|Summary: Three forces are driving gold up from its low point, but the most important is the least recognised – the return of the consumer. Here are three low-cost gold producers with a solid track record of good management and with strong growth prospects.|
|Key take-out: While exchange-traded gold funds sold down their positions over recent months, driven by hedge funds and speculative investors, demand for gold jewellery, coins and bullion has increased substantially.|
|Key beneficiaries: General investors. Category: Shares.|
Medusa Mining: Outperform (under review).
Troy Resources: Outperform (under review).
Northern Star: Outperform (under review).
Conditions are perfect for the gold price to rise, but even the threat of a US missile attack on Syria and a strike by South African mine workers are playing second fiddle to a more important factor in the gold market – the return of the consumer.
All three of those forces were at work in the gold market last night as the price of the metal shot back above $US1400 an ounce and was trading today at around $US1412/oz ($A1557/oz).
Syria, and the walkout by South Africa mineworkers, could continue to influence the price of the metal for weeks to come and are causes for an investor flight to safety.
Consumer buying, however, is a more permanent influence, which should prevent the gold price falling further. And it is an important reason for investors to take a fresh look at the gold equities sector of the ASX, which has been thoroughly trashed this year.
Before looking at three equity entry points for a return to gold, a few numbers tell the story of how gold has once again become an affordable luxury for consumers who had been blasted out of the market during its 12-year long rise to an all-time price peak of $US1920/oz in late 2011.
The price fall to $US1192/oz in June represented a 38% fall in the gold price in less than two years, a buy signal for people wanting to wear gold as opposed to those who wanted to lock it away.
According to the World Gold Council, “disinvestment” from exchange-traded funds this year has totalled 600 tonnes of gold.
On the other hand, gold jewellery demand has risen by 24% to 1,126 tonnes in the first six months, led by Indian, Chinese and Middle East buyers.
Bullion coins, a favourite of household investors, have also been in demand, with coin sales rising from 630 tonnes in the first half of 2012 to 900 tonnes in the first half of this year.
Those “consumer numbers” are sending a message that a floor has been established under the gold price after its spectacular fall, and while gold equities have pummelled some investment portfolios the situation has stabilised.
As a guide for anyone keen to re-visit a sector which retains a legitimate role in a portfolio able to tolerate a touch of risk, here are three starting points. All are low-cost gold producers with a solid track record of good management and with strong growth prospects.
Medusa Mining (MML) – Outperform.
One of the lowest-cost goldminers listed on the ASX, Medusa operates the small but expanding Co-O mine in the Philippines.
Last financial year the company produced 62,243 ounces of gold at a cash cost of $US313/oz. The result was worse than the previous year when the cash cost was restricted to just $US261/oz, but more ounces (60,595/oz) were produced.
It’s the financial performance of Medusa more than the number of ounces mined which stands out, together with an ongoing expansion program.
Last year’s production, combined with gold on hand, saw Medusa sell 77,488oz to generate revenue of $US100.7 million, an increase of 28% on the previous year’s $US81.2 million.
The company does not hedge, or forward sell any of its gold, preferring full exposure to the daily market price. This policy saw it lift pre-tax profit last financial year by 9% to $US63.2 million at a time when many other goldminers were reporting hefty losses.
No dividend was paid last year as Medusa embarked on a $US70 million expansion project designed to lift annual output to 200,000oz, which management believes will be produced at an eye-catching $US220/oz next year, rising to $US230/oz in 2015 and beyond.
On the market, Medusa was sold down heavily between late 2011 and June this year, falling from $8.35 to a multi-year low of $1.26 on June 25.
Since then, Medusa has been in recovery mode, rising to $2.62, earning a please explain “speeding” inquiry from ASX regulators on August 21, and replying with a standard “know of no reason”.
The obvious explanations for Medusa’s 107% rise from its late June low point is that the gold price has recovered some of its lost ground, the Co-O mine continues to yield low-cost ounces, and the mine expansion program is on time and on budget.
Not widely research by Australian stockbrokers, Medusa has a strong London following. Of local brokers who do track the stock there is a mixed view. Deutsche Bank has a hold recommendation and a price target of $2.30, which the stock has already exceeded. Citi has a buy (along with Goldman Sachs) and a price target of $3.20.
Troy Resources (TRY) – Outperform.
Once a pure Australian goldminer, Tory has put almost all of its eggs in a South American basket, and because of that it is a perfect takeover target for a gold-hungry North American miner.
Buying for a bid is, of course, highly speculative but it is a valid reason when the underlying performance of the stock is sufficiently well balanced in terms of production, costs and growth potential.
Troy has all three of those attributes, plus the appeal of a share price which has crashed back to Earth after a run-up to $5 late last year. This was followed by a fall to $1.22 early last month as investors worried about the price paid for the takeover of smaller rival, Azimuth Resources.
Since hitting that rock bottom price Troy has been recovering, trading more recently at around $1.72 thanks to completion of the Azimuth acquisition, a reasonable profit of $18.6 million in difficult circumstances, discovery news, and growth potential.
The current engine-room at Troy is the Casposo mine in Argentina, with a fading contribution from the Andorinhas mine in Brazil. Casposo produced 69,314oz of gold and 1.36 million ounces of silver last financial year at a cash cost of $US563/oz. Andorinhas produced 33,688oz at a cash cost of $US799/oz.
In the year ahead, Casposo will start accessing deeper, higher grade ore, and the next project, the West Omai discovery made by Azimuth in Guyana, will start to take shape as a mine, as well as the source of news flow from ongoing exploration.
Interesting as an ASX-listed stock, the combination of assets in Brazil, Argentina and Guyana, makes Troy a logical addition to a North American miner, perhaps sooner than later.
Northern Star (NST) – Outperform.
Unlike many of its fellow goldminers, Northern Star managed to increase its profit last financial year, cut production costs, pay a reasonable dividend and deliver solid exploration results, which should ensure ongoing production and financial success.
The improving outlook, which has been aided by the gold-price recovery, is reflected in the stock’s share price, which has risen from 53c in late June to around 90c, an impressive rebound but with further to go to reach last year’s peak of $1.58.
The key to Northern Star is the Paulsens mine in the Pilbara region of WA, an address better known for its iron ore. Worked without great success by earlier owners, the Northern Star management team has been able to unlock the geological secrets in Paulsens – and continues to do so.
Earlier this month, Northern Star reported a fresh discovery which runs parallel to the existing Voyager lodes that currently generate all of the project’s gold. Dubbed Titan, the new find promises to help expand output beyond the current 100,000oz a year, or extend the mine life beyond its current five years.
In a difficult gold market Northern Star really did star last year, lifting net profit by 30% to $28.3 million after driving the cash cost per ounce of gold produced by 5% to $680, while also distributing $10 million to shareholders by way of a 2.5c a share dividend.
Paulsens will remain the cash provider for Northern Star for some time with a second Pilbara development, the Ashburton project, on hold pending an improvement in the gold price.
As well as the Paulsens and Ashburton projects, Northern Star has an interesting joint venture with the big iron ore miner, Fortescue Metals Group. This gives it access to gold exploration on 8,500 square kilometres of FMG’s iron ore tenements.