Next upleg in gold sector underway – major upmove expected

Key Points

The last Dawes Points heralded the new Resources Sector bull market and the follow through is responding favourably.  Gold is leading the massive short cover rally.  Many Resources stocks have been exploding upwards.  Are you on board?  Asia is driving this next leg in the Resources Bull market.

This is a major global economic surge that might just run for the next 10-15 years.

Global equity markets making new highs daily.  The US is leading.  Germany is following.  The UK FTSE FINALLY made a new all time high last week.  India hit new highs and with the new business friendly Budget economic growth is accelerating and likely to hit 10%pa in the next year. China equity markets are surging and indicating speed up not slowdown.  New break outs noted after long consolidation periods by equity markets in Hong Kong, Singapore, Taiwan, Thailand and so on.  Everywhere.  Heed the markets not the commentators.

It is pleasing to see markets are starting to get some order at last after such a long time of indecision and the story is becoming stronger and very favourable for investment if you have the time to listen. And truly fascinating.  Sure, the US is leading but it will be China and India and ASEAN that you will hear most from.

The recent Dawes Points view on bond yields and prices is looking robust and with so many equity indices hitting new highs the outlook seems to be getting better with every day.  You wouldn’t think that of course if you read the press or watched the TV talking heads.  Will Greece leave or not? Will the Ukraine cause a major conflagration?   Will ISIS strike at the West’s heartland?  The markets are looking beyond these issues even if the commentariat isn’t.

Look at these numbers:-

  Level 31 Dec Level 27 Feb Since 1 Jan Comment
NASDAQ

4635

4963

7.1%

15 Year high

S&P Small caps

500

520

4.1%

All time high in 2015

S&P 500

2058

2105

2.3%

All time high in 2015

Dow Jones

17823

18132

1.7%

All time high in 2015

Wilshire 5000

22212

22169

-0.2%

All time high in 2015

Russell 2000

1233

1205

-2.3%

All time high in 2015

German DAX

9805

11401

16.3%

All time high in 2015

UK FTSE

6566

6946

5.8%

All time high in 2015

Mumbai

27499

29220

6.3%

All time high in 2015

Thailand

1497

1587

6.0%

All time high in 2015

Manilla

7230

7730

6.9%

All time high in 2015

 

Shanghai

3234

3310

2.4%

New rally high

Singapore

3365

3402

1.1%

New rally high

Hong Kong

23605

24823

5.2%

New rally high

Taiwan

224

232

3.7%

New rally high

South Korea

1916

1986

3.7%

New rally high

All Ords

5388

5899

9.5%

New rally high

This really could give us the global economic boom I have been talking about.

The last Dawes Points talked about record consumption in all metals and the move to deficits over 2013-2016 for copper, zinc, nickel and coal.  Global growth accelerating with insufficient capacity.

Higher commodity prices are now likely. Thank You China. Thank You India.  And Thank You ASEAN.

And also the long term fiddling in the gold and silver markets is coming to an end. The price discovery mechanism is being bolstered by newly established gold exchanges that require all sales to be gold-covered and that give more Asia representation at the pricing table.  No more midnight attacks of selling 50 tonnes of gold in 20 minutes in thin markets.  No more 100 contract oz on COMEX for every oz available for delivery. These scams are now having their use-by-dates enforced.

Yes, and Thank You to the citizens of China (1,400m of you)  and India (1,300m) for becoming wealthier and desiring the beauty, majesty and longevity of gold bars and gold jewellery at a rate that exceeds global mine production and more.  The cultural demand for gold exceeds the incessant fears in the West of apocalypse that seems to have gripped so much of the investing professionals and public alike.

Also, now Apple is to bring out an 18ct gold version (the Apple Watch) in its iWatch range that is due for release in March. Rumours suggest it will have two oz of gold (less than a gold ROLEX) and will be competing in that high end against ROLEX, Cartier, Breitling and Piaget at about US$10,000 but will have a phone and email.  Suggestions have been made that Apple could sell 1 million each month.

Should it be just one oz and 1 million per month then that is 12moz or 375tonnes pa.  Two oz is 750tpa or 25% of world gold production.  We will find out in just a week but this could make gold “cool” for the “techies” demographic (read China!) and physical gold demand could really overwhelm the bears.

Gold stocks performances

I am concentrating on gold because I consider that gold is leading all these equity markets higher. Gold and the Gold Sectors bottomed in November ahead of the bottom in December for other resources .

The Big Picture for gold is still best shown by the US Philadelphia Gold Index that is now lifting itself off the bottom after breaking the 2008 lows and testing levels seen in 1986. It has been +29% from its recent lows.

This market can only go higher.  And much higher at that.

In the short term, gold stocks in Australia have consolidated recent strong gains and the shallow and short correction I expected was certainly shallow but has been rock solid for over 6 weeks.

ASX Gold Index Daily 12 months

(Source IRESS)

The leaders in this index Northern Star (NST) – are you on board yet? – and Newcrest (NCM) are leading.

 

NST  Daily 12 months (Source IRESS)  NBM  Daily 12 months (Source IRESS)

And these two, St Barbara (SBM) and Metals Ex (MLX) are looking very exciting.

 

SBM  Daily 12 months (Source IRESS)  MLX  Daily 12 months (Source IRESS)

Many of the smaller golds are also warming up for good gains.

Have a look at some of the various Gold Indices here and in North America and some of the Dawes Points recommended stocks.  Note PDAC is on this week in Toronto and the TSX Venture Exchange (CDNX) seems to be finally turning up as well after its own horrific bear market.

    Nov low 31 Jan 15 27 Feb  Gain to Jan Gain to Feb
ASX Gold Index XGD

1642

2530

2690

54.1%

63.8%

Philadelphia Gold Index XAU

61.39

79.37

76.94

29.3%

25.3%

Gold stock ETF GDX

16.45

22.29

21.28

35.5%

29.4%

Junior Gold stock ETF GDXJ

22.34

27.74

26.57

24.2%

18.9%

ASX Small Res* Dec low XSR

1325

1599

1772

20.7%

33.8%

TSX V  Index* Dec low CDNX

637.06

676.81

706.70

6.2%

10.9%

Newmont US$ NEM

17.75

25.15

26.33

41.7%

48.3%

Am Barrick US$ ABX

12.19

12.78

13.02

4.8%

6.8%

Northern Star NST

0.92

1.80

2.36

96.2%

157.9%

Newcrest NCM

8.51

13.56

14.39

59.3%

69.1%

Oceanagold OGC

1.92

2.67

2.47

39.1%

28.6%

Doray Minerals DRM

0.29

0.47

0.49

62.1%

69.0%

Medusa MML

0.48

0.83

0.98

71.9%

104.2%

Gold Road GOR

0.20

0.37

0.37

85.0%

82.5%

ABM Mining ABU

0.27

0.30

0.23

11.2%

-16.4%

Blackham BLK

0.08

0.10

0.14

20.0%

75.0%

Metals Ex MLX

0.68

1.10

1.24

61.8%

81.6%

St Barbara Mines SBM

0.10

0.21

0.22

110.0%

120.0%

Saracen Minerals SAR

0.21

0.36

0.42

71.4%

100.0%

Did you get on board any of these?

Look at some of the leading players in the US –Newmont (NEM) is breaking out and Barrack (ABX) is not far behind.

 

NEM  Daily 12 months (Source IRESS)  ABX  Daily 12 months (Source IRESS)

Northern Star is clearly a leader globally.  Currently on FY16 PER of 9x and with a 50% payout ratio gives 5.7% yield.  For a long time.  What would it be at A$1800/oz?  Keep watching the Kundana JV and especially the 1.1moz 11.6g/t Pegasus mine which started up last month.  NST has 7 other Pegasus style targets along this very important shear zone just out of Kalgoorlie.

Kundana Golden 8km Corridor on K2 and Strzelecki Shears  – Significant discoveries made and excellent potential

I expect the market will hear much good news from many of these companies as operations are properly bedded down and as the benefits of the lower A$ and fuel prices work through. March Qtr figures should show very good cashflows from producers and exploration should be picking up again.

This confidence will flow through to developing companies and the capital raisings underway will be able to replenish severely depleted bank accounts.  Watch this space.

ASX Small Resources

With that in mind, have a look at this.  The ASX Small resources Index.  The XSR did not make a new high in 2011 but it had a 72% fall which has finished and now will move back up to new highs.

ASX Small resources Index Monthly 20 Year (Source IRESS)

What extraordinary volatility.  What extraordinary opportunities!

I have continued to point out the Disbelief/Pessimism stuff and labelling the ASX Small Resources Index (XSR) like this makes so much sense.  The Optimism Leg is underway now at long last.

My recent report on Blackham (did you read it? And more importantly, did you buy some?) suggests that it should be worth A$0.90-1.57 with 12-18 months.

BLK is not in the XSR but I can find about 10 other stocks actually in the ASX Small Resources that have similar upside potential.

If 20% of the XSR has 8-10x upside based on current commodity prices then we go to new highs.  The other 50% only needs to double.

These markets will build on themselves and go to new highs and then well beyond if commodity prices recover.

Resources stocks are just like any company.  They need a business plan and the management needs to run a business that makes money for shareholders.  The business plan can be to create value in an asset (by exploration, resource upgrade, feasibility study, mine development or whatever) or to generate revenues (build a mine, link a hydrocarbon discovery to a pipeline).  Very few resources can support a 40 year production mine life (some of course certainly can) but many can support businesses that generate medium term income by whatever means.

So management of wasting assets requires special skills and good management teams are what you look for in resources companies.  And many Australian resources companies have world leading management teams who are very experienced in coping with high volatility in commodity prices, currency and operating conditions.  The past three years clearly shows the volatility.

So note the companies that have thrived through the past extremely difficult few years.  NST, MLX and EVN stand out in the gold sector and OSH, LNG and DLS in oil and gas.

Good managers.  Good companies.  Good Businesses.

Investors in the resource sector are now actually making money again after a very long and extended period of negative returns.

I am seeing numerous opportunities coming up.

It is also fascinating to see BHP and Rio up 16.5% and 13.1% respectively since 1 January and management at each is projecting a robust outlook.  Volumes up. Demand strong, competition fierce but the underlying numbers are good.  Earnings are good and yields are very attractive.  What is holding people back?

Well, let’s look at the current scoreboard.  Note that gold and the ASX Gold Index bottomed in November while the rest bottomed in December.

We are winning again at last but there is so much to make up.

Change from

Nov low

Dec Low

31-Dec

current

Nov

Dec

31-Dec

2014 Low

BHP

30.67

27.29

29.37

34.17

11%

25%

16%

25%

RIO

56.12

51.99

58

65.56

17%

26%

13%

26%

ASX 200 Resources

XJR

3471

3096

3344

3742

8%

21%

12%

21%

ASX 300 Resources

XKR

3455

3081

3365

3674

6%

19%

9%

19%

ASX Small Resources

XSR

1580

1324

1599

1772

12%

34%

11%

34%

Gold

US$/oz

1130

1141

1184

1213

7%

6%

2%

7%

Gold

A$/oz

1326

1418

1450

1553

17%

10%

7%

17%

ASX Gold Index

XGD

1642

1700

2530

2708

65%

59%

7%

65%

The recent earnings season has generally been very good with strong results for everyone except iron ore producers and a strong focus on dividends.  The current preoccupation with shareholder cash income is misplaced in my view as investment should be more about capital growth than capitalisation rates determined by manipulated US interest rates. But the more important issue is that most resources companies have completed their capex programmes, are reducing debt and having more free cash to reward shareholders in the future.

Think of this trend as a return to normal when 50-65% was the right payout ratio for resources companies. We are getting there for most of these companies and it will be the gold companies that drive the story.

The outlook and the operations of the resources sector is robust and excellent investment returns are to be expected from here.

Barry Dawes
BSc F AusIMM MSEG MSDA

2 March 2015

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