Gold's turn in the sun

Old advice can be good advice, especially in gold mining where the maxim “follow the money” can reward investors, as a series of recent discoveries demonstrate.

Helping add value to the discovery news is a strong gold price, which has underpinned a recovery in the mineral exploration industry where expenditure rose by 15 per cent in the March quarter.

The improved performance of the overall mining industry and the extra spending on exploration, the lifeblood of mining, caught the eye of analysts at HSBC Bank Australia in a report published on Monday, which noted the “mining exploration and profits bounce”.

“With conditions improving mining companies have started to lift their spending on exploration, which rose in the first quarter (of 2017) to be 15 per cent higher year-on-year,” HSBC said.

“These numbers are still at low levels, having fallen by 67 per cent between 2012 and 2016 but appear to be past the trough.”

In simple (and theoretical) terms, the extra money spent on geological field work, especially drilling, is the key to discovering the next generation of mines.

A bonus in the current market is the gold price, which has been nudging the $US1300 an ounce mark, having already cleared $A1700/oz, a level at which only the most incompetent gold miner could lose money.

Examples this week of what the increase in exploration spending can achieve for miners, especially gold miners at a time of high prices, include:

• West African Resources hitting a half-metre thick intersection assaying a massive 1613 grams a tonne (1.6 kilograms a tonne) in a hole drilled at its Sanbrado project in the African country of Burkina Faso. That result, and other encouraging assays, lifted the company's share price by 28 per cent to 37c on Wednesday 7 June before it eased back to 32c.
• Middle Island Resources reporting an exceptionally thick intersection of gold-bearing material while drilling at its Two Mile Hill project near Sandstone in central WA. The 415.2m zone assayed 1.34g of gold per tonne, and while low, it is the thickness which counts because it creates the potential for large-scale bulk underground mining. On the market, Middle Island's share price rose by 52 per cent to 3.2c before slipping back to 2.5c.

Both companies are relatively small. West African is valued at $155 million, Middle Island at just $15 million, with their size a factor in the discoveries receiving little attention outside the specialised world of mineral exploration.

But the discoveries also demonstrate the flow of money from capital raisings by both companies over the past year is funding exploration and leading to discoveries.

In West African's case, a $21 million capital raising last August has underpinned fieldwork. The much smaller Middle Island raised a modest $1.76 million in early March to fund work on its Sandstone project.

HSBC traced the process of capital raising for exploration leading to discovery and possible mine development in its latest comments, which noted that the headwinds buffetting the resources sector up to 2016 had become a modest tailwind.

“The boost to incomes has already arrived in the form of a sharp rise in mining profits,” HSBC said of a 113 per cent year-on-year increase in mining company profits revealed in March quarter data.

“The next step is that mining investment should start to stabilize, as the projects which have been under construction are completed.

“A lift in exploration combined with increased spending on maintenance and repair of existing projects should support capital spending.”

Other examples of fresh capital delivering results include:

• Breaker Resources raising $12.4 million for work on its Lake Roe gold discovery in WA where the latest drilling has confirmed a wide, shallow, and high-grade gold deposit which included 4m at 119.24g/t, and 12m at 11.2g/t. On the market, Breaker traded up on Wednesday 7 June to a 12-month high of 76c, valuing the company at $96 million.
• Dacian Gold raising $92.2 million in February as part of a funding package for its Mt Morgans mine in WA. Since early May the stock has risen by more than 30 per cent to $2.11.

The key to what's happening in the gold sector is the price of the metal, which has moved erratically over the past 12 months, from a high of $US1366/oz 11 months ago to a low of $US1125/oz in late December, and now back up to $US1286/oz.

For Australian-based gold miners the price moves have been amplified by changing currency values. The price peaked, and hit an all-time high of $A1823/oz, in early July last year when the exchange rate was US72.5c.

The current exchange rate of US75.3c means the local gold price has been able to move back to around $A1704/oz, but remains heavily influenced by the US dollar price and the exchange rate.

For the Australian gold mining industry, conditions are arguably the best they have ever been. Costs are down because the slowdown in the iron ore sector has freed up workers and equipment, combined with the near-record gold price, and an abundant supply of fresh capital for exploration and mine development.

The flipside of gold enjoying its turn in the sun is that good times for gold can often signal bad times for everything else.