On 16 December 2015 the US Federal Reserve raised interest rates for the first time since 2006, sending the price of gold down to a six year low of $US 1,050 per ounce. The share prices of ASX Gold Miners across the board dropped along with the decline in the price of the metal. The following one month price chart shows the decline for two of the top gold miners in Australia, Evolution Mining (EVN) and Northern Star Resources (NST).
Historically gold is the safe-haven investors flock to in times of economic turmoil or uncertainty. Fear of runaway inflation and low or no interest environments fueled the price of gold in the not too distant past but as that fear eroded so did the price of gold. Check out the following five year chart from the US-based NASDAQ website for the price of gold.
As it gradually seemed inflation was nowhere in sight, despite numerous doomsday warnings, and the low/no interest conditions appeared to be boosting the all-important US economy, the price of gold fell. As you know the 2016 trading year got off to disastrous start, with the subsequent panic driving up the price of gold. Here is a one month chart.
While the price of the metal has dropped in recent days, many of Australia’s top gold miners have seen their share prices continue to rise. Over the last seven days gold has dropped about 2.7% while Evolution Mining is up almost 3%. Ultimately the miners need higher gold prices, which have suffered during the equity bull-run.
As is often the case, market downturns such as the one that ushered in the New Year are accompanied by a variety of prognostications as to what is next. Right now you can find experts claiming the bull market has taken its last breath while others maintain there is life left. Economic conditions in Brazil, Canada, Europe, and of primary importance, in China are questionable. Not long ago forecasters were speculating on Oil at $40 per barrel, then $30, then the possibility of $20 a barrel appeared and in the last days we see at least one expert claiming $10 per barrel is possible. It is rare for market bulls and market bears to agree on anything, but it seems everyone agrees 2016 will be a highly volatile trading year. Volatility breeds fear and fear makes gold a more attractive investment.
With that in mind, we looked for ASX gold miners that appear to have the best prospects. We looked for stocks with year over year share price appreciation of 50% or more, and/or stocks with two year earnings growth forecasts in excess of 50%.
The following table looks at the five miners we found, ranked by share price appreciation.
On 14 January 2015 St. Barbara Limited (SBM) closed at $0.14. Full Year 2014 Financials reported in August showed the company had fallen from a 2013 profit of $29 million to a staggering loss of about $500 million, including impairment charges for operations in the Pacific Rim. Without the one-offs, the loss was $94 million.
The first production report released in 2015 showed record level outputs from the company’s two operating mines (Leonora in Western Australia and Simberi in Papua New Guinea); a trend that continued along with reductions in All In Sustaining Costs (AISC) until St. Barbara released a blockbuster Full Year 2015 Financial report showing a $39 million profit, wiping out the bitter memory of the 2014 loss.
St. Barbara has raised its guidance for FY 2016 and is reducing its debt with some analysts predicting the company could be debt-free by FY 2018. The last reported AISC was $1,002 per ounce, which is the total cost of getting gold out of the ground. AISC fluctuates and earlier in the year SBM reportedly had an AISC of $798, a 23% drop over the last quarterly report. In addition, all gold miners are benefiting handsomely from a weakening AUD, which is at less than $0.70 against the US dollar. The following chart shows the recovery of the SBM share price over the last two years.
Ramelius Resources (RMS) has three operating gold mines in Western Australia along with a gold treatment plant and multiple stgelopment and exploration projects. Like St. Barbara, Ramelius has reported record production levels in 2015 along with positive exploration results and the discovery of higher grade ore at its flagship operation, the Mt. Magnet mine. A further discovery led the company to request a trading halt on 29 November. On 2 December the company announced a bonanza intersection (rich vein or pocket of ore) uncovered at the site (Milky Way), leading to a 22% spike in the share price which has continued to climb since. Here is a three month price movement chart for RMS.
Ramelius has an exceptionally strong balance sheet with only $1 million in total debt against $34 million total cash on hand, as of the most recent quarter (MRQ).
Saracen Minerals (SAR) has three major deposits at its Carosue Dam mine in Western Australia with another mine in late stage stgelopment at Thunderbox. The company’s latest update states the Thunderbox stgelopment is under-budget and ahead of schedule. When completed, operations at Thunderbox are expected to double total gold production for Saracen.
Saracen has a solid balance sheet, despite capex costs at Thunderbox. The company has $38.4 million in total cash against total debt of $1.4 million (MRQ). Analysts are bullish on this stock with four at STRONG BUY and five at BUY.
Evolution Mining (EVN) came on the ASX in 2011 as a result of a merger between Catalpa Resources and Conquest Mining and the additional acquisition of two operating mines from Newcrest Mining (NCM) – Cracow and Mt. Rowdon. In July and August of 2015 the company acquired two more mines – Cowal and Mungar. Evolution now has seven operating mines across Australia. In November Evolution acquired Phoenix Gold (PXG). Evolution pays an unfranked dividend with a current yield of 1.5%.
Northern Star Resources (NST) is the only stock in the table with a fully franked dividend, currently yielding 1.98%. This company has the best historical performance record of any gold miner on the ASX. Over ten years NST shareholders have seen a 40.2% rise in total returns (share price appreciation plus dividend) over ten years, with a 55% total shareholder return over five years, and a 37.6% return over the last three troubling years for gold miners.
Northern Star has five operating mines in Western Australia and the Northern Territory with its flagship project at the Paulsens Mine. In August of 2015 the company announced a joint venture with ASX junior gold miner Tanami Gold (TAM) to expand in the Northern Territory. The Tanami share price has risen 33% since the announcement while the NST share price has gone up 27%.
Northern Star came on the ASX in 2003 as an exploration company, opening at $0.20 per share. In 2010 the company made the strategic decision to shift from exploration to production by buying existing mines. To say the strategy was successful would be an understatement. Here is a price movement chart for NST since it came on the ASX.
Northern Star’s track record of acquisitions has been near-perfect, allowing the company to shift focus to organic growth. The exception to the string of successful acquisitions is the Plutonic Mine, purchased from Barrick Gold in 2014. In October of 2015 the company reported Q1 2016 results which included an alarming AISC at Plutonic of $1,832. Northern Star still managed a total AISC of $1,003 for the quarter, a 10% increase over the Q1 2015 figure.
Northern Star had vaulted into second place by market cap among ASX gold producers with its acquisition strategy, but has fallen behind rival Evolution Mining. For FY 2016 Evolution issued guidance calling for gold production between 730,000 and 810,000 at an AISC between A$990 and A$1,060 per ounce. Northern management states they are on track towards a goal of producing 700,000 ounces per year. Both turned in impressive financial results for FY 2015. However, Northern Star wins the prize here, having increased net profit after tax (NPAT) from $24 million to $92 million – a 73% increase – along with a revenue increase from $297 million to $845 million – an increase of 65%. Evolution turned in a somewhat more modest but still solid performance with revenues rising from $634 million to $666 million and a doubling of profit from $50 million to $100 million.
The average P/E for the Materials Sector is 11.47 along with an average P/EG of 0.64. By those measures every stock in the table looks cheap. However, as always with potential reward there is risk and despite stellar performance in comparison with other equities over the past year, the gold miners are subject to a great deal of risk.
First, the price of gold has proponents claiming it will rise to $1450 in 2016 and others claiming it could fall to $900 and below.
Second, in December of 2015 many experts forecasted four interest rate hikes from the US Fed in 2016. We have already seen what the first did to the price of gold.
On the other hand, the global stock market rout in the early days of 2016 has given rise to officials at the US Fed expressing concern about the impact of further rate hikes on a shaky global economy.
In addition, the economic problems in China and throughout the emerging market countries are not likely to dramatically improve overnight. The price of oil is another issue contributing to the panic and fear gripping investors worldwide. Historically gold has moved in the opposite direction of equities. The cold hard truth is that economic uncertainty and market volatility are good for gold and gold miners.