Commodities: Gold miners – “Big 3” report big growth spending

About the author:

Author name:

By Mat Collings

Job title:

Research Analyst

Date posted:

08 September 2021, 7:00 AM

Sectors Covered:

Mining

• While the USD gold price was softening, the AUD gold price actually peaked in late August as the AUD weakened.
• The All Ords Gold Index has declined ahead of both the USD and AUD gold price as sentiment has shifted away from defensive stocks like gold.
• NCM, NST and EVN all recently revealed large capital investments in the coming years to support and grow their respective production bases.
• We look at several standard valuation metrics across the sector, with each metric having strengths and weaknesses and all requiring context to be best understood and interpreted.

Gold price and sentiment

While the USD gold price was strongest at the beginning of June, in AUD terms the spot gold price peaked in late August above A$2,500/oz before declining slightly. Inflation concerns seemed to subside globally, with high results considered transitory.

Sentiment in the sector has softened as investors look outside defensive sectors, compounded locally by cost pressures in WA.

Costs continue to be a focus

Discussion of costs remained a key theme for analyst calls on FY21 results. In WA in particular, border closures and the strength of the iron ore sector has created labour shortages across the sector.

We capture reported All in Sustaining Costs for our companies, as well as reported (or estimated) All in Costs. Interestingly, average reported AISC fell slightly this quarter, with some producers enjoying strong copper credits, though AIC rose with large growth capital commitments from the major miners.

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

RMS remains our key pick under formal coverage for investors looking for exposure to the gold price. RED appears to be building momentum as it develops the King of the Hills project in WA.

While it is trading below our target price, expect high-cost production from Darlot until KOTH is completed. Our general commentary on the names included in this report is presented on page 2.

Figure 1: Gold Price and All Ords Gold Index

Source: Morgans Financial, IRESS

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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.