Over the long term, gold provides a natural hedge against rising inflation and, over the short term, periods of economic instability. Over the past year, the US dollar gold price has been stable trading in the range of $US1700 to $US1900 per ounce and there has been little change in the gold price between the end-November 2020 and the end of November 2021 both in US dollar terms and Australian dollar terms. Notwithstanding the flat gold price, the ASX Gold Index has fallen by 12.7% between end-November 2020 and the end of November 2021 while the ASX All Ordinaries Index is up 13.4%.
Taking a longer-term view, over the 5 years to end-November 2021, the gold price in US dollar terms has risen 49% and in Australian dollar terms, it is up 57% (so the $US/$A exchange rate has weakened over this period). Further, the ASX Gold Index is up 66% over the same period while the ASX All Ordinaries Index is up a more modest 36%.
The weakness in the gold sector in the past 12 months may provide a good long term buying opportunity. The following provides two established gold producers and one emerging producer that could be of interest to investors seeking to gain exposure to the gold sector.
Evolution Ltd (ASX: EVN)
Evolution Mining Ltd (Evolution) is an Australian gold mining company. Evolution owns five gold mining operations - two in Queensland (Ernest Henry and Mt Rawdon) and one in New South Wales (Cowal), Western Australia (Mungari) and Canada (Red Lake). Evolution has a market capitalisation of A$7.6 billion.
In November 2021, Evolution announced that it is acquiring 100% of the shares in Ernest Henry Mining Pty Ltd, the owner of the Ernest Henry copper-gold mine for a total consideration of A$1 billion. This transaction will result in Evolution’s copper production increasing, which in turn lowers its All-in Sustaining Cost (AISC) per ounce of gold.
Also in November 2021, Evolution provided a three-year outlook, with rising production and falling costs. Production is planned to increase from around 700,000 ounces in FY22 to around 855,000 ounces in FY24. Growth will be largely driven by the commencement of the Cowal underground mine in late FY22 and the execution of the Red Lake transformation plan. Importantly, Evolution’s AISC is expected to fall from $A1,165 per ounce in FY22 to $A1,020 per ounce in FY24. Provided the gold price remains flat in $A terms, this will result in rising profitability over the next three years.
Northern Star Ltd (ASX: NST)
Northern Star is an Australian gold mining company. It operates 3 production centres known as Kalgoorlie, Yandal (both located in Western Australia) and Pogo (located in Canada). Northern Star Evolution has a market capitalisation of A$11.3 billion.
Northern Star has announced a five-year production outlook, which is expected to increase to from around 1.6 million ounces in FY22 to around 2.0 million ounces in FY26. Mining costs are also expected to fall as production increases. On the cost side, Northern Star is expected to realise significant costs savings as a result of the merger of Northern Star and Saracen Mining Ltd in February 2021. In particular, Northern Star has indicated that it now expects these savings to be in the upper end of the pre-merger implementation estimate of A$1.5-2.0 billion. Similar to Evolution, provided the gold price remains flat in $A terms, this will result in rising profitability over the next five years.
De Grey Mining Ltd (ASX: DEG)
DEG is a Western Australian gold explorer and project developer with a market capitalisation of $1.8 billion. DEG has made a large gold discovery located in the Pilbara in late 2019. This gold discovery is located around 60 km south of Port Hedland. Consequently, critical infrastructure is currently in place to support a future mining operation including two major sealed highways, two gas pipelines, a high voltage powerline and a port all within a short distance of Hemi. This lowers development costs.
In October 2021, DEG announced the results of a scoping study to develop this resource (known as the Mallina Gold Project). Gold production is estimated to average 427,000 ounces per annum over an initial 10-year period. This means the Mallina Gold Project will be in the top 5 producing Australian gold mines. The total capital cost to build the mine (including contingency and pre-strip) is estimated at $893 million and the AISC is estimated at $1,224 per ounce. The Mallina Gold Project’s estimated post-tax net present value (NPV) with a 5% discount is approximately $2.0 billion (producing a post-tax internal rate of return (IRR) of 49%).
The Scoping Study provides justification that the Mallina Gold Project is commercially viable. Consequently, DEG will now conduct a Preliminary Feasibility Study (PFS). The results of the PFS are expected to be provided in the second half of 2022. The Mallina Gold Project may commence production in 2025 or 2026.
There is real potential that the economics of the project will improve over time for three reasons. First, the Scoping Study does include the 800,000 ounces of gold of largely inferred material within the Study pit shells that were omitted due to lack of drill density. Second, considerable intersections (namely, 173m at 1.6 g/t gold from 366m, 174m at 1.5 g/t Au from 271m and 121m at 1.1g/t Au from 146m) were not included in the Study. Third, DEG’s continuing exploration effort across the Greater Hemi region has a high potential to result in new discoveries.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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