Gold’s divided market, sliding majors and rising juniors

Most of the big names in Australian gold mining have had a rough ride recently as the gold price has struggled to reclaim last year’s all-time high, but it’s a different story at the small end of the game where exploration success is the key to share price movement.

The difference between producers and explorers is an interesting example of the old saying about it being better to travel than to arrive.

Dividends and yield have become the primary appeal of some big gold producers, a novel situation given the high risks associated with any form of mining and a position which will be challenged in the next interest-rate rising cycle.

While rewarding shareholders with generous payouts is an admirable management policy there is a risk that attempts to “industrialise” gold mining will inhibit the all-important drive to discover which is essential for all miners because of the unavoidable need to replace what’s extracted.

In my career of following the mining industry I can’t remember a time when a gold miner promoted itself as a yield play for the simple reason that few of them survived long enough to ever pay dividends, and those which did forgot how to explore, discover and develop.

New gold landscape or same-old?

This time, we are told, it’s different – a famous piece of advice which is as silly as it sounds because it never is different, just a variation on a never-ending theme of over-and-under supply which dictates price (school economics 101).

In the case of gold there is greater level of complexity because of its role as a form of reserve currency demonstrated by the fact that central banks are still buyers (and holders) of the metal.

But what really drives the gold price is a cocktail of pressures that include investor fear (gold is a safe haven in troubled times) and greed (is there a better return on a rival asset class?).

For gold, the ultimate rival asset is the US 10-year Treasury note (or its 30-year cousin), the financial instruments which set global interest rates and when they’re falling gold rises and when they’re rising gold falls.

It’s never quite as simple as that, but it’s worth considering how gold hit an all-time high of US$2,067 an ounce on 6 August last year, two days after the 10-year bond touched a 234-year (all-time) low of 0.5%.

Gold struggles to regain ground since record

Since gold peaked, it has struggled to gain ground despite a flood of government stimulus spending (and artificial paper money creation) and is now within sight of an end to the era of ultra-low interest rates that even saw a burst of negative rates.

Top gold produces such as Newcrest Mining (ASX: NCM), Evolution Mining (ASX: EVN) and Northern Star Resources (ASX: NST) are more exposed to the global interest rate cycle than small fry explorers – a point demonstrated by the big three all losing ground over the last six-months as the gold price has drifted lower and interest rates have started to creep higher.

For cautious investors, a stake in a big gold producer might provide comfort in the belief that part of the portfolio is exposed to the safe haven which is gold (with a dividend comforter), but a declining share price can quickly eat any gain.

Gold-rich Kimberley

Investors with a greater risk appetite will get more bang for their buck at the small end of the gold sector where exploration and discovery news dominate the share price with examples that include:

Calidus Resources (ASX: CAI) is one of the players in the rediscovered goldfields of the Pilbara region of WA, which is better known for its iron ore but showed flashes of riches as far back as the 1880s when prospectors moved south from the Kimberley gold rush.

Much more could have happened in the early days of Pilbara gold but the call of the Kalgoorlie discoveries in the 1890s saw the prospectors continue heading south leaving the best discoveries to the last few years, including De Grey Mining’s (ASX: DEG) rich Hemi deposit.

The new Warawoona mine is the primary interest of Calidus with first gold due early next year at a targeted production rate of 90,000 ounces a year over and initial eight-year life at an all-in life of mine cost of A$1290/oz, which is roughly half the current Australian dollar gold price.

A sweetener to the project is expected to be the addition of high-grade ore from the recently acquired and nearby Blue Spec mine, one of Australia’s the richest gold projects with the distinction of being named after the 1905 Melbourne Cup winner.

Because Warawoona is still being built, Calidus is a high-risk stock but at a price of $0.51 the company is valued at a modest $203 million with abundant upside.

Kalgoorlie goldfields still has discovery potential

Lefroy Exploration (ASX: LEX) is a small player in a location which has produced some of Australia’s best goldmines.

Lefroy is the latest explorer trying to unlock the riddle of the salt lakes which lie south of Kalgoorlie, masking high grade deposits such as the prolific St Ives camp being mined by South African based Gold Fields.

Burns, the latest Lefroy discovery is shaping as a company-maker. The discovery attracted keen interest when the first drill hole into the structure yielded 38 metres at 7.6 grams of gold per tonne, plus 0.6% copper.

More recent drilling has expanded the footprint of the discovery with assays due later this month.

Perhaps significantly Gold Fields is a key supporter of Lefroy with an 18% stake in the stock and it doesn’t require too much imagination to see the relationship growing as it did when Gold Road invited the big South African to its Gruyere project.

Since the first report about Burns was released in February, Lefroy has rocketed up from $0.21 to $1.23 though even at that latest price it retains a lowly market value of $147 million.

Tulla Resources (ASX: TUL) is a well-connected albeit low key gold player.

The company has a 50% stake in one of Australia’s great gold deposits at Norseman, south of Kalgoorlie, with Pantoro (ASX: PNR) holding the other half.

In theory, Norseman should be a prodigious gold producer, but its complex geology has made large scale mining difficult.

This latest attempt to tame Norseman includes a plan to be producing at a rate of 108,000oz a year from next year at an all-in sustaining cost of A$1292/oz.

Canaccord Genuity is keen on the Tulla story tipping it as a stock heading for the share price of $1, roughly double last sales at $0.51.

East coast gold potential

Micro cap gold stock Torrens Mining (ASX: TRN) has a market value of just $19 million. Torrens is a minnow swimming with the big fish via a 30% stake in the eye-catching Emmie Bluff copper and gold discovery of Coda Minerals (ASX: COD) in South Australia and the Mt Piper exploration project 30km southeast of Kirkland Lake’s (ASX: KLA) rich Fosterville mine in Victoria.

Work on both projects has the potential to significantly re-rate Torrens which was trading at $0.14 earlier this month to its latest price of $0.29.

Other gold stocks to keep an eye on

Other gold stocks worth keeping an eye on though strictly not small caps are:

Emerald Resources (ASX: EMR), which has just started processing ore at its Okvau gold mine in Cambodia.

With a high quality and ambitious management team the mine could be just the start of something much bigger. From a low of $0.46 this time last year Emerald is now trading at $0.98, valuing the company at $502 million.

It has taken years for Capricorn Metals (ASX: CMM) to advance the remote and low-grade Karlawinda gold project from exploration to the brink of production. But commissioning is underway and first gold is due soon.

Annual output is expected to be between 110,000oz-and-125,000oz at an all-in cost of A$1,140/oz. The imminent start-up has seen the stock rise a few cents over the past week to $1.96 – a price which values Capricorn around $686 million.

Meanwhile, for readers prepared to do their own homework here are few more names which caught my eye and might catch yours: Bardoc Gold (ASX: BDC), Red 5 (ASX: RED), and BMG Resources (ASX: BMG).