3 gold stars

Financial journalist
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Gold is steadily on the rise, on the back of its traditional role as a safe-haven investment, with the probability of a US recession looming, concerns that the Federal Reserve might not have finished its rate-hiking cycle, and stress over the US debt ceiling – if you look at the bond market, that is, and not the more blasé share market.

Financial year 2023 (FY23) saw the gold price increase by about 6% in US dollar terms, and 8.5% in Australian dollar terms, and that helped the All Ordinaries Gold index outperform the broader Australian share market by 24%.

Gold reached FY23 highs of US$2,049 an ounce, and A$3,102 an ounce. For many Australian producers, that drove strong operational cashflows and healthy margins. Although costs continue to rise, there are plenty of gold miners for which the numbers imply the good times continuing in the near future.

Goldman Sachs projects at outlook in which gold could reach a new record high of US$2,200 an ounce by 2025: not a prediction, but a highly conditional “could” depending on the macro-economic and geo-political environment. On the same basis, the investment banking giant sees a “feasible” gold price forecast for 2030 at about US$2,700 an ounce. If that were to be borne out, a lot of goldminers would be making serious profits.

There are always idiosyncratic risks with gold-mining companies – ranging from proving-up their orebodies, technical issues at processing plants, and even the risk of operating where they operate – but in the ever-changing dance of the costs of doing business versus what their gold sales earn, there is also, sometimes, good investment value for taking those risks. Here are three such situations; two of which carry heightened “sovereign risk” because of where their orebodies are on the map.

  1. West African Resources (WAF, 83.5 cents)

Market capitalisation: $914 million

12-month total return: –31%

Three-year total return: –7.7% a year

Estimated FY24 yield: no dividend expected

Analysts’ consensus valuation: $1.50 (Stock Doctor/Refinitiv, five analysts), $1.60 (FN Arena, one analyst: Macquarie)

As the name suggests, West African Resources operates in the west African country of Burkina Faso, which, for some investors, will carry significant sovereign risk, given the troubled geo-political situation in the region. But in terms of what the company can control, WAF has done very well: it poured the first gold at its Sanbrado operation in March 2020, and has made net profits in the past two years, of $214 million in 2021 and $184 million and in 2022. Sanbrado produced just under 230,000 ounces of gold last year and is expected to continue producing at that rate for more than a decade. In 2021 the company bought the nearby Kiaka and Toega projects, taking its resource base to 12.6 million ounces, and ore reserves to 6.4 million ounces.

In 2022, West African generated revenue of A$608 million from 233,930 gold ounces sold unhedged, at an average realised price of US$1,798 an ounce ($2,586 an ounce).

In the first half of 2023, WAR produced 113,009 ounces, at an All-in Sustaining Cost (AISC) of US$1,169 an ounce. (The AISC is a figure that incorporates not only the “cash cost” of production but all the costs that allow production to be sustained: it is the minimum price for which an ounce of gold must sell on the market to allow a producer to break even.) This generated revenue of A$309.7 million, and the company struck a net profit for the half of A$82.4 million.

The company maintained its 2023 guidance at a range of 210,000 to 230,000 ounces of gold, at an AISC of less than US$1,175 an ounce – that is definitely at the low end of the global cost spectrum, meaning WAF has excellent margins.

West Africa Resources (WAF)

In the interim result, West African told shareholders it was on track to become a 400,000 ounce-plus per year gold producer, with the development of its second gold mine, the 7.7-million-ounce Kiaka project, to the south of Sanbrado: the company is fully funded through to first gold at Kiaka, through a credit-approved US$265 million loan facility. The company’s ten-year production outlook estimates production of more than 200,000 ounces of gold a year in 2023 and 2024, and more than 400,000 ounces of gold a year from 2025 to 2032.

WAF has lucrative, low-cost, long-life gold operations in a major producing region; it looks very good buying at these levels.

  1. Perseus Mining (PRU, $1.81)

Market capitalisation: $2.5 billion

12-month total return: 23.4%

Three-year total return: 7% a year

Estimated FY24 yield: 1.6%, unfranked

Analysts’ consensus valuation: $2.55 (Stock Doctor/Refinitiv, five analysts), $2.30 (FN Arena, two analysts)

Perseus Mining also operates in West Africa, where it runs three gold mines: Edikan in Ghana, and Sissingué and Yaouré in Côte d’Ivoire. Perseus produced 535,281 ounces of gold at a low AISC of US$959 an ounce for FY23, outperforming both production and cost guidance. Revenue was up 27%, at $1.43 billion, pre-tax profit more than doubled, to $569 million, and net profit surged 70%, to $476.7 million. That is a remarkable figure, given that it is more than 60 times what Perseus was making in net profit just four years ago. A bonus dividend of 1.77 cents on top of the second-half payout meant that Perseus paid shareholders 3.54 cents a share for FY23, up more than 40% on the 2.45 cents a share paid in FY22.

Looking ahead to the December half-year, Perseus maintained its production guidance in the range of 262,100 to 277,120 ounces, at an AISC of $US1,080 to $US1,190 an ounce. The company has hedged 24% of its gold production over the next three years at an average price of $US2,008 an ounce, close to the record high of $US2,085 an ounce reached earlier this year. And the company has a cash and bullion stash of $US542 million ($848 million) of to play with.

Peruses Mining (PRU)

But with West Africa troubled by recent political instability, Perseus is in a similar boat to West African Resources, in that investors are under-valuing the stock quite significantly – as with WAF, investors who wish to take on this risk could be handsomely rewarded.

  1. Calidus Resources (CAI, 18.5 cents)

Market capitalisation: $112 million

12-month total return: –67.8%

Three-year total return: –30% a year

Estimated FY24 yield: no dividend expected

Analysts’ consensus valuation: 65 cents (Stock Doctor/Refinitiv, one analyst)

Calidus Resources controls the 1.7-million-ounce-resource Warrawoona gold project, located near Marble Bar in the Pilbara region of Western Australia. Gold was first discovered at Warrawoona in 1897. In 2016, Calidus began consolidating the tenements around the project, and commenced construction of the project in early 2021, following all regulatory approvals and completion of financing. The company began mining ore in August 2021, processing commenced nine months later, in April 2022, and first gold was poured at Warrawoona in May 2022.

The company is in the process of ramping-up production to an average production of 90,000 ounces a year, at a life-of-mine AISC of $1,290 an ounce, over a projected initial mine life of eight years. Stage two of the project envisages underground expansion, to 100,000 ounces, and stage three would take the figure to 130,000 ounces a year by adding the Blue Spec project, situated 70 kilometres from Warrawoona. All the environmental permits necessary to begin mining at Blue Spec were secured earlier this month.

The Blue Spec mine was discovered in the early 1900s and was mined historically to 320 metres of vertical depth. Calidus says the project has two high-grade deposits including the Blue Spec and Gold Spec deposits, which account for up to 190,000 ounces at a high grade, coming in at 24.4 grams per tonne (g/t) of gold. Both deposits are geologically “open,” meaning that there is plenty of potential to extend the resource through further exploration. Being so close to the Warrawoona processing operation, Blue Spec gives Calidus significant potential to boost its production profile and extend the mine life, at low cost.

Calidus also believes it can increase near-term production by mining the Blue Bar gold project near Warrawoona, which is part of the recently announced Haoma Joint Venture, of which Calidus owns 60%, with the rest owned by Haoma Mining.

Calidus Resources (CAI)

In the June 2023 half-year, gold production came in at 31,364 ounces, at an average realised price of $2,549 ounce, ahead of the AISC guidance of $2,000–$2,250 an ounce (which is projected to come down significantly as the project proceeds).

Calidus looks attractive enough just on its gold assets, but there is the bonus of a substantial portfolio of lithium prospects, held in Pirra Lithium, part of the joint venture with Haoma

 

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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