What is your professional pick?
Gold Resources is based in Western Australia (WA) and began drilling its 100% owned Gruyere gold deposit in 2013. The region is located 150km east of Laverton in WA, within the northern tenements of the Yamarna Belt, which it now wholly owns.
We’re most excited about exploration drilling in Northern Yamarna, outside of Gruyere, in the following areas:
- Wanderrie is most encouraging, with four advanced targets identified. Management expects to take at least one of these through resource drillout;
- Washburn is an earlier stage target, with high grade coarse gold intersected in 87% of Reverse Circulation (RC) drilling conducted to date; and
- Rickenbacker and Ibanez are even earlier stage, with extensive strike identified, but their progression destiny is contingent on assays from infill aircore (AC) drilling results, before moving onto RC drill targeting.
There are a host of other regional targets being drilled, but way too many to name individually. We are hopeful that 1-3 of these could pay off in the short to medium term.
How long have you held the stock?
We initiated our position Gold Road Resources in March 2014 following promising metallurgical test results and high-grade depth extensions at the 100% owned Gruyere gold deposit. In January and May 2015, we topped up in in anticipation of Gruyere Resource growing from 3.8Moz (million ounces) to 5.6Moz.
What do you like about it?
We like that management takes a low risk approach to exploration; focused on progressing an enviable portfolio of gold projects at various stages in the mine development life cycle. Given the large number of projects, de-risking is a key focus early on, with staged drill testing and metallurgical test work, to ensure time is not wasted on low quality, uneconomic projects that don’t move the dial.
How is it better than its competitors?
Gruyere is a world class project; we’re expecting forecasted production to grow strongly over the mine life. The production profile is expected to be enhanced with depth drilling targeting a potential underground operation, or other emerging regional prospects (both based on recent promising drilling intersections) along the highly under explored Yamarna belt.
It stands out from the pack with our expectation for up to $250 million free cashflow to be generated for the first two full years of production commencing FY19. Its ASX listed mining exploration peers fail to compete on these metrics of commerciality.
Globally, it’s one of the few large-scale exploration and development projects that has successfully raised funding in such a tough natural resources environment.
What do you like about its management?
Gold Road management are very good at prioritising exploration targets, and progressing projects through the development pipeline. Management’s focus on sustainable growth has been achieved by raising funds well in advance of requirements. Their ability to raise funds can be largely attributed to their unique high quality gold project.
What is your target price on GOR?
Our target price is +$1/share, post Gruyere project development funding, which assumes zero involvement from their Southern Yamarna joint venture partner, Sumitomo. Sumitomo have signalled interest in the wider Yamarna complex, but would need to substantially chip-in upfront to get involved. Our valuation also has the opportunity to be refreshed, with further resource additions either from Gruyere or other emerging regional prospects. Once first gold has been poured, and expansion opportunities progressed, considerable upside is expected.
This scenario may never eventuate as there’s high likelihood a larger gold producer peer may come forward with a takeover offer and stop Gold Road’s development aspirations in its tracks.
At what point would you sell it?
In the event of a big downgrade, or reduced quality of the Gruyere resource base, and consequential escalation in the extremely competitive operating cost base. We see downgrade risk as a low probability, given robustness of ore body continuity, and thorough ongoing preliminary feasibility study (PFS) work. Furthermore, the first two years that the ore is to be mined are essentially drilled out to a grade control confidence level, which is a rarity amongst GOR’s peers. A further sell event trigger is if the regional exploration program doesn’t produce a further discovery within the 100% owned Northern Yamarna tenements.
How much has it added to your overall portfolio over the last 12 months?
We added 41 basis points performance over past 12 months.
Is it a liquid stock?
Liquidity in the stock is OK, with an average of 2.9 million shares traded per week over the past 12 months.
[1]Source: Yahoo! Finance, 21 December 2015
Anna Kassianos is Senior Materials and Energy Analyst with Platypus Asset Management
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