St Barbara Gold: The 16.4 bagger!

A junior gold miner’s remote mine has proved richer than first thought.

Summary: Gold miner St Barbara has risen by an eye-watering 1640 per cent in the past year. St Barbara’s Gwalia mine had been discounted as a profitable project but fresh exploration drilling has revealed thicker and richer seams. The company plans to add more years to the mine’s life.

Key take-out: The high Australian dollar gold price has boosted a number of ASX-listed gold miners over the last 12 months besides St Barbara, including Newcrest, Saracen, Northern Star and Evolution.

Key beneficiaries: General investors. Category: Gold.

The gold price might be under pressure for the reasons listed by Barron’s in its latest look at the metal (see How low can gold go?, published today). But that does not mean that all gold producers are facing tough times with a handful of local miners performing exceptionally well.

A stand-out example is a company that many investors have forgotten, St Barbara.

Any suggestion 11 months ago that St Barbara Ltd could become one of Australia’s top performing stocks would have been laughable given the miner’s poor record, but that is precisely what’s happened thanks to a relatively strong Australian-dollar gold price and new life in a 119-year-old mine.

Gwalia, a mine with a remarkable history, has made a surprise return as a mine with an equally remarkable future.

That no-one expected Gwalia, located near the remote WA town of Leonora, to return as the driver behind St Barbara can be seen in its share price, which has risen by an eye-watering 1640 per cent from 7c in early December last year to recent trades at $1.22.

St Barbara is not alone as a business able to capitalise on the combination of a reasonable US dollar gold price and a lower Australian dollar exchange rate, a combination which has driven a number of local gold stocks sharply higher.

Northern Star, Evolution Mining and Saracen Mineral Holdings are another three companies which have expanded rapidly thanks to the effects of the high Australian dollar gold price and the sale of Australian assets by US-based mining companies.

Newcrest, the biggest of the ASX-listed gold miners, has also enjoyed a sharp share price rise over the past year. But its 43 per cent increase to $13.64 pales alongside Saracen’s 185 per cent price increase to 57c, Northern Star’s 172 per cent rise to $2.49, and Evolution’s sector-leading 212 per cent increase to $1.36.

All gold stocks have benefited from the currency effect on gold in Australia with the local price continuing to sit around $A1560 an ounce, an historically high level which underpins the profitability of most miners, and has made gold (in its physical form or via equities) one of the better investments in Australia over the past year.

Whether there is more to come in gold is an interesting question. Barron’s thinks not for a number of reasons, including the prospect of higher US interest rates.

Whether gold is an investment worth considering is one you must ask your adviser as this report is not investment advice but is a look at one of Australia’s more extraordinary mining revival stories which has seen St Barbara propelled out of the penny-dreadful ranks to a company valued today at $609 million.

One reason St Barbara’s Gwalia mine had been discounted as a profitable project is its depth. With workings already stretching more than 1500 metres (1.5 kilometres) below the surface, Gwalia is one of the deepest mines ever dug in Australia.

But fresh exploration drilling has revealed thicker and richer seams beyond the current workings which should be sufficient for Gwalia to drive on to a depth of at least 2200 metres and for its life to be extended for at least another seven years.

The old mine which counts former US president (and mining engineer), Herbert Hoover, as one of its original investors, has returned as the star in St Barbara’s otherwise tatty collection of assets and failed developments that stretch back more than 40 years.

Gwalia was inherited when St Barbara acquired most of the gold assets sold by the administrators of the failed Sons of Gwalia, but was not considered the best assets because of its age and production history which dates back to 1896.

The first campaign at Gwalia lasted more than 60 years, ending in 1963, partly because the gold price was pegged by the US Government at $US35 an ounce, and partly because the mine was becoming too costly. It returned in 1983 thanks to a gold-price boom, but closed again in 2002.

Until recently Gwalia was seen as a secondary asset of St Barbara which had staked its future on gold projects on other mines which have largely failed to deliver, a reason (along with the gold price) why the company’s share price collapsed from $2.30 in late 2012 to last year’s low of 7c.

The Gwalia revival is being driven by the same factors which attracted explorers to the Leonora region more than a century ago, high-grade gold seams plunging deep into the ground.

A glimpse of what’s happening at Gwalia came in St Barbara’s September quarter report released last week which revealed that the mine produced 72,388 ounces of gold at an all-in sustaining cost of just $692/oz – generating a profit margin of more than $900/oz and producing positive cash flow approaching $70 million for the quarter.

The keys to that result were the grade of the ore being mined, 9.7 grams a tonne which came from higher grades “shoots” in the mined areas, together with a high level of ore extraction.

What comes next is the interesting question because very few Australian mines reach the depths being achieved at Gwalia which is approaching levels generally seen only in low-cost mining regions such as South Africa where some mines are being worked well beyond 2000m.

St Barbara’s plan is to add more years to Gwalia’s life, either by continuing to drive the decline deeper (a corkscrewing roadway down to the mine face), or sink a shaft to provide easier access.

Three shaft models, along with other underground changes, are being examined with costs ranging from $100m to $250m for a full-scale development, and taking up to two years to dig.

Macquarie Bank in a report written two weeks ago after a visit to the Gwalia mine said it expects production to continue until at least the year 2022 thanks to the potential addition of a shaft and continued strong exploration results from deep drilling which shows that the orebody remains thick and rich.