Analysts from Canaccord Genuity believe billions of dollars of capital is waiting to be deployed into gold developers and explorers.
Canaccord head of mining research Reg Spencer told a webinar last week that the firm remained bullish on the gold price.
“And that means we have to be bullish gold equities – gold stocks provide the best leverage to rising gold prices,” he said.
The gold price is up by about 40% over the past 12 months but it’s only been recently that equities have started to really catch up, though Spencer suggested there was plenty of room left for stocks to run.
“We think valuations for gold producers and gold stocks in general are undemanding,” he said.
“If you have a look at average gold or ASX producer price to net asset value multiples, they’re currently sitting at about 0.7 times. Average P/NAV multiples have largely remained range bound for five years.
“This is in spite of the fact that Aussie dollar gold prices have more than doubled in that same period of time.
“In cycles past, gold stocks have traded at premiums to NPV … so despite this recent outperformance of equities, we think that this is still supportive for further upside in gold equities.”
M&A cash to redeploy
Gold takeovers have picked up in the past six months, leading to offers for three ASX 200 companies.
Northern Star Resources (ASX:NST)wrapped up its $6 billion takeover of developerDe Grey Mining (ASX
EG)earlier this month, whileSpartan Resources (ASX:SPR)has agreed to a $2.4 billion buyout byRamelius Resources (ASX:RMS)and Gold Fields has offered $3.7 billion forGold Road Resources (ASX:GOR).
Spencer said that equity capital, equating to around $12 billion, would need to find a new home, which would likely flow down into developers and explorers.
Rising margins for gold producers and increased profitability means that M&A activity will continue, according to Canaccord.
Spencer said developers were particularly ripe for consolidation.
“We think you’re going to continue to see a lot of M&A in the sector, and it’s those single asset, pre-production companies that are more likely to be prey, as opposed to the hunter, I guess, for lack of a better term,” he said.
Laverton developerMagnetic Resources (ASX:MAU)has confirmed itself as a target recently, with the company opening a dataroom to interested parties.
Near Kalgoorlie,Astral Resources (ASX:AAR)could find itself being looked at due to the close proximity of its Mandilla project to Gold Fields’ St Ives mill.
Westgold Resources (ASX:WGX)is the top dog in the Meekatharra area and could have a look at soon-to-be producersMeeka Metals (ASX:MEK)orNew Murchison Gold (ASX:NMG)(the latter of which it already has an ore purchase agreement with), or high-grade explorerGreat Boulder Resources (ASX:GBR).
Antipa Minerals (ASX:AZY)is considered a prime takeover target for growing producer Greatland Gold, which would likely fancy Antipa’s Minyari ore for its hungry Telfer mill.
In West Africa,Predictive Discovery (ASXDI)is a likely target for eitherPerseus Mining (ASXRU)or its newer shareholders Zijin Mining and the Lundin family.
In South America,Challenger Gold (ASX:CEL)is hoping to catch the eye of China’s CMOC Group, which is acquiring its Ecuador neighbour Lumina Gold, while Sunstone Metals has confirmed corporate interest in its own Ecuador ground.
Explorers gaining momentum
Spencer noted the surge in exploration for critical minerals, including lithium and exploration, over the past five years.
“That’s tracked risk capital away from the gold sector, and typically you see a lag in exploration spend and commodity prices. So now we’ve had two years of rising gold prices, we’ve had falling lithium prices, falling rare earth prices, and we see risk capital returning to the early stage exploration sector,” he said.
“That increasing exploration activity is going to lead to new discoveries, and there’s nothing that gets the market excited like a brand new gold discovery.”
Last week, Canaccord released the second annual version of its Emerging Precious Metals Book, which highlighted 26 gold stocks not yet under its formal coverage.
The report included eight grassroots, pre-resource explorers, which Spencer said should be included in a gold investment portfolio.
“If you have a look at the Lassonde curve or where value is created with mining projects and mining companies, the biggest value creator is discovery, so a smart portfolio would include everything from a Northern Star or aNewmont Corporation (ASX:NEM)all the way down to explorers in Western Australia, South America, West Africa and places like that,” he said.
One of the pre-resource explorers to get a mention isKoonenberry Gold (ASX:KNB), up nearly 200% following an emerging discovery at its Enmore gold project in New South Wales.
Fellow NSW explorerWaratah Minerals (ASX:WTM), which has nearly doubled, made the cut due to exploration success at its Spur gold-copper project.
In WA,Caprice Resources (ASX:CRS)is up 165% this year on high-grade gold results from its Island gold project, while Kalgoorlie Gold Mining has more than doubled after making a discovery at its Lighthorse prospect.
Golden Horse Minerals (ASX:GHM)is up nearly 60% on drilling at its Hopes Hill project, while Ordell Minerals is flat for the year but has assays due for its Baramaia project.
Many Peaks Minerals, which this week reported a hit of 201m at 1.12g/t gold at its Ferké gold project in Côte d’Ivoire, is up 200% since the start of the year.
The earliest stage explorer in the report isMetal Hawk (ASX:MHK), which is yet to drill a hole at its Leinster South project. The stock has surged this year off the back of high-grade rock chips and the arrival of Tim Goyder on its register.
Further afield isWest Wits Mining (ASX:WWI), which boasts an impressive 5.03Moz at 4.66g/t Au resource at its Witwatersrand Basin project in South Africa.
A debt facility to fund the initial development of Qala Shallows – ore reserve of 351,000oz at 2.71g/t Au and Stage 1 mine inventory of 1Moz at 3.04g/t – is expected by the September quarter of this year, Canaccord noted.
(20min delay)