Katana's top 2 gold stocks

Gold may be sitting in the shadow of crypto, but over the weekend, the gold price reached a record high of US$2,120 per ounce. At the current exchange rate , this translates into $A3,250 per ounce. An extraordinary price.

                                                                                                               Source: Factset and Tradeview

Despite these record prices, gold stocks have been tracking sideways at best. We see some excellent opportunities in this space and currently own 6 ASX listed companies. The 2 with the best prospects in our view are West African Resources Limited (ASX: WAF) and De Grey Mining Limited (ASX: DEG).

West African Resources Ltd (ASX: WAF)

Last week, WAF released its updated 10-year life of man plan. A number of brokers subsequently released updates valuing the stock well north of $1.50 per share and one as high as $2.25 per share. And this was before the latest up-tick in the price of gold.

We are not aware of any 200kozpa low-cost gold producers trading on a market capitalisation of less than $ 1bn. For the 2023 calendar year, WAF produced 226koz from its Sanbrado mine at an all-in sustaining cost (AISC) of US$1,126 per ounce. This generated not only a significant paper profit, but more importantly strong operating cashflow. This factor alone justifies a notably higher valuation.

But the real appeal for Katana, is the rapidly developing Kiaka gold project south of Sanbrado. This is a mid-scale but world class, low strip, open pit development. Company releases confirm a 19-year mine life averaging 220kozpa. With first production slated for the 2^nd half of 2025, this will elevate combined production to >400kozpa. On the current market capitalisation, this seems an excellent risk-reward opportunity.

As with every company, it is important to understand why we believe it is ‘mispriced’. In the case of WAF, the market would appear to be concerned with two issues: 1) funding and 2) country risk.

In the case of the first issue, WAF have repeatedly stated that they are fully funded to first production and do not need to raise capital. As a worst case, if they need/choose to raise, it is unlikely to be more than $100m to $200m; which is a modest 10-20% of the current market cap. So not material, even in the “worst case scenario”.

With respect to Burkina Faso (country risk), there are superficially some valid concerns around sovereignty. But what investors may not be aware of is that:

• West Africa is now the largest gold producing region globally.
• Burkina Faso is the 2^nd largest producer in West Africa.
• Burkina Faso is ranked #1 for gold discoveries over the past decade.
• The country is also ranked #1 globally for permitting times and construction costs.

It is also worth remembering that every country has sovereign risk – including Australia. In the past 2 years alone, we have seen a lack of industry consultation leading to the sudden implementation of significantly higher coal royalties, mandatory coal reservations, increased gas tariffs and threats to revoke or reduce existing LNG export licenses.

Additionally, we must consider risk in light of the potential upside. In the case of WAF, most brokers are forecasting that post the commissioning of Kiaka (2025), the company will enter a period of enormous cash generation. The well regarded analyst at Barrenjoey for example, forecasts WAF will generate >100% of its market capitalisation in free cash flow in just 3 years . This is an extraordinary - if not unprecedented - level of cash generation.

De Grey Mining Limited (ASX: DEG)

DEG is at the construction end of the spectrum, but is a similarly high quality and undervalued company in our view.

DEG is Australian based, and in fact not just Australian based, but Pilbara based. Few if any mining districts in Australia boast better credentials than the Pilbara region in terms of access to skills, infrastructure, logistics and efficiency, and certainty of approvals.

And DEG has scale – global scale. In the recently released Definitive Feasibility Study (DFS), DEG highlighted that the Hemi mine would average 530koz per annum. This would elevate the project into the realm of the top 3 producers in Australia. At 530koz per annum, it is also the 3rd largest undeveloped gold project globally. And importantly the only one in the top 3 that is based in Australia.

Impressively this production is based purely on reserves. There is substantial upside to come from drilling out the resource categories for both Hemi and nearby prospects, which currently stand at nearly 13m ounces. There is also exploration upside from a large number of drill ready targets.

The all-in sustaining cost (AISC) of <A$1,300 per ounce is amongst the lowest of any new development. For cashed up global producers, this stock must surely be the standout on all metrics. In fact, we are struggling to see a universe in which this company is not taken over. There is simply only a handful of assets of this scale and quality anywhere on the planet.