Key Points
- Gold market gaining confidence
- Australian Gold Producers well placed
- Paradigm Gold Portfolio was up 75.5% in 13 months to 31 Dec
- Kalgoorlie gold region being reinvigorated
- 2016 should see further Australian gold development resurgence
- Long term trends may be indicating end of deflationary times
The strong performances of key ASX-listed Australian domestic gold producers have been a key feature of Dawes Points' views of the world. Upbeat reports on production, cost reductions, earnings, cash and dividends assisting a +75% untraded weighted portfolio gain have insulated many clients from the external volatility in most other market sectors. Exploration results have also helped for some companies.
These gains in Australia have encouraged Dawes Points to consider that the actions in the global gold, gold equities, commodities and commodities equities will be following those in Australia sooner or later in the new year of 2016.
The Paradigm ASX 300 Gold Index share of All Ords value turnover graphic has been of great assistance in showing that the relevance of Gold Stocks was recovering and that indeed a major turning point was coming about after a very long decline.
Similar but still nascent changes seem to be underway in ASX Small Resources and also in the XMM, with prices still falling but volumes and market share increasing. All good tentative signs.
The Dawes Points 3 December 2014 untraded gold stock portfolio provided a 73.6% return for 13 months to 31 December plus almost 2% in dividends.
Here is the proof.
Great gains by overweighted leaders Northern Star and Evolution together with half weighted emerging companies Blackham, Saracen and Gold Road gave the portfolio most of the performance and it outperformed the ASX Gold Index by about 20 % points in value and about 0.5% in yield.
It is easy to say that the local gold sector has done well because of the weaker A$ but the A$ gold price has been around A$1,500/oz for the past five years. The recent moves above A$1,600/oz and last week's surge to A$1,588 will certainly help sentiment.
The gold price at A$1,500/oz has made good earnings for many companies and I expect that the Dec Half of 2015 will bring even more gold production growth, lower operating costs and higher earnings.
Expect many gold producers this month to put out early advice of good production stats ahead of the formal quarterlies.
But it is not just the A$ gold price that has made these good market performances.
Real effort, ingenuity and investment is involved in this local industry and here is where the industry is going with the production growth results very clear in WA which has consistently produced 65-70% of Australia's mined gold.
The longer term appears robust for all Australia.
In assessing the Gold Sector Portfolio, emphasis was placed on the S&P ASX 300 Gold Index to ensure investors were looking at visibility and liquidity for most chosen stocks.
However, since the ASX sold its index business to S&P the resources market has never been quite the same. The Gold Index was discarded and not resuscitated until about 2005 and then was backdated.
The actual XGD Index was recently critically reviewed by Dawes Points to analyse its effectiveness.
This index has been found to be an appalling collection of gold, non-gold, local and foreign listed stocks that gives no real reflection on the activity in the Australian gold industry of the past decade.
So coming to the real action in the ASX Gold Index today we have a tale of two sub sectors:-
Domestic gold producers; and locally domiciled companies with offshore gold production.
The ASX 300 Gold Index currently has 22 stocks. Ten are gold-only plays domiciled in Australia and operating mostly Australian gold mines. Eight are Australian domiciled and operate mines offshore. Two are foreign domiciled and have all or mostly foreign gold mining operations. One is a diversified miner with local gold production and one is a diamond mine developer.
Look at this.
First of all, note the June 2013 low that I have often mentioned! An unweighted index of up to ten Australian local producers is up 165% since that low.
The eight offshore producers are down exactly 50%. The Index itself is up just 28%.
Where did you want to be in this index? Clearly with Australian gold companies producing locally.
The other four stocks in this 24 stock universe have little or no relationship with the Australian Gold Index.
What a misallocation of resources. What would be the interest in ASX gold stocks be if the ASX Gold Index actually reflected these strong gains and the activity in the Australian gold industry itself!
ASX investors should be able to invest in confidence in Australian companies involved in the gold industry.
Australia is the second largest producer of gold, after China, and the opportunities should be large and many. A decade ago, almost two thirds of Australia's gold production was owned by overseas domiciled gold companies. Recently, substantial gold production assets have come back to Australia through sell downs and acquisition by Northern Star, Evolution and MetalsX.
Everyone should be investing in this production growth and not, as suggested by the ASX 300 Gold Index, in some foreign domiciled offshore producer and certainly not in an offshore uranium prospect. Or in a coal miner, iron ore producer, or a gas company.
Actually, the story of these Australian gold producers gets better.
These terrific ten Australian gold producers make up over 90% of the XGD turnover and as noted above this is now back up to around 2% of All Ords turnover.
Makes the current makeup of the XGD Index look silly.
Well, my 2016 portfolio will still emphasise most of these top ten (eight actually) with a few more that should soon come into the XGD:-
Only three of the offshore producers make the grade for the portfolio.
I have added some emerging stars to give us the Dawes Points 2016 Gold Stock Portfolio for a A$100,000 portfolio. $40% in the larger stocks, 30% in mid caps, 20% in growth opportunities and 10% in minnows.
I am taking the 31 Dec as the start date so let's follow the performance over the year and compare it with the 2015 Portfolio.
I would like to refer to two other minnows that wouldn't fit in the Gold Portfolio but could provide some excitement in 2016.
Mustang Resources (MUS.ASX) has some very high quality projects in Mozambique that include rubies and diamonds.
Alt Resources (ARS.ASX) is a recently listed explorer with an outstanding copper porphyry target near Cooma in the Snowy Mountains on NSW.
The Big Picture
The current sell-offs in commodity and equity markets continue the bearish trend of the past few years and we all are experiencing tough times outside these local gold stocks.
But these gold stocks are showing that not all is dismal and pessimistic.
The big picture for gold remains that market sentiment remains poor and most professional investors have been out and probably short since the highs in 2011. We have now had over four years of declining US$ gold prices and all manner of uptrends have been broken. However, the graphic below shows US$ gold is almost bouncing off the US$1032 high of the GFC in March 2008. This may be very important. The momentum and sentiment indicators are good enough for the gold price to have completed most of its decline and to bounce and renew the bull market.
Long Term Gold Price from 1980.
The US Fed has begun its interest rate hikes as that economy strengthens. The evidence is clear that this is a sub normal recovery but the deleveraging has been substantial at personal and government levels and even the US Budget Deficit seems to now be 40% lower than just a few years ago. Savings rates around the world have improved balance sheets everywhere. The US$18trillion debt is still there but the bond market is still signalling that higher yields are in store over the next few years.
Rising bond yields after such an extended period of easy money will be reinforcing the probabilities of the end to the deflationary days and a pick up in inflation.
Over US$90trillion of capital is tied up in government and corporate bonds. This is a massive source of capital and when coupled with the global cash levels, there should be strong flows of capital out of cash and bonds to gold when sentiment changes.
US 10 Year Bond Prices - Weekly
The market for gold is now driven by the Love Trade for jewellery in India and China and is likely to do so for quite some time.
From this graphic it is easy to see that most of the world's 170,000 tonnes of gold is held as jewellery and demand for gold into India is insatiable.
China in 2015 according to Koos Jansen at Bullion Star had another record year of imports (~1,200tpa) and domestic withdrawals (2,405t ytd) through the Shanghai Gold Exchange.
World mine production is only about 3100t so between them China and India absorb all mine production.
Coin demand remains robust and silver coins mint production in North America has maintained the very high levels of 2013 and 2014 to meet this strong demand.
This Supply and Demand for Gold for the Next Ten Years strongly suggests a tight market for gold will exist for quite some time.
You will be familiar with graphics of the Philadelphia Gold Index (XAU) that is showing an index level that is almost as low as that at the US$248/oz low in 2000.
My reading of this indicates we are near the lows in these major North American gold stocks and if the market is completing the Wave 2 correction then the upside should be strong and should follow what we have already seen in the Australian Gold Production Sector above.
The market is currently all about sentiment and the sentiment has not yet turned favourably towards gold but that change cannot be too far away now and the response could be rapid.
This strong view for North American gold stocks is supported by the very long term graphic for the Barron's Gold Mining Index which goes back to 1940.
An excellent long term uptrend is matching support of 2000 and is also about the same as highs in 1969!
Readers will probably be also familiar with the XAU vs the S&P500 whereby gold stocks there have fallen 90% against the S&P500.
We can look again at the S&P500 against all commodities (CRB Index) and extreme is the only word that can apply!
And market sentiment shows it very well.
Finally, four major indices that don't look as if they are about to crash.
| Shanghai |
Germany |
 |
 |
| India |
Japan |
 |
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The Paradigm Gold Portfolio has performed well in 2015 and by my assessment the stocks are cheap on PERs and yields and well as having the lower A$ protection and production growth.
As noted, this portfolio performance has underpinned the optimism of this newsletter and as noted on a recent CNBC interview appearance, it was hard to be overall bearish when the portfolio was doing so well.
Of course the Non Gold sectors have been horrible despite record exports, imports and consumption for almost all the industrial metals and for iron ore. Please note that LME inventories have continued their medium term declines (other than some obvious warehouse transfers from stale bulls(?)) and this reflects the record consumption and limited new supply.
Oil, iron ore and coal have seen substantial investment in new capacity so the concept of oversupply against firm demand has applied. More on oil at a later date and but you should note this data :-
- double digit growth in consumption of transportation fuels in many countries in 2015,
- the ~1.8% total increase in global oil consumption in 2015 and more in 2016
- the 64% decline in the Baker Hughes US oil rig count in Calendar 2015(52% fall for gas rigs)
- the 30% decline crude oil output since the peak in Dec 2014 in key Eagle Ford tight oil field.
- Global crude oil stocks are high but are still only 6-8% above the five year averages
All make fascinating reading and the issues developing between Iran and Saudi Arabia may yet become a major issue for Saudi oil production. Note too the big bond issues to prop up the Saudi budget, local petrol price subsidies significantly reduced there and also the discussions on selling assets, including listing 5% of Saudi Aramco oil company with its 260bn bbls of reserves. Saudi Arabia might also be raising cash to fund military activities.
Oil is back to the 2008 lows and also the highs of the 1990s. May soon be time to call a bottom here.
Markets are always difficult to assess but true value always wins.
You can contact me at
bdawes@psec.com.au or +61 2 9222 9111.
I own: NST, BLK, GOR, MLX, TBR, DRM, MML, RSG, CGN, GEE, TNR, TYX, MUS, ARS
Edition #44
You can draw some very interesting conclusions here about sector rotation.
So when looking at Dongfang Modern here is what you find.
First of all I hope you expect that the Due Diligence carried out on this company is of a high standard. The Legals were overseen by Piper Alderman and the accounts were reviewed by PKF Lawyers. The accounts have been audited since 2009 by PKF Hong Kong so the data is reliable. The cash on the balance sheet is actually there!
I have made mention previously that this has to be the most impressive set of accounts I have seen in my +30 years.
This company was set up in 2005 and in 2008 the current Chairman injected about US$6m to acquire an 89% holding.
This was the last capital injection to the company. No more equity and no debt at all.
The plan was to acquire as many plantations as possible and by 2012 it was 9 plantations over 4500 hectares and by end 2015 it will be 19 plantations over 9,000 hectares.
That initial investment of US$6m in 2008 has probably provided the highest multiyear IRR ever recorded. After A$57m (A$ equivalent) earnings in 2014 DFM's June 2015 Interim showed Retained Earnings of A$216m. All done without additional equity capital and without debt.
These numbers are attractive and make interesting reading. 2015 and pre 2015 are PKF numbers and the forecasts post 2015 are Dawes Points alone.
The company is now probably the largest citrus grower/harvester in China with about 1.3% market share by revenue in a very fragmented industry. So many industries in China seem to be highly fragmented and the aggregation and consolidation process there has probably twenty years more to run. These are important business drivers and help to show another side of China.
Paradigm carried out major financial due diligence and modelling and made a site visit to several of the plantations.
Detailed forecasts were made based on all available published information and then some conservative assumptions were made.
Growing and harvesting citrus produce isn't all that far from something like coal mining.
You have a resource (trees) that should give a certain grade (harvest) with output of net fruit (grade) and at an expected recovery (yield). The selling price is the market price so revenue is saleable output time's price. Costs are roughly fixed so improved yields and productivity improvements can increase volume without fixed costs rising. Dongfang is hoping improve yields by about 4-5% pa for the next few years. So output should rise and costs rise less so.
Output will also rise as additional plantations are acquired.
Prices have been rising over the past few years too because demand has been stronger than supply and supply growth.
Dongfang's operating margin has been over 40% for the past few years and it expects to will stay high.
A study of future earnings for the next decade based on increasing tree volume through plantation acquisition, rising labour cost (which they are doing), modestly improving harvest yields and marginally higher product prices gave some quite astounding numbers.
Dongfang was #2 by sales revenue in 2014 with 1.2% market share after AIM listed Asiatic Citrus but the increased output to 230,000tpa in 2015 by Dongfang coupled with a couple of operational issues for Asiatic Citrus should now make DFM #1 with about 1.3% market share.
Market leader with 1.3% market share reinforces this fragmented industry concept.
Dongfang would like to go to 4-5% market share over the next several years so that implies organic and acquisitional growth
The numbers for Dongfang as assessed from public information by Dawes Points look like this with historic data in RMB and converted to A$ at historic rates or using the IPO Prospectus forecast of RMB 5:A$1.00.
This Valuation Matrix shows DFM's P&L and Balance Sheet in one and also gives a valuation target for DFM.
Note three years earnings history, the current year estimate and three years forecast for EBITDA on a product basis (note the very low D&A levels) and no interest cost.
Forecasts are deliberately conservative on prices, output, acquisition growth and costs but still show earnings rising steadily rather than surging.
The staff levels are low (only about 100 people) so administration expense is low and all harvesting is by contractors so EBITDA for each product is net cash. Note no tax is payable on earnings from agricultural food production and that almost all earnings have been reinvested, with capex mostly into acquisition of additional plantations.
The balance sheet is cash-rich without debt and EBITDA against estimates of sector assets gives a Return on Investment (on book value) of 30% overall and almost 100% for tangerines.
If we put each product division on 5x EBITDA, and add the cash, the appraised value for DFM is over A$500m and A$1.47/share compared to the IPO price of A$1.00.
Note that the forecasts have used 5:1 on the exchange rate, well above the current level, so A$ earnings would be higher with today's 4.62:1.
I expect over time that the market will give a much higher rating after DFM delivers on its plans.
Dongfang Modern is one of the largest China operations listed on ASX and shouldn't be the last.
If you came into the IPO, (and thanks for your help), you probably only came in in a modest contribution.
If you haven't, the hard work has been done so you should now be able to come in at lower entry risk to share the gains.
Barry Dawes
19 October 2015
I own DFM and Paradigm was the lead manager of the DFM IPO.
Edition #42 
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.
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.
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
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$45m. My numbers say PER
Blackhams abridged 25km of strike along the Wiluna Structure
The ASX gold index closed on Friday at 2819 which is a 72% gain from the low in November 2014.
Some very important technical issues actions suggest much more is to come and that something very special is about to happen.
Long term 
My view has been that Disbelief was 2000-2011 and Pessimism was 2011-2014. We are now finally into that Optimism Leg that should last at least as long as Disbelief (~10 years (say)).
This next leg will be driven by earnings and dividends and then by production growth and then by the US$ Gold price.
So there you have it.
I called the low in ASX Gold Sector in
Are these attractive enough for you now at A$1630?
PER 4.0x FY16 and 4.1x FY17 this universe? And yields of 10.0% and 15.0%.
And at a range of higher prices?
It is still 71% below that high. Cheap here.
And gold stocks have fallen against the A$ gold price. About 73% from the April 2011 highs and 78% from the 2008 relative value. Very cheap here.
And with XGD market share so low at about 1.5% of ASX All Ordinaries turnover (it was down to just 1% in August 2014!) compared with 4.5% in 2011-12 and over 6% in 2010, NO-ONE owns these stocks. A downtrend break has occurred. Huge pent up demand coming here. Remember the A$1,660bn in bank deposits.
And just remember the ASX Gold Index history.
Well, did you get aboard? And do you have in your portfolio these producing stocks that will be big dividend payers in 2015 and beyond now that most sector capex is complete and debts are being paid down?
If not, 
Those large dividend blue chip gold companies should be making shareholders very wealthy over a very long time. Have you enough gold and gold shares?
I am going to come back to this concept in another Dawes Points very soon. The implications are extraordinary.
The 10 year bull market was saying something and something big was afoot. Many reasons. Currency, debt, inflation, wars and deficits. All contributed. Many more reasons out there too.
For me, the build up in public sector debts and the gyrations in currencies are my preferred reasons. Who can really trust politicians or their government bureaucracies and their welfare recipient supporters to protect a currency and the population’s wealth?
But then we had the extension of the 30 –year rally in the US T-Bond market that brought yields down even lower and bond prices into the sky. And a US$ that rallied hard.
Do keep in mind that the US$ Index is made up as follows:-
These suggest the rally is real and, even with some technical pull back, gold in these currencies will be heading higher.
This `market breadth’ says buyers everywhere are buying gold not just arbitraging currencies.
The big buyers throughout 2014 have been India, China and, surprisingly, Turkey.
Here we have gold in Indian rupees, Chinese yuan and Russian roubles.
Source:24hGold.com
Demand from China has continued to explode with recent figures indicating 70 tonnes of gold withdrawn (i.e., acquired by Chinese citizens) from the Shanghai Gold Exchange in Week 2 of 2015 and have brought the year to date figures to 131 tonnes ahead of the Chinese 2015 Spring Festival starting on 19 February.
Source: Koos Jansen Bullionstar
This is 3400 tonnes annualised from China alone and EXCEEDS annual global gold mine production of 3100 tonnes!
The numbers from India are reported to be even more after the new Modi government made major changes to import restrictions. More market liberalisation could take place and further increase demand for gold from India.
Note that the Shanghai and Mumbai equity markets have been on a strong tear in the Dec Half of 2014. Shareholder wealth has increased and demand for jewellery has been boosted.
I have adjusted my Supply/Demand graphic to show this increased demand from China and India.
Demand for gold from Europe in recent months has also increased sharply to reflect fears of Islamic State terrorism, QE threats by the European Central Bank and the continuing general European malaise.
I consider that jewellery and bar demand will be higher and central banks and ETF demand will exceed my projections.
I consider that jewellery and bar demand will be higher and central banks and ETF demand will exceed my projections.
The `Deficit’ may also in fact be exacerbated by a decline in the 1400t annual availability of scrap. The GFMS numbers indicate that high prices in 2008-2012 drew out an extra 3000 tonnes of scrap gold. Aunt Audrey probably doesn’t have any scrap jewellery left now.
Where will the gold come from?
These numbers do show that there is a real game in play for physical gold and the market manipulators in gold futures markets do not have much more time to cover before the final whistle is blown. If large short positions do in fact exist it will be very difficult to buy back any such gold.
The playground is also being tested by the emergence of the new gold exchanges in Dubai (for Indian demand), Shanghai and Singapore. New gold only contracts are now being used so unless traders have the gold, they can’t sell. In addition a new 24 hour COMEX 1 kilo physically-delivered contract is planned to accommodate Asian buyers who will now be able to have a real pricing presence in the US time zone with physical delivery in Hong Kong. It will be interesting to see if the gold price manipulators try to attack the futures market while the physical market stays aloof. No gold to sell, no play.
The retreat by Switzerland from its peg to the Euro has added another dimension to the declining trust in central banks and fiat currencies. I understand it has been an important game changing event in Europe.
The demand for gold keeps rising, the supply is inflexible and so the gold price must rise.
A major turning point was probably seen in the Dec Qtr of 2014 and the outlook for gold is very strong.