Gold’s against-the-odds push through $US1,300 an ounce fuelled a massive re-rating of the gold producers in the past couple of months.
So much so that the hard-nosed types in the market reckon the leading gold producers have become too expensive on a net present value basis.
None of that means much if gold continues to build above $US1,300 an ounce. But the very same reasons why gold wasn’t meant to get there in the first place (expectations of rising US rates and a stronger US dollar from tax reform) have not gone away.
So stand by for a raft of downgrades on the producers from buys to neutral, and god forbid, the odd sell recommendation. At the same time, there will a rotation out of the established producers in to the gold mine developers.
The hefty share price gains the producers received in the last couple of months means at current prices, investors are paying around $6,000 an ounce on an EV/production basis. That’s fine if you think the gold price rise has more in it but is a bit worrying if it hasn’t.
The developers, on the other hand, have also enjoyed strong share price gains of late but are trading at around $2,000 an ounce on a (prospective) EV/production basis. Prospective is the key word there given that the developers are not yet in production.
So there are risks around things such as commissioning, confirming grades and recoveries and final capital costs to consider before abandoning the established producers.
But with equity values for the producers to trade in line with gold price moves for the time being, there is better value to be had among the developers. Macquarie is one to think so.
“The recent rally of Australian gold equities into the New Year, supported by a sector wide buoyancy over 2HCY17, in our view, has led to an erosion of value of many of the junior and intermediate Australian gold producers,” Macquarie said in a note to clients this week.
“With the erosion of value of domestic producers, our value has shifted to developers and offshore producers.”
Its preferred domestic developer was Dacian (DCN) which is trading at $2.92 for a market cap of $609m. It is storming towards first production at its 200,000 ounce-a-year Mount Morgans gold project near Laverton in Western Australia by the end of the March quarter.
An update from the company yesterday said that the treatment plant was 90% complete and is on time and budget. Underground and open-cut mining is underway.
Plus, little Stavely awaits drilling results in its hunt for a big copper-gold discovery. Read more +
