Resources sector outlook looks brilliant

Key points

The strong performance of the ASX Gold Index in 2015 is reflecting the higher Australian dollar gold price but it is also a recognition of the robust underlying fundamentals in the Australian Gold Sector.  Costs have been cut, capex has been completed, debt repaid, output improved and cashflows have been surging.  Cash levels are high.  Dividends are rising and the list of payers is growing.  Much more to come!

The Paradigm 17 stock untraded portfolio is up 88% (risk weighted basis) and has also received some handy dividends.  Another favourite St Barbara (not in the 1 Dec Portfolio), is up 490% since added as a BUY in January.

These stocks have held clients in good stead, especially NST, BLK, SBM, TBR, DRM and RSG for most accounts while the rest of the equity markets were getting thumped last month.  We have also been adding MML and TNR and expect to do very well here.

The Gold Sector has been a great performer since the lows in November 2014 and many would say it is just the A$ gold price jumping through A$1600.  Maybe.  But my view it is saying something else and that something is a lot more important than just the A$ gold price through A$1600.

The Bears have been shrill with the rants calling for the end of the world but I have to say that if that was the best they can do to commodities and equities then it is all upward from here.

Dawes Points has long opined that the April 2011 – Nov 2014 bear market in gold and resources was merely a savage 42 month correction in an ongoing long term bull market in commodities.  Savage is an understatement but the worst is well behind us now and investors can now start really thinking what is coming next.

The last two Dawes Points editions had highlighted the underlying strengths in the Asian economies and the renewed vigour in the U.S. economy.  At the same time the CRB Index showed prices down at levels for many commodities not seen since 1974 and equity market indices around the world were showing the irrational pessimism that typically marks market bottoms.

This index has bounced from the bottom.

Try to keep in mind the time frames in these markets we have been following.

Commodities last bottomed in Dec Qtr 1998 and rallied for almost the next 10 years into 2008.  The GFC gave a big selloff followed by a rally into 2011 with new highs for some metals but not for most.  The recent lows give almost 7 years of decline.

Seventeen years up and down cycle of sorts.  I would expect at least another 10 years upward from here!!

The US economy seems to be strengthening (no Greater Depression there yet!!) with basic indicators such as housing and auto sales very robust, China is still doing 7% GDP growth and the Shanghai stock market seems to bottoming out OK despite the hysteria.  India is off to double digit growth and all those 3,300m people in Asia are doing OK.

Dawes Points views on metals consumption growth have held up with record levels still being achieved in most and this seems to be clearly shown with the continuing decline in LME inventories.

The LME inventory graphic says so much.  No LME inventory for most metals.  Even Aluminium has had 21 months of relentless decline from 5.4mt to 3.1m against nearly 50mtpa consumption – just 3 weeks there now.

So much in fact that the LME metals decided to have a major surge last Friday in London.

So after all the media focus on Glencore and how its impending demise was going to bring everything down it seems that maybe things aren’t so bad after all.

For oil, US crude production has begun what I consider will be a sharp decline of about 800,000bopd.  It is already down 400,000bopd from the highs.  The high decline rates accompanying shale oil wells are still applying and the number of new wells has dropped sharply.  Significantly higher productivity per well including through the use of multiple fraccs and increased charges of proppants is helping but a gross US$50/bbl is not enough for profitable operation and the drilling of the next well. Those days of +100% IRRs on US$100 oil seem far away today.

Global oil demand has been rising with the lower oil prices and the market still needs about 1.5mmbopd new supply each year.

No wonder WTI has jumped up through US$50/bbl again.

The ISIS battles and aggravation in the Middle East are getting very close to the internal workings of Saudi Arabia.  Oil purchases for inventory security are likely to increase despite the current high levels.  I have always considered the last fall in oil prices as a correction in the bull market.

Gold Sector Opportunities

Back to gold, Asia’s strong economic growth and particularly in India and China is increasing demand for gold which should be in robust growth mode for now and for the foreseeable future.

The tightness in the gold market continues and premiums are being paid for physical delivery.  The COMEX games of selling paper gold where there is only one physical ounce available for every 200 contract ounces will not end happily for many who have short positions but as to when we can only ponder.

The ASX gold index closed on Friday on 2819, up 72% from the Nov 2014 low.

The ASX Australian Gold Producers are leading the entire resources market but I still see considerable upside in the gold sector ahead of a more general market surge.

By my reckoning, a break through 3000 on the XGD would see a move to 4500 then to 6300 in quite a short time.

After almost five years of declining market interest in ASX gold stocks the trend has now clearly changed so the graphic above should show continuing relative strength as an underweight market plays catch up.  Obviously initially in the leaders, NCM, NST, EVN, SBM and OGC but the smaller plays will provide exceptional returns as even modest new capital inflows to the sector just won’t find enough stock.

My 30 stock ASX gold stock universe still shows an unweighted PER average of

The ASX Gold Index should now show a major increase in market share of the All Ordinaries turnover.

I will reiterate my views on the gold mining sector in Australia where I see new focus around Kalgoorlie and in particular the Strzelecki and Zuleika Shears.  These gold bearing `structures’ are proving to be strong continuity narrow high grade deposits that have low costs and are delivering handsome cashflows to the owners.  The strike length of the Shears is tens of kilometres.

You need to know what NST is doing here and why EVN and Zinjin are so keenly interested.

From Northern Star:-

Kundana – A Corridor of Riches

NST has exploration targets at:-

And watch this too:-

A little company called Cascade/Torian is very active here too on tenements that stretch along over 40 km of strike.  And its share price is up almost 100% since June.

You will need to get to know this map as well.

Discoveries here have been brought into production very quickly and local excess mill capacity means rapid cash returns and very high IRRs.  As an example, Barrick found the indications of the 1.2moz 11g/t Pegasus deposit in mid 2013 prior to its sale of the East Kunduna JV interest to NST in March 2014.   NST had subsequently proved a 750koz resource by Dec 2014 and began mining in Feb 2015 after upgrading it to 1.1moz @ 10.6g/t.  It is now 1.2moz. Most of the 220kozpa EKJV output will come from Pegasus.  I like NST, TBR and TNR here.

Also ask me about a Nov 2015 A$4.2m high quality gold mining IPO I am doing in this region.  Might just be the first ASX gold IPO since 2013.

And while we are talking extensive mineralisation along strike have a look at our favourite Blackham Resources (BLK.ASX).

This is a good analogy to the Strzelecki Shear projects and BLK owns 55km @ 100%.

Oh yes, and BLK is fully funded to restarting gold production at Matilda through the Wiluna mill.  Up to 100,000ozpa by July 2016 at costs under A$1000/oz AISC.  That’s A$60mpa net cashflow (EBITDA) for a company with a market cap of just A$45m. My numbers say PER

Blackhams abridged 25km of strike along the Wiluna Structure

The ASX gold index closed on Friday at 2819 which is a 72% gain from the low in November 2014.

Some very important technical issues actions suggest much more is to come and that something very special is about to happen.

Long term Dawes Points readers will know my view on Disbelief, Pessimism, Optimism and Opportunity before the Euphoria sets in.   Investors should also understand that each leg of the market has taken many years to unfold.

My view has been that Disbelief was 2000-2011 and Pessimism was 2011-2014.  We are now finally into that Optimism Leg that should last at least as long as Disbelief (~10 years (say)).

This next leg will be driven by earnings and dividends and then by production growth and then by the US$ Gold price.

So there you have it.

I called the low in ASX Gold Sector in Dawes Points on 1 December 2014.  I rang the bell again for gold in August and in September rang the bell for resources generally.

Opportunities abound and I am well prepared for it.  Are YOU??

Call me.  +61 2 9222 9111.  Email bdawes@psec.com.au

I own NST, SBM, TBR, TNR, MLX, MML, RSG, BLK.

Edition #41

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