Rivers of gold whet investors’ appetite for developers and explorers

Lots will be written on the reasons why gold has shot through $US2,000/oz, seemingly on its way to record levels.

The latest push higher was a response to weak jobs data out of the US. Treasury yields and the US dollar fell on renewed recession fears. All that provided fresh gold momentum to the upside.

But there is a bigger picture out there which Sprott Inc, ever a bull on the gold price, summed up nicely during the week.

Sprott managing partner John Hathaway reckons the failures of Silicon Valley Bank, and the shotgun marriage of systemically-important Credit Suisse to UBS, has given rise to questions over the solvency of the global banking system.

So if you have money, you would be starting to worry about it disappearing.

“Rising interest rates have turned much of the asset side of the banking system balance sheet into bad loans. The experience of loan losses will turn lenders cautious. That caution will reduce credit availability and likely cause a recession, which in turn will undermine the ability of borrowers to repay their loans,” Hathaway said.

His solution for investors to the uncertainty is to turn to gold, through one of Sprott’s physical gold ETFs in the space, at any rate.

“The metal has no counterparty risk (unlike all other financial instruments including bank deposits and government bonds), is highly liquid and has an unbroken record of retaining value in absolute terms and relative to financial assets,” Hathaway said.

He added that during the last seven “crisis” periods since 2007, gold has demonstrated its value as a haven asset. On average, for the seven periods, gold bullion has returned 10.93% compared with minus 14.75% for the S&P 500 Total Return Index, and a positive 4.08% for U.S. Treasuries (at 31 December).

Whatever the deep underlying reasons for gold’s return to favour, more certain is that it is having a nice rub-off effect on ASX listed gold producers, developers and explorers.

Long-ignored because the focus was on the now-fading lithium space, the gold sector is back in town.

Gascoyne Resources (ASX: GCY)

It has got to be a source of frustration to own a 2.5mtpa treatment plant that has been parked up while the Aussie gold price is messing with $3,000.

It is a situation that Gascoyne (GCY) finds itself in. But Gascoyne boss and former Northern Star operative Simon Lawson wouldn’t have it any other way.

Lawson made the tough call last November to park up the company’s Dalgaranga treatment plant near Mt Magnet in WA’s Murchison. The plant was on song but a head grade of just 0.8g/t gold was making things tough.

High inflation and the skill and supply shortages in the WA mining industry didn’t help.

Normally, when an operation goes into care and maintenance mode it is an open-ended thing.

But it is different for Gascoyne thanks to the discovery of the high-grade Never Never deposit just 1km from the treatment plant and the main open pit, not long after Lawson became MD.

It has been worked up to more than 300,000oz at 4.64g/t, with more to come from the current drilling program.

Lawson never wants to be producing gold from a head grade of less than 1g/t again. So he has mapped out a 15-month plan to have an initial five years of mine life at about 1.5g/t before switching Dalgaranga back on.

That others liked the plan came through in the $50m funding package Gascoyne put together earlier this year to chase down becoming a 130,000-150,000oz producer of much more profitable ounces, starting towards the back end of next year.

It is something that Never Never and other new targets at Dalgaranga has made possible.

Gascoyne put on 0.5c to 10.5c in Thursday’s market in response to the kick higher in the gold price. That makes for a $75m market cap.

Take some but not all of $50m cash in the till (a portion gets to work on drilling out the 5-year higher grade reserve), and Gascoyne stands, on an enterprise value/replacement basis, as one of the better value stories in the new high gold price environment.

Rox Resources (ASX: RXL)

Being able to match up impressive exploration results to the gold price spike is also having a nice effect on the market-rating of Rox Resources (RXL).

It shares popped 7c or 25% higher to 34.5c in Thursday’s market, with resource development drilling at its Youanmi project near Mt Magnet returning more high grade hits, including 6.53m at 10.31g/t gold, from drilling on the Link lode.

A big drilling program at Youanmi – it was a producer from mainly refractory ores up until 1997 when an Aussie gold price of $A450/oz made things all too hard – started in January across resource development drilling and exploration drilling.

Apart from Link, the market has also got excited about high-grade hits coming from the Midway and Youanmi South areas, with the latter said by some to have the hallmarks (28m at 34.81g/t) of being a potential game-changer for the company and the project.

Earlier scoping work pointed to a 71,000oz a year operation at Youanmi producer of gold in concentrates and dore, costing $134m and with a mine life of an initial 8 years.

The bigger picture emerging at Youanmi comes as Rox moves to acquire the 30% of the project it does not already own from long-time partner Venus Metals for scrip and the extinguishment of a $6.1m loan.D

When it is all said and done, Rox’s market cap will be about $115m. For that, Rox comes with an existing resource of 3.2Moz. Refractory ores are not for everyone. But there is a deep market in China and other parts of the world for the stuff, particularly the low-arsenic type Rox expects at Youanmi.

RED 5 (ASX: RED)

Red 5 was in the happy position this week of being able to match up the gold price rise to record gold production in March at its new King of the Hills (KOTH) gold mine near Leonora.

KOTH has taken longer than previously forecast to hit is straps, with the company saying all along we just had to wait until mining in the KOTH open cut got stuck into higher grade material from the primary orebody on the granodiorite/ ultramafic contact.

Now that it is in the good stuff, production in March took off to a record 17,550oz from the processing of 400,000t of ore at an average head grade of 1.49g/t, taking output the March quarter to 40,867 ounces from 1.04Mt grading 1.32g/t.

So the improving trend has been established, allowing Red to confirm previous guidance for output in the second half to come in at 90,000 – 105,000 ounces at an AISC of $A1,750 – $A1,950 per ounce.

Achieving second half guidance will go a long way to restoring Red’s share price, which took a battering last year on concerns things weren’t going well in the open cut or the underground at KOTH.

Those now-easing concerns, and this week’s gold price run, was enough to drive Red shares 3c or 20% higher to 18c for a market cap of $550m in Thursday’s market.

The company is in the process of completing a $90 million equity raising to ensure there are no cashflow dramas ahead of KOTH getting to originally-promoted annual output of 200,000oz, and to help fund work aimed at utilising the spare capacity, and possibly the expansion potential, of the new KOTH treatment plant.

Red’s good news on KOTH comes as the much-vaunted rationalisation of the Leonora district via a merger between Genesis (GMD) and St Barbara (SBM) hit a snag because of yet another production downgrade at St Barbara’s ageing Gwalia mine.

Terms of the nil premium merger are to be recut and it has got to be wondered if the brand new KOTH mill with its spare capacity and expandability should be part of a broader rationalisation in the ore-long/mill-short Leonora region.