Dollar excites a sector, but for some it's the pits
The famed Diggers and Dealers "conference" concluded last week and certainly lived up to its Bacchanalian reputation, even in the wake of a gold price that has fallen about 30 per cent in the past 10 months and a decline of about 60 per cent in the ASX index of gold companies.
No doubt the bounce of many resources stocks in the sector got them going. Most have benefited from the 15 per cent fall in the Australian dollar in the past two months with the prospect of expanding profit margins. The price of iron ore at $US130 a tonne, translated into Australian dollars at US90¢, is $144. The gold price at $US1300 is worth $1430 an ounce.
But the stock that is possibly generating the most excitement isn't one that will benefit from the weaker Australian dollar for some time. We're talking about the explorer Orbis Gold (ASX code OBS), whose stock has almost trebled in the past month or so.
Orbis has a prospect in Burkina Faso, West Africa, and announced a maiden resource of 1.8 million ounces of gold at 3.7 grams a tonne, which is apparently good grade for ore contained in a pit. It has another prospect about 150 kilometres away and a total resource of 2.5 million ounces at 4.1 grams a tonne, which is a good start, according to one trusted rock expert. Exciting stuff, but whether this company can convert its prospective drilling into a higher share price before it needs to inevitably raise capital is another matter.
One stock that is further along the development curve is Doray Minerals (DRM), which poured its first gold recently at its Andy Well mine 45 kilometres north of Meekatharra, Western Australia. An Under the Radar favourite is the producer Northern Star Resources (NST), which has a small reserve base of 150,000 ounces of gold at its Paulsens mine near Kalgoorlie. This equates to a mine life of just 1½ years. The hope for shareholders is that it can extend its mine, which Bill Beament's team have been successfully doing since it first paid $40 million for the mine in mid-2010.
Geologists on the ground are now talking up the prospects of its recent Titan discovery, which is a mere 100 metres from the Paulsens mine and touts a hole that returned 6.9 metres at 24.7 grams a tonne in gold.
When the hangovers from Diggers fade, your columnist believes that the producers who don't have to go back to the market for money will sleep easier than pure explorers, who do.
It's one thing to find gold; it's something else altogether to find finance.
Richard Hemming edits the fortnightly newsletter Under the Radar Report: Small Caps.
Golden dawn
Frequently Asked Questions about this Article…
The article says ASX-listed gold stocks rocketed up an average of about 25% in July largely because the Australian dollar weakened. A roughly 15% fall in the Australian dollar over the prior two months boosted translated revenues and the prospect of expanding profit margins for resource companies, helping gold and other resources shares bounce.
A weaker Australian dollar increases the Australian-dollar value of commodities priced in US dollars. The article gives examples: iron ore at US$130 a tonne translated to about A$144 at roughly US$0.90, and a gold price of US$1,300 translating to about A$1,430 an ounce. That currency swing can expand local profit margins for miners listed on the ASX.
Orbis Gold's stock almost trebled in the month mentioned after the company announced a maiden resource in Burkina Faso of 1.8 million ounces at 3.7 grams per tonne, plus a nearby prospect that brings total resources to about 2.5 million ounces at 4.1 g/t. The article notes this is a good start for an explorer, though converting prospects into lasting share-price gains before needing to raise capital remains a key question.
Doray Minerals poured its first gold at the Andy Well mine, located about 45 kilometres north of Meekatharra in Western Australia. The article describes Doray as further along the development curve compared with pure explorers.
Northern Star has a relatively small reserve base at its Paulsens mine—about 150,000 ounces of gold, which the article equates to roughly a 1½-year mine life. Geologists are optimistic after a nearby Titan discovery about 100 metres from Paulsens, including a drill hole that returned 6.9 metres at 24.7 grams per tonne that could help extend the mine.
According to the article, producers who don’t have to go back to the market for money will likely 'sleep easier' than pure explorers. The key point is that finding gold is one thing, but finding finance is another—explorers often need to raise capital, which adds financial risk.
The article describes the Diggers and Dealers conference as high-spirited (even 'Bacchanalian') and a focal point for optimism, despite a gold price that had fallen about 30% in the prior 10 months and roughly a 60% decline in the ASX gold index. The conference highlighted renewed excitement driven in part by the weaker Australian dollar and a bounce in resource stocks.
Based on the article, key risks include: explorers like Orbis needing to convert resources into economically viable mines and likely having to raise capital; short reserve lives at producers such as Northern Star’s Paulsens that require successful discovery or extension to maintain production; and broader commodity and currency moves—gold prices and the Australian dollar—driving share-price volatility.
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