Commodities: Gold miners – balancing growth with margin

About the author:

Mat Collings
Author name:
By Mat Collings
Job title:
Research Analyst
Date posted:
13 May 2021, 2:30 PM
Sectors Covered:
Mining

  • Though the gold price declined through Q3, we have seen a lift in the All Ords Gold Index since March with improving gold price and inflation fears re emerging.
  • With the merger of Norther Star (NST) and Saracen Mineral Holdings now complete, there is a large gap in valuation from the three remaining ASX gold “majors” to the mid tiers, with only Regis Resources (RRL) having a clear pathway to grow to match the “majors”.
  • It is much harder to distinguish between the mid tier gold miners on valuation metrics this quarter as most stocks have lifted with the gold price.
  • We look to better understand the full impact of capital for the first time by estimating “All in Costs” - discussed on page three (login to view).

Gold price and sentiment

The gold price has enjoyed a small rally since March, climbing from sub US$1,700/oz to above US$1,800/oz recently.

A combination of USD weakness as stimulus continues, recent jobs data in the US being softer than expected and increasing comments on inflation concerns in the media have provided some support to gold as the world once again considers how smooth the recovery from COVID-19 may be and markets remain volatile.

Costs a focus for investors

Several companies openly discussed cost pressures in the resources sector, particularly in WA where border uncertainty and a red-hot iron ore price are creating shortages of labour in certain segments.

While this was an issue everyone was watching for, it was the first time we noted cost inflation being mentioned, rather than more general comments on labour shortages impacting timetables.

In addition to following the reported All in Sustaining Costs of our companies, we are also capturing (or estimating if not reported) the All in Costs of production to understand how capital and exploration impact cash flows.

Ranking the miners

No two gold miners are the same. Scale of production, jurisdiction and number of operations all factor into the market valuation.

Larger miners provide relatively ‘safer’ optionality to the gold price with production spread across several operations.

Small producers may offer more leverage to the gold price, or upside from discovery or production growth, but at relatively higher risk. As such, no metric generates a ranking that fully captures valuations.

We rank and review our ASX-listed gold miners on a number of metrics and consider if relative valuations are fair.

Key observations

Under formal coverage, Ramelius Resources (RMS) and Regis Resources (RRL) remain key picks in the short and medium term.

Ramelius Resources (RMS) has near term news flow on mine life extensions and should see improving margins as the Penny project is bought online next year. Longer term, RRL stands out as the company most likely to re-rate towards the ASX “majors” with a clear pathway to production growth now laid out and funded.

Outside formal coverage, we think short-term risks outweigh recent performance improvements for St Barbara (SBM), which requires a major production lift in Q4 to meet guidance while also changing mining contractor in WA.

Find out more

We go into further detail in our full research note, commenting on gold price and sentiment and providing an in-depth analysis of the performance of 17 ASX-listed gold producers.

Download full research note

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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