Gold stocks poised for re-rate on strong quarterly cashflows

Much hope is being placed on the potential for a significant re-rate of the ASX gold sector once June quarterly reports are done and dusted.

The optimism is based on a gold price that is currently more than $500/oz higher than its average in the June quarter last year.

So free cash flow figures for the current June quarter should be nice and pumped.

It is assumed it will be a case of the sector’s FCF being too strong to ignore and could finally do away with the long-standing disconnect between the rise in the gold price and gold stock valuations.

The extent of the build-up of cash inside the gold producers was on full display during the week at Ramelius (ASX:RMS).

It spent $85m acquiring an intriguing 8.9% stake in its Murchison neighbour Spartan (ASX:SPR).

Ramelius said it was still holding in $446m in cash and gold after the pick-up and forecast that it would continue to generate significant FCF over the medium term.

Add back the $85m from the Spartan foray and cash and gold would have been $531m, or $124m higher than the $407m in cash and gold held at the end of March quarter.

That sort of FCF growth is being repeated at most, but not all, of the gold producers and is due to hit onlookers square in the eyes in coming weeks.

Today’s specific interest though is in Calidus (ASX:CAI) which has been sorting out the worst impacts of its hedge book and getting its Warrawoona gold operation in the Pilbara on song.

Its share price has been smashed to a 52-week low of 10c a share (10.5c in Thursday’s market) pending the efforts being translated into some serious FCF generation for the company with its $85m market cap.

It has just put some pep into its FCF outlook by releasing an initial resource estimate for the currently-mothballed Nullagine project in the Pilbara, acquired late last year. A restart plan is to follow in the September quarter.

Without an ore reserve for the restart stated just yet (September quarter as well), there hasn’t been much else Calidus could say.

But Canaccord, which has a 29c price target on the stock without pricing in the Nullagine upside just yet, has had a bit of a dive into what Nullagine could mean on the FCF front in a June 14 research note.

“Assuming mining dilution of 20%, a 900,000t Golden Eagle mill (Nullagine) could yield 30,000-40,000 additional ounces for Calidus on top of the 80,000oz of gold production we currently model from its Warrawoona mine in CY2025,’’ Canaccord said.

“If AISC of $A2,300/oz could be achieved and the gold is sold at spot, the Nullagine gold project could yield annual FCF of $20-$30 million.’’

That’s interesting in itself for a gold producer with an $85m market cap.

But then Canaccord goes on to say it is currently modelling Warrawoona’s FY2025 FCF at $77m.

“We await release of the planned feasibility study in the September quarter 2024 before formally modelling the Nullagine gold project as a production scenario, but we believe the above demonstrates the appealing plan, at least on paper,” Canaccord said.

Rare Earths:

Futurist-types will tell you that we are witnessing the dawn of an investment thematic to out-do all others – the AI-driven rise of humanoid robotics.

There’s no surprise that Tesla’s Elon Musk is a fan of the thematic. He said recently that Tesla’s (androgynous) Optimus robot would be available for sale next year.

In the same breath, he said the robot could one day drive Tesla’s $US625 billion market cap to $US25 trillion, or more than half of the value of the S & P 500 today.

Musk later followed up by predicting that there will be a market for up to 10 billion robots – one for every person, untold numbers in industry, and of course their military applications.

It was typical grand-standing stuff from Musk but perceptive nevertheless given the US and China are already squaring off as to who will dominate the robot industry.

Perceptive too in that A1 seems to be wonderful stuff but what is the big and disruptive revenue stream it can deliver. Humanoid robots – androgynous or not – seem to be the answer.

But wait HAL, we have a problem. Electric vehicles are heavy on permanent magnets produced from rare earths but robots take things to the next level.

Musk’s prediction of 10 billion robots doesn’t even have to get close to being on the mark for demand for rare earth magnets to take off into uncharted territory.

It is a subject that US rare earths producer MP Materials raised at J.P. Morgan’s Energy, Power & Renewables Conference in New York on June 17.

MP’s chairman and CEO James Litinsky said that it was likely that the robots coming our way would have two to three times the magnet content of your average electric vehicle.

More than that though, if demand for the magnet rare earths (NdPr) for things like EVs, hybrids, wind turbines and so was dialled back to zero, there would only enough of the stuff for 50 million robots.

“Certainly not the 10 to 20 billion that are being talked about,” Litinsky said.

“So if you believe one-tenth of that market potential, then certainly there’s going to be an enormous bull run around the need for incremental supply in NdPr (a number of years down the line.”

His commentary on our robotic future comes as the non-China rare earths industry – essentially the $US2 billion MP and our own $5.5 billion Lynas (ASX:LYC) – is dealing with a brutal bear market in rare earths.

But it can’t go on much longer as even the Chinse producers (80% of the global market) would be losing money at current prices.

And then there is the issue of China having to think about holding back its rare earths exports in support of its own robot ambitions for industry and the military.

So investors in the space don’t need to dream as big as Musk to perhaps start positioning to the robot revolution. Why, if only a fraction of Musk’s crystal-balling comes to pass, even the beaten up rare earth explorers could be worth a look.

It is notable that given all of the above, Lynas has just stepped up its NdPr separation capability at its operations in Malaysia, and that rare earths developer Meteoric (ASX:MEI) has signed up for a potential supply deal with Latin America’s first permanent magnet maker. Both stocks have been trading at or near 52-week lows.

It is also worth mentioning that MP and Lynas were involved in merger talks earlier this year that did not go anywhere. But bear markets in commodities can force a rethink on these things.

Also, it was reported at the time of the now aborted MP/Lynas merger talks that Gina Rinehart had assembled a 5.8% stake in Lynas, and a 5.3% stake in MP. It is not known if she is a robot fan or not. But robots in the mining industry does seem a natural progression from driverless trucks and remote boggers.