Lions at home, lambs away – Aussie gold stocks in North America

Lions at home, lambs away – while that’s a comment normally reserved for sporting teams (think of England cricket), it also applies to a surprising number of mining companies struggling to master international investments including St Barbara (ASX: SBM), Northern Star (ASX: NST) and Evolution Mining (ASX: EVN).

For investors in big and small resource stocks there is a lot to learn from the challenges of these three gold miners, because they are not the only Australian companies finding the world a more difficult place than home.

BHP (ASX: BHP) has always struggled in Africa and Oil Search, before its merger with Santos (ASX: STO), was making heavy weather of its expansion into Alaska.

Challenges with foreign investment

To be fair, the problem of investing internationally cuts both ways with many overseas companies finding Australia a very foreign place, especially when it comes to complying with government regulations which are not only different from what they’re used to but vary between the states.

South African mining companies, for example, have always found Australia hard going, largely because of different land ownership and labour laws.

Best known as owner of the historic and still prolific Sons of Gwalia goldmine in Western Australia St Barbara’s most pressing problem is the Atlantic Gold project in the Canadian province of Nova Scotia. Atlantic Gold was acquired almost three years ago but is struggling to perform as promised.

Starting the Australian gold miner rush into North America was Northern Star the best part of four years ago. However, the company is finding its Pogo mine in Alaska much more challenging than expected, with Covid-19 restrictions the latest in a long line of obstacles.

Evolution acquired the Red Lake project in western Ontario more than two years ago and is making slow progress with mine development.

Newcrest (ASX: NCM), a fourth goldminer with global operations, appears to be mastering its Red Chris mine in Canada and has just made a second acquisition in British Columbia, but one of its earliest overseas investments, the Lihir project in Papua New Guinea has been a decades-long struggle.

Underperformance a common theme

A common thread linking all the gold miners is their recent stock market underperformance when measured against the price of gold, which has been remarkable steady over the past year.

Despite occasional moves up and down gold is today just 1% less than 12-months ago, US$1,796/oz compared to around US$1,818/oz.

St Barbara, on the other hand, has suffered a 48% share price fall over the last 12-months, dropping from around $2.50 in January last year to under $1.30 this month with overseas investment the primary cause of the downturn starting with the Simberi project in Papua New Guinea, followed by geological and government permitting issues at the Atlantic mine in Canada.

The share price plummet has occurred even as the company’s flagship Sons of Gwalia mine in its WA backyard performs at the top end of guidance.

RBC Capital Markets singled out for special mention earlier this week the problems St Barbara is having at Atlantic, particularly a 20% downgrade in gold production at the mine this year thanks to delays in obtaining waste rock storage permits, heavy rainfall in Nova Scotia and an updated mining plan.

Those problems were reflected in an overall increase in costs per ounce of gold produced from A$1,492/oz in the September quarter to A$1,587/oz in the December quarter.

It’s a similar story at Northern Star which continues to struggle with its Pogo mine in Alaska long after it was expected to be one of the company’s top performers.

The all-in sustaining cost of gold produced at Pogo in the December quarter was US$1,735/oz, marginally better than the US$1,751/oz in the September period though cash flow, after accounting for growth capital, was negative US$9 million.

Macquarie Bank is confident that Northern Star will eventually master the challenges at Pogo and retains a buy tip on the stock, but it also describes the Alaskan mine as a “key catalyst,” in the company’s future performance along with the potential to buy another North American asset.

Some investors will be wondering whether expanding deeper into the international market is a good idea given the 30% fall in Northern Star’s share price over the past 12-months.

Evolution appears to have been the most successful of the Aussie gold miners trying their hand overseas having made its move into North America with its late 2019 acquisition of the Red Lake mine. Though, investment bank analysts point out that Red Lake has been slower to ramp up output than originally expected.

With Red Lake still to contribute, Evolution posted a solid December quarter with an improved all-in-sustaining cost across its operations of A$1,347/oz. The company anticipates Red Lake to begin contributing to group gold output over the remainder of FY2022.

Newcrest’s Red Chris operation in Canada, surprised the market with a 11% fall in production and a 51% jump in all-in sustaining costs to A$1,622/oz.

The company attributed the higher cost to lower gold and copper sales and increased operation expenses.

North America remains tier one mining destination

The lure of North American gold assets is understandable.

Both Canada and the US are tier one investment destinations, but they are also home to astute company managers.

So, when you see an Australian company claiming it has bought an asset at a bargain-basement price in Canada or North America take the time to dig a bit deeper to test whether it really is a bargain, or more trouble than it’s worth.