seeing gold rising to all-time highs in the face of that headwind is really... You can take it two ways and think, "Oh, it's defying gravity," or you can say, "That's really good that it's rising even in the face of these headwinds." I tend to be in the latter camp. We could see a double-dip inflation like what happened in the 1970s. For gold to be performing in that environment is really positive.

Chris Conway: Rick, what about you… anything to add there? What's your view on the cycle, bullish or bearish?

Rick Squire: We're pretty positive on gold. Similar reasons to John. The dynamics are unusual for most people in terms of their knowledge or their experience in the market. So then, what we then look at is, "How do we see that in terms of the cycle for the gold stocks that are in there?" And certainly, the gold producers have been great performers in the last six months or so and a few of the juniors have really struggled. But even in the last three or four weeks, we've seen a real change in the market where we've seen a couple of companies, juniors, that have done a raise and their share price has actually responded positively after that.

So a good one was Waratah (ASX: WTM), [it] recently raised some money and the share price jumped 15-20% after that. And we haven't seen that for nearly two years. And then, we've seen a couple of these small companies like Lefroy (ASX: LEX) now really come off the floor. Now, having said that, they've come off the floor but they're back to the prices they were in November. But on no particular news, there's been a sharp rebound. So I think we're into that part of the cycle where some of those juniors are really starting to re-rate and move. So now, it's a matter of identifying the best opportunities and which ones are going to run the hardest in that rebound.

The next big opportunity?

Chris Conway: Rick, you touched on it there. I might dig a little bit deeper in terms of where you believe the next big opportunity is. It seems like it's in the juniors, as you were just saying.

Rick Squire: Yeah. I think so. And that can be driven by two things. It can be driven by organic growth which is drilling and making a discovery. But also, I think that inorganic growth is the way, so through merger and acquisition. Because investors are looking for the next Bellevue (ASX: BGL), the next big development project and it's hard to see. De Grey (ASX: DEG) is out there. It's a really big company. It has a long timeline. Predictive (ASX: PDI), is a great company but it's been known about for a while in terms of where it's going to go from here. But what's the next one that's going to come in and fill that gap and get that rapid growth into that development slot? One way to achieve that is to merge with another company and I think there are actually too many gold juniors out there at the moment. If you merge two or three of them together and make something out of that, there'll be a really strong re-rating for the companies that can actually achieve that.

Chris Conway: John, what about you? Do you take the same view or is there a different take on where you think the next big opportunity is in gold?

John Forwood: We saw Newmont (ASX: NEM) share price go up and they're the big boy in the room. Up 6% the other day after the gold price hit another all-time high. So we are seeing a re-rate occurring in the big end of town. And Rick mentioned, you're seeing perhaps patchy re-rating at the small end of town but coming off an extremely low base. So I think for us, we look for significant upside in the junior sector and I think that it's absolutely latent with it at the moment.

Risks investors need to be aware of

Chris Conway: John, I'll stay with you. Risks, what do investors need to be aware of when they're considering the gold opportunity?

John Forwood: Metallurgy is always a risk. There's some great projects out there with lots of resources but some of them may be refractory. So you could have lots of ounces, really good grade, but can you actually produce the gold? That can be a metallurgical challenge. Australian gold companies are exploring in pretty much every country in the world. So you need to be wary of sovereign risks and that can be more than just nationalisation. It can be, "Okay. Like Tanzania did 10 odd years ago, we're just going to put the royalty rate up to some eye-watering level which makes all projects uneconomic." So yeah, you just do need to be a bit wary of the jurisdiction.

Chris Conway: Rick, what about you in terms of risks? Anything to add there?

Rick Squire: The only other one to add is just make sure they've got enough money to afford that exploration program. Which it might sound like a really simple one, but there are a lot of companies that batten down the hatches - they're not raising any money but they're still spending it just to stay alive. If the market can see that the company has income issue, it doesn't matter how good their project is, everyone's going to stand off. So just make sure they're reasonably well-funded.

Overpriced gold names

Chris Conway: Rick, that's a nice segue for the next question. Stocks that might be a little bit overvalued. Again, this is another sector that's run really hard. All the share prices have been moving. What's one that you think's a little bit overcooked at the moment?

Genesis Minerals (ASX: GMD)

Rick Squire: For us, it's probably Genesis at the moment. While it's a great management team and the 3 to 5-year outlook is great, the next 12 or 18 months, they're operating a mine which is a challenging asset that they're mining at Gwalia. While the longer-term outlook is good and for those that got a 3-year view, that's totally fine. But as an investor that might be taking a 12-month view, I think there are better opportunities over the next 12 months to be there and then you can actually come back in. So in 12 months time, I certainly won't be saying it. But for the moment, I can't see any reason to be there.

Chris Conway: John, what about you, one that you think's a little bit overcooked at the moment?

Bellevue Gold (ASX: BGL)

John Forwood: One that's done a fantastic job but does have a pretty reasonable valuation at the moment is probably Bellevue. Moving into commissioning and first production. While it might not have a lot of downside, we don't see it as having as much upside as perhaps some of the other more leveraged players that you could get.

What are you buying?

Chris Conway: John, I'll stay with you. Let's talk stuff that you do like. Two names that you have been buying or looking at closely at the moment.

Astral Resources (ASX: AAR)

John Forwood: A couple of ASX-listed companies. The first one is a company called Astral Resources which is very close to home. Well, in the heart of the Western Australian goldfields which is a real tick. There's been quite a bit of M&A activity happening in WA goldfields over a period of time and there definitely will be more. Astral is sitting on 1.3 million ounces. They've got a very large open pit development proposal there. And they've got a really sweet satellite project with some really nice high grades in there which could add into the early days of that project. But also, they're within spitting distance of Gold Fields's St. Ives plant which, as I understand it, does need ore. So they've got a couple of options in terms of development. So we really like that one with a forty-odd million dollar market cap.

Matador Mining (ASX: MZZ)

The other one, also ASX listed but active over in Newfoundland, is a company called Matador which we've been in for quite some time. I see it as having a really extensive strike extent of really well-mineralized belt shear zone called the Cape Ray Shear Zone. And it is a little bit reminiscent to me of a company that we did really well in a couple of years ago called De Grey up in the Pilbara which had the Mallina Shear, had tens of kilometres of Mallina Shear. A few resources already defined on there but some really good exploration potential. And that's what Matador offers. So while the share price has been really beaten up, we think that they're plugging away, doing the right thing, methodically exploring, and they've got one of the Canada's better respected larger gold companies in B2Gold (TSE: BTO) as one of their more substantial shareholders which is providing technical input. So yeah, that company gets a tick from us as well.

Chris Conway: Great explanations. Thanks, John. Rick, we'll finish with you. Two that you're really liking at the moment.

Awale Resources (CVE: ARIC)

Rick Squire: We really like Matador too. In fact, I went out and had a look... Went out the site last September and had a look around. So for all the same reasons, I like that. But another one we recently got into was Awale. It's a TSX listed company. It's really early days. It's one hole. But they made a really interesting discovery of what's called an iron oxide-copper-gold deposit which you'll see things like Ernest Henry or the really big things like Olympic Dam but you do get some gold rich systems.

Very similar to what you see in Brazil. But geologically, South America and West Africa were once joined and it's the same belt that crosses into Côte d'Ivoire. And so, they're seeing very similar style of a deposit. Now, it's really early days and that's my spicy one for the mix. And they only own what could be 20% of it. But if it grows, it could be something really exciting. A bit like Greatland Gold and their Havieron deposit. That 25% of something super exciting can still be really valuable.

Predictive (ASX: PDI)

The other one is a little bit different. It's Predictive, PDI, that normally we don't worry too much about the M&A opportunity. But I think Predictive is where the value of the company is and the quality of the asset. And the recent announcement has shown the quality of their exploration potential that still remains there, that we think that's a great opportunity and we're seeing that the big well cashed up producers are actually looking for companies. While Guinea has got its challenges with the military junta in place, as perverse as it might sound, that regime seems to be doing a lot of the right thing to protect and to keep the country going. Unlike places like Mali and Burkina Faso, which is a stark contrast to how those countries have been run. That they're continuing to go well. So I think if they can get over their permitting issues, get a line of sight on developing the project, it's got a great potential.

Chris Conway: Great. Again, great explanations. And I'd like to thank both of you for explaining them to me in a way that I would understand. If you enjoyed that gold special, make sure to give it a like and don't forget to follow our YouTube channel because we're adding lots of great content every single week.