The price of gold in Aussie dollars has NEVER been higher… 3 gold stocks to consider

Romano Sala Tenna

Katana Asset Management

On Friday, the price of gold that Australian producers receive, reached an all-time record high. Not even when Adam was a boy, did gold trade at this level.

And yet as we can see from this chart, gold stocks have failed to keep pace with the current rally.

Source: Katana and FactSet

There are always reasons for such divergence, and indeed some of them are valid. For example, there is a healthy scepticism that this gold rally will hold. Clearly the horrendous and tragic events in the Middle East have sparked the latest rally. And as with many geo-political events, the impact tends to be transient rather than structural.

At a stock level there are also issues around cost escalation, ever present production issues and declining grades.

But even if gold were to consolidate below the current level, there still appears to be a disconnect between what producers are earning and what they are being valued at. So how are we playing gold? We tend to avoid explorers and categorise gold stocks into 3 buckets:

1. larger scale producers,

2. emerging producers and

3. developers.

Regis Resources Limited

Equities
Our top gold pick was 230% higher when gold was last at this price
. The table at the end of that article best summarises why we have invested in this company and the potential price triggers.

Tietto Minerals Limited

The emerging end of the market entails a disproportionately higher level of risk and uncertainty, and accordingly, investors should demand a notably higher level of return. Mean reversion does not apply to emerging gold producers. The landscape is littered with producers that have not reverted in any way shape or form to their former self, but rather have continued to decline until the CEO resigns, the plant is put on ‘care and maintenance’ (a wonderful euphemism), the stock is delisted and the company eventually declares bankruptcy. And not necessarily in that order!

We would strongly caution investors to do multiples of their research before investing in such companies. But the rewards are there for diligent and experienced investors. At Katana, we don’t deviate into this realm too often, but one that caught our attention is Tietto Minerals Limited (ASX Code TIE).

Tietto has a market capitalisation of less than $500m, despite having just updated the market with a revised long term production forecast of 170kozpa at an impressive all-in sustaining cost (AISC) of US$982/oz . The peer group that offers similar levels of production, are trading at closer to $800m+ valuations. And few can match Tietto’s low production costs, strong balance sheet and pathway to further production growth. Of course, Tietto is trading at a discount for a reason, being that management failed to deliver to plan during commissioning. So cautious money will wait and watch for signs of improving grade, mining productivity and production. But if Tietto deliver to spec, then the wave of buying will follow.

In the developer segment, we see De Grey Mining Limited (ASX Code DEG) as being the standout. De Grey is looking to develop the world class Hemi Gold project in the Pilbara region of Western Australia. If you could choose any region in the world to develop a gold mine, this would be close to the top of the list.

De Grey Mining

In late September, De Grey released a much-awaited Definitive Feasibility study. This study concluded that the mine would average 530koz per annum at a low cost of <A$1,300 per ounce (versus spot price north of A$3,000 per ounce). On these numbers, the project will repay its capital in 1.5 to 1.8 years on the back of an internal rate of return of 36% post-tax (45% pre-tax)

And almost as important, the study utilised only reserves (99%) which stands at 6moz. Firstly, this provides a high degree of confidence that production will be met. But secondly, it provides substantial upside as the total global mineral resource estimate (MRE) stands at nearly double the reserve (11.7moz) and is open in multiple directions. With the recent in-fill drilling now complete, we would expect to see exploration drilling yield further growth in the MRE in the coming months.

Longer Term Outlook for Gold

As mentioned, the horrendous situation in the Middle East has triggered the short term uplift in the gold price. But this will pass (hopefully sooner rather than later) which will cause this premium to evaporate and the gold price to retrace. The question then, is what is the longer term outlook?

I’m not sure if there is anything harder to call than the gold price, and there is no shortage of conflicting opinions. But when we cut through the noise, what we do note is that US budget deficits are increasing and the interest costs are accelerating. As this continues, the most likely outcome is that the US$ will come under pressure at some point. And a declining US$ has been one of the top drivers of the gold price in past cycles.  

........
The information contained in this article is provided to each recipient on the following basis: this article has been produced by Katana Asset Management (KAM). This article does not purport to contain any information that the recipient may require to evaluate KAM’s performance KAM is the holder of Australian Financial Services License No: 288412. none of KAM, Katana Capital Ltd, their respective directors, officers, employees advisers or representatives (collectively the representatives of the company/license) make any representation or warranty, express or implied, as to the accuracy, reliability or completeness of the information contained in this article and nothing contained in this article is, or shall be relied upon as a promise of representation, whether as to the past or the future. except insofar as liability under any law cannot be excluded, the Beneficiaries shall have no liability arising in respect of the information contained in or not contained in this article. statements in this article are made as of the date of this article unless otherwise stated. this is a general article only and it is not a recommendation and there is no consideration of the personal circumstances of any person;under no circumstances should this be taken as financial advice.

Romano  Sala Tenna
Portfolio Manager
Katana Asset Management

Katana Asset Management was founded in September 2003 as a boutique investment management firm. Katana employs an all opportunity investment mandate being style, sector and market cap agnostic.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.

Comments

Sign In or Join Free to comment