WITH bullion prices apparently on the march upwards, some of Australia's ugly duckling gold stocks are gaining wings. None more so than Ed Eshuys' St Barbara, which is starting to convince the doubters on its bold aim to make the old Sons of Gwalia assets bloom. The Metal Detective by Stephen Bell
Shares in Melbourne-based St Barbara are up 18% this month as investors warm to its plan to treble production to 450,000oz per annum by late 2008, using the unloved SOG mines that Eshuys bought two years ago.
It is belated recognition for Eshuys, who some thought had taken leave of his senses when he paid the administrators $38 million for SOG's beleaguered gold operations.
The rally in gold prices has certainly helped St Barbara's cause.
Bullion is up 5% this month as the precious metal finds support from the weakening US dollar, and talk that it could start playing catch-up with other high-flying commodities.
Heavyweights Newcrest and Lihir have tracked the gold price, up 7% and 6% this month respectively.
Some smaller fry have fared even better, as investors bet that higher gold prices will compensate for rising costs and the stronger Australian dollar.
PNG hopeful Allied Gold is up 22% this month, while WA gold mine developer Avoca is up 19%.
Those gains show investors are prepared to punt on "riskier" gold plays, despite the harsh cost environment of the past 12 months or so that has squeezed the life out of some gold diggers.
WA-based Gleneagle Gold went into administration earlier this year after continued problems at its Fortnum mine, while BMA Gold called in the bean-counters in January after problems at its Twin Hills operation in Queensland.
Over in Victoria, meanwhile, Bendigo Gold and Perseverance Corporation have chewed up cash as they struggle with grade problems in their narrow-veined mines.
"As a general proposition, the gold industry has historically been a voracious consumer of cash for little return," Macquarie Bank said recently in a note on St Barbara.
It is a fairly gloomy assessment, as St Barbara embarks on a $170 million spending spree in the next 12 months to rev up its expansion plan.
Yet Macquarie retains an 'Outperform' on St Barbara, which has replaced Perseverance as its preferred domestic producer exposure.
Macquarie admits St Barbara is not without risk, with much of its optimism about the stock based on a more positive view on gold.
Higher gold prices would be a boon for St Barbara's Southern Cross operations (where Eshuys hopes to cap cash costs at A$500/oz) and the Gwalia Deeps development.
A $45 million decline development at the latter is due to reach the top of the orebody, at 1100m below surface, early next year.
Eshuys has taken out some "insurance" via the purchase of put options with a strike price of A$700 per ounce for Gwalia.
"That gives us a reasonable return for an eight-year mine life," he told MD. "And it leaves us completely exposed on the upside should the gold price ever increase."
The group has also bought puts, priced at A$760/oz, for forecast production this fiscal year from Southern Cross.
Eshuys says the puts, which cost around $10 million in total, are far-removed from the hedging policies that caused the downfall of SOG.
"It is not a commitment," he said. "It is just an option and, basically, insurance." However you describe it, the market seems happy enough with Eshuys' "revenue protection" strategy, along with last month's $100 million convertible note issue to fund the WA expansion.
It is interesting to compare St Barbara's fortunes with Monarch Gold, Michael Kiernan's gold vehicle that is looking to go from zero to 500,000oz per year by late 2009.
Like St Barbara, Monarch's plans are based on several unloved WA gold assets, including Davyhurst, Mt Ida and Minjar.
Unlike St Barbara, though, investors have been lukewarm towards Monarch. The shares did go for a run last month when Kiernan announced Monarch's Dubai listing. This month, however, the shares are up just 5%.
Mind you Kiernan has been a tad distracted, with his Territory Resources' counter-bid for Consolidated Minerals taking up oodles of time.
And Monarch's shares may be re-rated soon, with Davyhurst due to start cranking up production in the current quarter.
Let's hope that up-and-comers like Monarch, St Barbara, Allied and Avoca all do well.
As investors sniff the beginnings of a mini-gold boom, the last thing they want to see is broken promises.
* A feature on St Barbara and Ed Eshuys will appear in the August edition of Australia's Mining Monthly
SBM Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)