Quality And Long Life Key To Oz Gold Miners

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The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

-M&A activity likely to surge
-Paying little for upside
-Higher AUD a buffer
 

By Eva Brocklehurst

A resounding "No" vote at the Swiss referendum on whether the central bank should hold 20% of its reserves in gold was moderately bearish for the market. The proposal would have required the central bank to purchase up to 2,000 tonnes of the precious metal. As such, the vote has kept the downward pressure on gold equities, with Macquarie observing the bulk of ASX-listed producers were down 10-15% over the past week. The broker maintains a longer-term positive outlook for gold, despite ongoing price volatility.

Gold miner merger & acquisition activity could surge into 2015 and Macquarie's preferred names all generate strong cash flow at current spot prices, enabling them to take advantage of the significant decline in the share prices of the explorers and developers. In the search for high quality, long life assets, or companies that can buy them, Macquarie's main contenders are Independence Group ((IGO)), Northern Star ((NST)), Regis Resources ((RRL)), Evolution Mining ((EVN)) and Saracen Minerals ((SAR)).

Citi is relatively neutral on gold but expects a falling Australian dollar will provide relief to Australian exporters. The broker downgrades OceanaGold ((OGC)) to Neutral from Buy after a recovery in the share price. Goldman Sachs aims to identify those deposits the market is prepared to pay the most for and which companies, therefore, are of greatest value. Alacer Gold ((AQG)) stands out, as it screens well on reserve quality and value. Northern Star has a short mine life and, hence, the most risk to cash flow as resource conversion is key to its survival. Goldman Sachs believes Alacer Gold is undervalued and Northern Star overvalued, when looking at the multiples in terms of enterprise value relative to reserves and the cash margin they generate.

The broker expects the gold price to underperform in the near term and gold equities to remain volatile. It is important to be exposed to those equities most insulated against a declining price which can ride out fluctuations. The key is long-life assets. Newcrest Ming ((NCM)) is considered mixed on this front, with its Cadia operation screening well on the broker's metrics, but downside exists at Lihir, where mine life could potentially be less than 10 years unless the plant can be run profitably once stockpiles are depleted. Goldman Sachs is also becoming more concerned about the long-term gold grades for Medusa Mining ((MML)) and Beadell Resources ((BDR)).

Given the current environment, investors are paying very little for upside to projects. In the broker's view there are two that stand out. Newcrest's Wafi/Golpu and Alacer's Copler sulphide. The broker is confident the Copler operation can move to a 20-year mine life and while Wafi/Golpu depends on market conditions, it is likely to be built at some stage in the future. There are two more projects in the 2m-plus ozs camp, belonging to Perseus Mining ((PRU)) and Regis Resources, but these are likely to be on the backburner while each company sorts out current producing assets.

 A higher Australian dollar gold price is expected to provide a buffer for domestic producers in 2015 and Deutsche Bank remains positive on OceanaGold and Independence, the two lowest cost producers under coverage. The broker suspects further cost cutting is unlikely and costs should start to lift again next year as production growth stagnates. Still, the currency tailwind has allowed Australian producers to reintroduce some costs without sacrificing margin.

Deutsche Bank suspects six assets belonging to those stocks under coverage will be above all-in-sustainable cost calculations in 2015, including Edna May (EVN), Mt Rawdon (EVN), Lihir (NCM), Hidden Valley (NCM), and Garden Well (RRL). St Barbara's ((SBM)) Simberi is considered highly likely to be closed. Discretionary spending remains very low across the sector. Deutsche Bank expects that only Alacer Gold, with its Copler sulphide expansion, OceanaGold, with its Didipio underground, and Evolution Mining, with its cutbacks at Mt Rawdon and Edna May, will commit to new major project expenditure in the near future.
 

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