According to Maple-Brown Abbott, the Australian small cap gold sector is set to attract increased investor interest given it represents approximately 9 per cent of the S&P/ASX Small Ordinaries Index by market capitalisation and has the potential to react positively to the recent increase in gold prices.
The commodity has been witnessing a hot streak in recent weeks, hitting record highs of more than US$2,387 per ounce in the several days.
“If the gold price remains higher for longer, this has the potential to result in material positive earnings revisions for companies at the smaller end of the Australian gold mining sector,” remarked Maple-Brown Abbott’s Matt Griffin, co-portfolio manager, Australian small companies.
He observed upside potential for companies in the sector that can deliver on production guidance, effectively manage costs, and offer significant operating leverage.
With this, some valuations for select producers remain relatively undemanding, particularly in the context of all-time high gold prices.
“Current stock valuations broadly imply gold prices around long-term pricing, which is well below the current spot price,” said co-portfolio manager Phillip Hudak.
“Valuations have held up best for producers with high-quality projects, for example, Perseus Mining, that continue to deliver production growth, meet cost guidance, and build cash reserves.”
Other preferred stocks for the small caps team include Spartan Resources and Genesis Minerals, part of the “increasingly acquisitive local small-cap gold market”. They highlight the limited organic growth profile for many miners due to depleting reserves and reduced exploration spending.
“Given the recent strong gold price and rising producer margins, this promotes merger activity to backfill declining production profiles. In addition, increasing complexity and time taken to permit new projects means it is likely now cheaper and easier to buy versus build.
“We have also seen early-stage explorers continuing to struggle to attract new capital with the number of global junior fund raisings in February 2024 being lower by 33 per cent relative to the previous period last year and the lowest reported since January 2022 which makes them easy targets in the current environment,” Griffin said.
The fund manager highlighted stabilising mining costs in the past 12 months, after a few years of being plagued by higher costs from labour constraints and inflation pressures, indicating the tides could be turning for the gold mining sector.
Hudak elaborated: “Our discussions with gold miners indicate labour pressure is easing, validated by the decline in job advertisements in the mining services industry. This has been assisted by the recent closure of nickel and lithium mines given commodity price pressures which is easing mining industry labour constraints.”
Last month, VanEck’s head of investments and capital markets, Russel Chesler, also identified a potential once-in-a-decade opportunity in gold mining stocks.
“Gold miners typically outperform gold bullion when the price rises and underperform if the gold price falls. However, there is currently a disconnect in that relationship, meaning we have an opportunity not seen in the last decade,” he said.
“The only other time there was a disconnect in that relationship was in 2011, but it wasn’t long before the two started to move as they had before that date, with gold miners racing ahead. In 2023 that relationship disconnected again. As the gold price rose, the price of gold miners fell.”
He opined markets could be “on the precipice of a gold miners rally”.
Like Maple-Brown Abbott, he noted miners have strengthened balance sheets and improved cash flow generation over the past decade and retained healthy margins.
“What we’ve seen is that while all-in-sustaining costs have risen for gold miners since 2016, disciplined mining companies are still generating a substantial amount of free cash flow,” Chesler remarked.
In terms of the outlook for gold, which has been rallying as investors seek a safe haven asset to hedge against geopolitical risk and uncertainty regarding rate huts, he held that it has seen a “big gain” but “there could be more to go”.
“Looking back since 2000, the price momentum following a spike of this magnitude (initially greater than 15 per cent in 90 days) has resulted in strong gains,” Chesler said.
“We have also seen continued strong buying by central banks with the annual net purchases of 1,037 tonnes almost matching the 2022 record.”
This, combined with strong jewellery consumption even in this high gold price environment, looked to bode well for the yellow metal, Chesler contended.
