gold stocks' horror run not over yet

Gold stocks' horror run not over yet

PAUL GARVEY |
The Australian |
December 26, 2013 12:00AM

THE gold sector's horror story of 2013 looks certain to translate into fewer gold stocks next year, with consolidation or collapse likely to further thin out the ranks of Australian producers and explorers.

Gold stocks have been smashed over the course of the year, with the sudden end to a decade-long gold price bull run and continued cost pressures coupling to destroy profitability and send investors fleeing from the sector.

The S&P/ASX All Ordinaries Gold Index, which consists of 37 Australian-listed gold players, is down 63.6 per cent this year even after allowing for dividends.

Only one member of the index managed a positive return for the year, and that was Interpid Minerals -- a company that should arguably be classed as a copper play, rather than a gold stock.

The next best performer was Beadell Resources, which managed to limit the pain this year to a 24.5 per cent fall. Some 27 of the 36 companies on the index more than halved in value, while the two darlings of the gold sector -- miner Regis Resources and explorer Papillon Resources -- each had a total return of negative 41 per cent and negative 46.1 per cent, respectively.

Fund managers are not expecting to see much of a recovery in the sector in the coming year, with several under-pressure producers likely to be either forced into mergers with healthier peers or face the prospect of sliding into administration.

"There's a lot of gold companies living on borrowed time," said Westoz Funds Management executive director Dermot Woods.

Many miners, he said, were mining higher-grade portions of their ore bodies in an effort to stay afloat, while others were taking advantage of well-priced hedge positions that were now in danger of running out.

"It was an industry that unduly attracted too much capital during the gold price push," Mr Woods said.

"Things got money that shouldn't have got money."

While consolidation has long been suggested as a likely outcome of the gold industry's changed fortunes, deal flow for much of the year has been subdued.

A flurry of activity in recent weeks, however, suggests some acquisitive companies are increasingly confident in their ability to take on board new assets, while also showing an increased willingness of target companies to engage with buyers.

Northern Star this week announced it would buy the Plutonic underground goldmine from Canadian gold giant Barrick Gold for just $25 million (Northern Star managing director Bill Beament believes the same mine would have cost $150m just a year ago), while Metals X snapped up the marginal Australian goldminers of Alacer Gold in September for $40m.

In West Africa, a region home to numerous small Australian explorers and miners and long tipped as a hotbed of possible M&A activity, two recent deals look to have got the ball rolling.

Ampella Mining, a one-time flag-bearer for West Africa's gold potential and which once traded as high as $3.33 a share, earlier this month agreed to a sale to goldminer Centamin for 16c per share in a deal that valued the company at $40.9m.

Last week, dual-listed PMI Gold agreed to a $C183m ($193.2m) takeover offer from fellow Ghana developer Asanko Gold, just 10 months after shareholders forced PMI to abandon a proposed sale to the same company for $C339m.

Despite that flurry, mergers and acquisitions involving Australian gold companies and/or assets have plunged this year, with just 116 deals worth a combined $1.79 billion announced to date.

That is well down from the 141 deals worth $19.77bn that were announced in the Australian gold space back in 2010, and is also shy of the 123 deals worth $4.34bn announced last year.

Terra Capital director Jeremy Bond said he would not be surprised to see some consolidation in the gold sector next year as more and more boards came to accept their stock's low prices as the new reality.

"If you find your company is trading below cash backing and has been for some time, eventually you will have to do a deal," Mr Bond said. "You may not have a year ago, but at some point you're going to have to realise there's no coming back. There will be a reckoning at some point."

However, he said some struggling gold assets simply were not good enough to find a buyer.

"Some of the projects are just never going to be economic, so it doesn't matter how cheap they get. If it's never got any potential to be mined, what's the point?" he said. "Some gold companies will be OK, a lot of them won't."

The prospect of heightened M&A activity won't be enough to lure some disenchanted investors back to the gold sector.

EIM Capital Managers director John Robertson said he had removed all goldminers from the firm's portfolios in the past three months due to a belief that the industry was broken.

Goldminers' costs have been rising at 7.5-10 per cent a year for the past decade, Mr Robertson said, while production had remained flat. In addition, the increased ease with which investors big and small could invest in gold through exchange-traded funds meant there were simpler, safer ways to play the gold price than investing in gold equities, he said. "The gold sector is in a valuation trap. They've outlived their usefulness," he said. "Sometimes there are historical shifts for any industry. Just ask Nokia or Kodak. Just because you've existed for so long doesn't give you a right to exist in that same form in the future."

Mr Robertson said the gold industry needed to change its approach if it was to survive.

He said special purpose vehicles with the sole purpose of funding the development of a single mine, and which returned all proceeds back to investors, could be the model of the future for goldminers: "Right now the tendency is to raise capital, develop a mine, and use any positive cashflow to go find something else. The shareholder never gets anything back."
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