Gold Outlook #75

by Barry Dawes

Key Points

  • Australian Gold Sector is leading global resources recovery
  • Earnings, gold production and dividends rising
  • Gold Price Volatility very low – but likely to rise again
  • XGD.ASX Volatility also very low – calm before renewed action?
  • Gold price technicals very strong in medium and long term
  • A$ gold price ready to break 7 year downtrend
  • Australian Gold stocks prices appear to be ready to rise

Call me to discuss ways of participating +61 2 9222 9111

The Australian Gold Industry has been a global leader in operational activity and profitability over the past five years and, according to the Dawes Points data base, it has been the leading sector amongst most things raw material globally.

The XGD.ASX Gold Index bottomed and turned up in November 2014, more than 12 months ahead of general resources stocks, North American gold stocks and US$ Gold itself which essentially all turned in Dec 2015/Jan 2016.

The XGD.ASX rallied 250% from that Nov 2014 low of 1642 to reach 5760 in July 2016 before pulling back to 3345.  The Index has since slowly made it way higher and has been flirting with the 5000 level and wanting to move higher as the company operational actions continue to show the creation of shareholder value.

The hard evidence is being delivered as rapidly increasing cash balances across the sector.

Gold production is at 18 year highs and on course to make new record highs above 1997’s 314 tonnes in 2018 and beyond.

Western Australia is indeed the Golden State and is now participating fully in this great bull market in gold.

Note that WA basically did not participate in the 2000-2008 section of the bull market.  Gold production here declined almost 40% while the gold price rose from sub US$250/oz to over US$1000.

But the Australian Gold Industry operators are made of stern stuff and have brought about that brilliant recovery after taking back mines operated by overseas companies driven by different agendas.

The leading companies, NST, EVN, NCM, SBM, RRL and SAR have done marvellously well.

Gold production has risen, operating costs have generally fallen, ore resources have grown and mining reserves increased for longer mine lives.

Stock price performances have been good with NST, the star, hitting all time highs and being closely followed by SBM which has also done exceedingly well by passing its July 2016 highs.  But all the leading (and many more emerging) companies have done well and are poised to do very much better. Very soon.

These leading Australian gold companies are now paying dividends and many of the smaller players will also join the list of dividend payers.  And so they should. Gold mine resources are a wasting asset and shareholders need to be paid for providing the capital.

The better news though for shareholders is the GROWTH in resources and reserves of these companies primarily through near mine exploration.

This means that dividends from current operations will be paid for longer and at a higher rate.

This increasing maturity in the Australian Gold Sector is likely to lead to corporate M&A activity.

The current corporate activity seems is fascinating.

Market Leader NCM is very actively upgrading its own operations and also acquiring strategic holdings in some very attractive large scale development JV plays.  Investment in Ecuador for Solgold’s Cascabel and Lundin Mining’s Fruta del Norte in are high quality high volume projects.    The joint venture with RandGold in the very important Birimian Belt in Cote D’Voire West Africa offers access to additional large scale gold projects.

NST has been driving an internal operational programme that is increasing resources at Jundee, Kanowna Belle, Zuleika Shear and Tanami. Resources growth has been rapid so the corporate objective is to increase milling capacity.  The acquisition of a 20% stake in Echo (EAR.ASX) will underpin the reopening of the Bronzewing mill as a low capital cost option to treat new NST open cuts ore from Jundee.  Acquisition of WGX.ASX’s Southern Operations will provide mill capacity for a substantial lift in Zuleika Shear ore production.

SBM is focussing on the continuation of the great Gwalia mine, operations at Simberi, some additional exploration plays and investments in our favourite CYL.ASX at Bendigo and with PEX.ASX deep copper plays in NSW.

EVN is focussing on near mine exploration at a very prospective Lake Cowal, at Mungari in the Zuleika Shear and at Cracow.

These companies are now cashed up but are currently and prudently sticking to the knitting of concentrating on improving present operations.

I imagine this will be a very different discussion in 2019.

Exploration is picking up and the Australian Gold Sector geotechnicians are delivering. The near mine action from NST, EVN, RRL and SAR in particular has been very successful but it is notable that new exploration models in WA have provided some interesting outcomes.  The SW Yilgarn is seeing success in high grade metamorphics by AUC.ASX, EXU.ASX and CY5.ASX. This region is vastly underexplored but is delivering some outstanding results.

The XGD.ASX Gold Index is really performing well and is being shown in this graphic. This says a major change is coming as the uptrending forces defeat the downtrending forces.

XGD.ASX 2003 – 2018

The technical tension developing here will most likely send the XGD to a new high and I expect this in 2018.

It will be mostly, as I see it, new incoming investor buying that pushes this index higher.

The gold price in A$ has been reasonably steady over the past several years but here again the uptrending forces are meeting the downtrending forces.  The downtrending forces have been winning for the past SEVEN years but it will have been a pyrrhic victory for the bears as they now get mauled.  The pressure on gold to the upside is looking increasingly strong.  A good break here should see a sharp move to A$2000/oz.  Keep in mind that the A$ rises with US$ Gold so I don’t expect a lower A$ to be driving this.

This steadying of the A$ gold price has had a stabilising effect on the XGD.ASX which is exhibiting very low quarterly volatility ( ie (qtly high – qtly low)/opening qtly price).

The average qtly volatility here is 26%.  The past 12 months has been well below this average.

A change is due and likely.  Could we get another 50% volatility here?  To take the XGD to >8500?

I think so. I still expect a new XGD high in 2018.

Now come look at the individual stocks.

NCM is the biggest producer with the longest mine life.  It is still emerging from corporate wilderness but it is now doing very well.   Production is being expanded, debt is being (slowly) reduced, costs are being reduced, dividends reinstated and the corporate strategy is, as noted , giving Tier 1 growth prospects.

NCM 1999 – 2018

Being a very large cap stock (~A$16bn), NCM makes up a larger part of the value weighted XGD Index, and so NCM reflects the Index. A resolution of its ups and the downs is now due. Soon.

Stop Press : Tailings Dam issue at Cadia has affected NCM but this should not be more than a short term issue.

NST has performed spectacularly well and has made a recent new all time high.

The success at Zuleika Shear/Kundana and the wonderful achievements at Jundee will ensure this stock continues to rise.

Long Section of Jundee showing the potential doubling of the 10moz

My three year target of >A$20 should be easily achieved.  Expansions with the newly acquired extra milling capacity will push both Jundee and Kalgoorlie above 300kozpa each and Tanami will provide some further production growth.  So much development has taken place at Zuleika and now we should see stope grades rising to reserves grades as development ore share declines.

An excellent balance sheet including almost A$500m in liquid assets just makes this stock brilliant.

NST 2003 – 2018

SBM has also performed spectacularly well as its debt has been paid down and the Gwalia mine has hit its straps.  The exploration potential is being examined through the application of seismic.

At new 10 year highs and looking to go much higher.

SBM has just announced a 10% holding in ABU.ASX for exploration in the Tanami

SBM 1999 – 2018

EVN has made some outstanding acquisitions with Lake Cowal being wonderful and Ernest Henry providing a great revenues and reduced costs input.

Lake Cowal exploration potential

Acquisition debt is now well down so corporate activity should re emerge. EVN is testing all time highs in its current operating form).

EVN 1999 – 2018

RRL has delivered strong financial results and dividends to shareholders and continues to add to its regional position.

RRl is also looking for expansion in NSW and elsewhere.

This graphic seems very powerful to me with a big upside target generated.

RRL 1999 – 2018

Two other major developers are doing quite well

GOR  1999 – 2018

DCN 1999 – 2018

Another important but smaller developer also about to commence gold production

GCY 1999 – 2018

And a potential fledgling NST in PNR

All these (other than NCM) are essentially outperforming the XGD.

This means that many of the medium and smaller players have UNDERPERFORMED the XGD.

It is interesting that many of the medium size stocks have similar price patterns to NCM and suggest resolution upwards too.

In contrast, many of the smaller stocks in the XGD are hitting multiyear lows as the lack of investor interest results in a self perpetuating low liquidity. Interestingly here, most of these stocks are picking up longer term uptrend lines.

Overall the Australian Gold sector is looking in excellent shape and should provide strong returns over the next few years.

Gold in US$

The big picture is still very positive in the long term as the long term uptrends are strong and the long term downtrends from the 2011 highs have been broken.

The medium term shows the `battleground’ of the past four years that will be resolved soon.  The 2011 downtrend is clearly broken and a successful retest on it has taken place.  A short term uptrend is in place and major resistance is at US$1350-70.

The short term is getting quite exciting now.  How long will it take?

The gold price seems quiet with the price within a relatively narrow band between US$1050 and US$1370.  Underneath it seems very active,

But the net effect is a very low level of volatility.  Years of trading under the long term average.

The long term average is 12%.  The past two quarters have been just 6%.

6% at US$1324 is US$79. 

Another 6% or US$79 certainly breaks through US$1370.

The impact on North American gold stocks is also interesting.

The Big Picture from the Barron’s Gold Mining Index is just exciting.

Those of you following Dawes Points over time will remember this graphic giving a long term buying opportunity again in late 2015.  When everything else was so gloomy.

The very long term history is so important and allows you to `heed the markets, not the commentators’

The BGMI is hugging a downtrend from 1983 and may be signalling something big is about to occur.

Just more evidence.

Barron’s Gold Mining Index 1940 – 2018

And I like this subset of that very long term.  The lows in 2000 clearly ended something and started something else.

The pullback to those lows in 2015/16 ended something and again started something.

If you keep your eye on the big picture you can see the patterns emerging with much greater clarity.

If you wish to participate, talk to me about this.

Barry Dawes BSc F Aus IMM (CP) MSAFAA

+61 2 9222 9111

I own or manage in portfolios I control:


Perth Conferences

21-22 March 2018
Crown Perth Burswood WA

I have been invited to Chair Day 2 of the Minerals and Investment Conference in Perth next week.

Should be a great discussion on the potential of the Pilbara Conglomerates Concept.

There will be three other strands

Iron Ore and Steel

Minerals Sands

Lithium Battery Metals