Treasure Chest: Finding Value In The Gold Sector

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Australia’s mid-tier gold miners have had a strong FY18 but are they too well priced, and is there opportunity elsewhere?

-Oz mid-tier miners outperform gold price
-Relative value apparent in smaller developer/explorers
-Valuations stretched for producers
 

By Greg Peel

Last week’s Macquarie Security Australia Conference included a day of presentations from leading ASX-listed gold producers, developers and explorers. What particularly impressed Macquarie’s analysts was the breadth of growth options being generated and delivered by the sector.

Backing this up is a big increase in exploration, which has already delivered new discoveries, and a drive to embrace new technology. Companies now have the balance sheet strength to facilitate change and grow their businesses, Macquarie notes. The analysts believe the local sector will continue to outperform on the global stage.

This outperformance has been evident in a 17% rise, FY18 to date, in the ASX gold index, led by mid-tier stocks. Emerging gold plays have also fared well, note the researchers at Argonaut, helping to drive the ASX small resources index up 48%. Over the period, the AUD gold price has risen 10% and the USD price 7%.

Argonaut believes this outperformance has been driven by North American investment in Australian gold miners when US gold miners have underperformed.

By Argonaut’s calculation, US miners have returned around -3% in value in FY18 while the average of Australian returns is +5%. But within that average, a core group of mid-tier miners has returned 30-80%.

Too Much?

Ord Minnett has long held the view that the ASX gold sector looked inexpensive versus its global peers, and this recent breakout in valuation versus the gold price is supported by the value creation occurring within these companies via operating efficiencies, strong cash generation and reserve replacement.

But have the mid-tier producers now run too far?

Argonaut believes so, suggesting further significant upside is hard to identify from current valuations. But Argonaut notes that over the same period, emerging developers have recorded only incremental gains. The analysts argue that in the near term, investors will look to come “down the curve” into the developer space for value.

Here, Argonaut’s key picks are Dacian Gold ((DCN)), Gascoyne Resources ((GCY)) and Gold Road ((GOR)).

Dacian poured its first gold at its Mt Morgans development at the end of March, having completed the project on time and on budget. Macquarie also has Dacian among its key producer picks (Macquarie now identifies Dacian as a producer), along with St Barbara ((SBM)), Saracen Mineral Holdings ((SAR)) and Regis Resources ((RRL)).

Among the developers/explorers, Macquarie likes Gold Road and West African Resources ((WAF)).

St Barbara and Regis Resources are also favoured by Ord Minnett, but the broker believes they have now run too far, hence a downgrade for St Barbara to Hold from Accumulate and to Lighten from Hold for Regis.

Ords also has Evolution Mining ((EVN)) and Northern Star Resources ((NST)) on Hold ratings, leaving OceanaGold ((OGC)) as the only mid-tier producer retaining an Accumulate rating.

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