The AUD plunged from 94 cents against the USD back in July to the current levels around 78 cents. This dramatic decline sent investors scurrying in search of stocks to benefit from our falling dollar. Yet if you read many of the prospect lists scattered across the internet, you will find little mention of ASX gold miners. Why?
Some investors focus exclusively on the benefit of revenues earned in US dollars without considering the company’s cost basis – USD or AUD. Gold miners with production and exploration assets limited to Australia incur costs in our dollars while revenues are in US dollars, thus maximising the benefits of the falling dollar.
What’s more, the per ounce price of gold in Australian dollars is obviously higher than in US dollars, but the price has been more stable as well. The following two charts track the one year price of the precious metal in both currencies.
Looking at a one year AUD/USD chart clearly shows while the dollar was falling the price of gold in our dollars has been rising.
The GFC ushered in what some experts believe is an era of unprecedented volatility. While few sectors have been immune, miners have been rocked by both high costs and lower commodity prices. In response to falling prices, all miners have cut operating costs substantially. Mining exploration has fallen or been restricted to only the highest potential sites and production has in many case shifted to higher ore grades in order to get better pricing. When the AUD began its descent ASX gold miners were positioning themselves to benefit from lower cost operations and higher ore grades. Now they have the added benefit of higher revenues due to the more favorable exchange rate. In addition, lower oil prices will lead to more cost savings. How can you go wrong with a company with lower operating costs and better profit margins from a highly favorable exchange rate?
For some investors this scenario may not be enough to overcome the hesitation to buy the miners due to the spotty price performance over the past decade. Who can forget the countless articles trying to explain why the share prices of gold miners were not keeping pace with the price of gold when it was escalating to all-time highs only a few short years ago? Who can forget the wild-eyed predictions of the price of gold falling below USD$1,000?
Yet since reaching its all-time high around USD$1,900 back in 2011, the price of gold has fallen below USD$1,200 only once. And this is despite strong headwinds ranging from a stronger US dollar to minimal inflation to falling oil prices.
For those who believe in the investing strategy of following the “smart money”, we now have other signs that suggest it is time to move some gold miners onto the radar screen. Private equity firms in the US and Canada are reportedly looking to invest in Australian junior miners with solid prospects but no cash to pursue them. In better days the juniors could raise development capital through stock issuance, but nervous investors have dried up that well. It is worthy of note that these are private equity firms that specialise in mining operations.
Rather than cast a net for junior miners, we have chosen to look at lower risk ASX gold miners. With the exception of gearing we chose to look only at forward looking measures:
• Forward P/E (to 2016) under 10.0
• Estimated 5 Year P/EG under 1.0
• 2 Year Earnings Growth Forecast over 40%
• Year to Year Increasing Earnings Growth Forecast (2015-2016)
• Gearing under 20%
The following table lists the four stocks that met these criteria, listed by market cap.
Earnings Growth Forecast
Northern Star Resources
Silver Lake Resources (SLR)
Northern Star Resources Limited (NST) and Saracen Mineral Holdings Limited (SAR) appear to be the best bets here, based on two year earnings growth forecasts. The five year estimated P/EG is calculated by Thomson/Reuters and should be viewed with caution as five years can be an eternity in the share market. Northern Star’s Trailing Twelve Month (TTM) P/E is 18.97 and Saracen’s is 111.25, which may explain why these two are the only companies in the table with an analyst consensus Hold rating.
Northern Star vaulted into second place among ASX gold producers through a series of acquisitions, which is expected to increase production more than six times. The company is still buying and expanding; announcing on 24 February it had acquired the Hermese Gold Project in Western Australia from ASX listed Alchemy Resources (ALY) and also reached a Farm-In arrangement with the same company on another project. Two days later Northern Star announced a joint venture with Tanami Gold. Northern Star now has five mines in operation with exploration projects underway in an additional six areas, all here in Australia.
The acquisition strategy appears to be paying off as the Half Year 2015 Results reported a 471% revenue increase and a 573% increase in net profit after tax (NPAT). What is truly stunning about the profit growth is the company did not exclude the one-off charges from acquisitions and restructuring. The price of gold has been declining for a little more than two years. During that time Northern Star’s share price has risen 150%. Here is the chart.
Northern Star pays a fully franked dividend with a current yield of 2.15, with a dividend growth forecast for the next two years of 70%. For the Full Year 2014 the company reported earnings per share (EPS) of $0.08, with a forecast for 2015 of $0.258 and $0.403 for 2015.
Saracen Mineral Holdings (SAR) operates in Western Australia at Carosue Dam and Red October. The company has reduced its All in Sustaining Costs (AISC) of operation to around AUD$1,100. With the price of gold in Australian dollars at around $1535 right now, Saracen is well positioned for future profitability. In January 2014 the company acquired two mines in the Thunderbox Operation that had been put in care and maintenance in 2007. Despite the fact this company has had several capital raises over the last few years; Gearing is minor, at only 6.17%.
The share price has been somewhat more volatile over the past year than that of larger rival Northern Star but is up close to 30%. Here is the chart.
In FY 2014 the company reported EPS of $0.009 with a massive EPS increase forecasted for 2015 to $0.067 and for 2016 EPS is expected to be $0.117. Analysts are bullish on SAR with a consensus Buy recommendation, with 8 analysts recommending investors buy the stock and only 1 at Hold.
Regis Resources Limited (RRL) has a more modest growth forecast over the next two years of 67.5%. For FY 2014 the company reported a loss of $0.298, with expected growth to a positive $0.158 in 2015 and to $0.24 in 2016. The company has operating mines in Western Australia and in New South Wales with additional exploration permits in both areas.
Regis has had its share of troubles that might be characterized as bad luck. In early 2014 two of its mines experienced heavy flooding. This contributed to a dismal Full Year Results report, with losses across the board. Then on 6 March the company reported more problems in an Operating Update ranging from more rain, to pit wall failures, to lower grade ore. On a positive note, management announced it was working to restructure its existing debt facility to allow the company to begin paying dividends again. Investors were not impressed as by mid-day trading the share price had dropped from an opening price of $1.79 to $1.40. The share price has been falling for two years. Here is the chart.
Silver Lake Resources Limited (SLR) had two operating mines in Western Australia along with two major exploration projects. On 24 February the company announced it was placing its Murchison Goldfield Operation into care and maintenance, due to the declining gold price. Silver Lake most recently reported AISC of AUD$1,298, which hardly qualifies as a low cost producer. Costs could have contributed to the closing of Murchison. The Half Year Results recently reported focused on the remaining Mount Monger operation, which saw a 52% drop in revenue.
Although Silver Lake does have a 2 year growth estimate of 44.5%, a look at the actual EPS figures for each year paints a less rosy picture. For FY 2014 the company reported a loss of $0.258 which is expected to turn to a positive EPS of $0.019 by 2015 with a scant increase to $0.022 in 2016. The share price is down about 90% than since the beginning of the decline in the price of gold. Here is the chart.
While Silver Lake may be the highest risk investment of the four shares in our table, analysts have a somewhat mixed consensus Overweight rating on this stock. Three analysts recommend Buying the stock; 1 has an Overweight recommendation; 4 are at Hold; and 1 analyst recommends investors sell the stock.
Doray Minerals Limited (DRM) is another low cost gold miner to consider that didn’t make the list due to more than 20% gearing and a slight decline in EPS earnings forecast between 2015 and 2016. Analysts are extremely bullish on this stock with 7 recommending investors Buy the stock. The Forward P/E is 4.36 with a two year earnings growth forecast of 75.3%.
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.