Four Top Gold Stocks ASX

Richard Hemming

Under the Radar Report's top four gold stocks have returned an average 90% since early 2018, most recently aided by a gold price that has climbed 21% in six months in US$ and 18% in A$ terms.

What are the best gold stocks in Australia?

Under the Radar Report has had long-term investment success from ASX listed gold companies including Northern Star Resources (ASX: NST) and Evolution Mining (ASX: EVN). In fact, Northern Star Resources (ASX: NST) is one of Under the Radar’s best performing gold stocks on the stock market, having increased more than 14 fold since we first tipped it. 

Australian ASX gold stocks

Australia’s extraction expertise with ASX gold stocks should never be underestimated. What you pay for this skill, experience and potential is the key to making money. Of course, if you invest you should overlay this with a view on the gold price, which is what we are discussing in this article.

Is ASX gold a speculative asset?

Bears will argue that gold is an entirely speculative asset to invest in on the stock market, which relies on a greater fool to buy. To an extent, this statement is true. The proof of the pudding from our perspective is the long history of gold as a store of wealth. Gold is also portable, fungible, anonymous and easily tradable.

Why is it important to buy ASX gold?

The importance of buying ASX gold stocks has only increased over the past few months in line with the share price. The unlimited money printing triggered as a response to the coronavirus, on top of existing record levels of government debt, has a number of implications to ASX listed gold metal. In the medium term these would appear to be very supportive of the price of gold in US$. It is possible that A$ strength will offset that somewhat, if US$ weakness continues to be part of the story.

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Current gold situation in Australia

In our view the reluctance of central banks worldwide to increase interest rates from current levels of zero, which means that real interest rates will be negative, significantly increases the risk of inflation in the medium term. Ultra-low interest rates also mean that the cost of owning ASX gold for a professional investor is negligible.

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Should you buy gold now?

The conditions certainly favour buying gold. Low interest rates, US dollar weakness and almost unparalleled economic uncertainty due to the pandemic is all combined with an unprecedented binge of central banks around the world printing money in the form of Quantitative Easing.

Factors to consider before buying Australian gold stocks

The biggest factor in buying into this resources sector is that gold is not an obligation of the US government. You need to protect yourself with a financial asset that is not compromised by political exigencies. ASX Gold and other hard assets have the historical record of maintaining long-term purchasing power despite violent currency fluctuations. We have always reminded subscribers that the yellow metal remain a portable and tradable financial asset that is not an obligation of the US Government, or anyone else. That is still the appeal when is comes to buying precious metals.

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Time to start investing in gold

After its strong run since the worst of the coronavirus liquidity crunch, there is bound to be some consolidation, and we advise investors use those opportunities to add some resources exposure if they do not already have enough. 

How much gold should I buy?

Existing industry holdings should be anywhere between 5% to 10% of any portfolio, and a mix of low cost strong high grade resources mining producers and a Gold ETF (GOLD) or bullion itself is recommended.

What Australian gold stocks do we favour for investing?

We continue to favour investing in Australian diversified mining companies but at current levels the share price is very expensive. Even if ASX listed gold companies aren’t the best value today, the key is to get to know them. When the share price dips and your portfolio is ready for exposure, you can invest with more confidence.

The link between gold stocks and the gold price

It has been noted that in Australia gold stocks sometimes rise in anticipation of the actual gold price when it’s at a turning point. Gold formed a base around US$1,680/ounce on 8 March 2021 and after a brief rally revisited the US$1,680 level again on 30 March 2021 before rallying to around US$1,755 per ounce in early April. The price is now weakening. Will it continue to weaken or rise again?

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Gold EFT's

Vaneck Vectors Gold Miners ETF is an ASX listed ETF (ASX code GDX) that seeks to replicate the price and yield performance of the NYSE Arca Gold Miners Index. It bottomed on 4 March 2021 and kept rising through gold’s weakness in late March. The same thing happened for the S&P/ASX All Ordinaries Gold Index (ASX code XGD), which bottomed on 5 March 2021.

What's currently happening in the gold resources sector in Australia?

What is interesting right now is that many of the better quality mining gold explorers and potential gold developers have recently broken long downtrends and their share prices are also rising. The rally is not just confined to companies that are currently gold producers. It is still early days, but now seems the right time to start investing in gold.

Pantoro Limited (ASX: PNR)

ASX Share price: $0.255

Market cap: $300m

Net cash: $70m

Dividend yield: 0%

Out of all four stocks, this ASX Small Cap gold stock Pantoro is by far the riskiest one to invest in and as you would appreciate, it’s also the one with the most potential. The company is in a trading halt as we write, as it’s raising $45m at 24 cents a share, which is above 18 cent level it traded this time last year. It’s been a wild ride for investors, having traded as low as 6.5 cents in March. You heard right. This stock highlights single mine risks and exploration potential.

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What happened last year with PNR?

Last year management was continuing to talk up the ramp up of its Nicolson’s gold mine in WA’s Kimberley region to 80k ounces a year. This has been a major disappointment; in the past 12 months it produced under 40k ounces of gold and it probably only has a 2-3 year mine life.

New mining resources project announced

What has surprised was its mining high grade Norseman Gold Project (50%) located south of Kalgoorlie, which has always had a large resource of 4.4m ounces but has always proven to be difficult to extract. The high grades that are coming out have got investors excited and the company intends to spend about $60m on the mining project – hence the capital raising.

Should you be investing in PNR?

The ASX resources company looks fairly valued/expensive, although it does have big exploration potential. There is high risk for investment. You are paying for the prices to keep going and there is exploration risk. We think investors should hold on for the ride.

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Evolution Mining (ASX: EVN)

ASX Share price: $6.12

Market capitalisation: $10.4bn

Net debt: $196m

Dividend yield: 2.4%

Evolution Mining remains our favourite ASX gold stock and recent reports suggest that the resources company is delivering operationally as well as benefitting from the sharply rising US$ gold prices. While this gold stock ASX has successfully managed issues within its control, the second half illustrates both the good and the bad luck that is inherent in gold stocks, even a mature producer like EVN.

FY20 production

FY20 production ex Red Lake was 715k oz at an all-in sustaining cost (AISC) of US$700/oz (A$1008/oz). Operating cash flow was up 45% at $1,121m, 4Q20 net mine cashflow was $225m, full year net mine cashflow was $736m, and free cash flow, from which dividends are paid, was $542m.

This gold stock has potential to be a world class mineral system

The Cowal underground maiden ore reserve of 804k oz and increased indicated resource of 2.9m oz will bring forward higher-grade ore from the underground extension and provide a step change in output. Management of this gold stock ASX believe that Cowal continues to have the potential to be a world class mineral system.

EVN new goldmine project

Evolution bought the high grade US Red Lake resources goldmine from Newmont for US$375m, completing in March. The group must make substantial investments after acquisition to improve output and efficiency. It is likely to take at least 3 years to reach management’s annual targets of 200k oz at an AISC below US$1000. 4Q20 was expected to deliver 25k oz @ A$2100-A$2300/oz AISC, but in fact A$1943 was achieved. Operational improvements have shown early gains and focus on operational challenges are starting to bear fruit. Management also say the scale of opportunity at Red Lake is far greater than expected.

ASX EVN mines

The sale of the Cracow short life project raised $60m in July, with further minor payments and royalties to come in the medium term. The bad news was that a $75m-$100m non-cash write-down was triggered by a review of the resources at the Mt Carlton mine. There was a 10k oz FY20 impact from the Mt Carlton shortfall, with a likely ongoing annual impact of 10k-15k oz. But the downgrade represents only 1% of the company’s total resource and the company’s mines have an average reserve life of 10 years.

Dividend yield forecast 15 cents

We are forecasting an annual dividend of 15 cents based on the interim, and we recommend Evolution as one of the better ways to expose a portfolio to long term gold price upside especially if the ASX gold stock comes back again on any temporary price weakness.

Should investors buy EVN?

Evolution Mining is delivering some significant operational wins and if it can realise its growth potential, there should be earnings upside even without further price appreciation. But the valuation reflects much of the good news in the short term, and we will take focus again if there is any price weakness.

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Northern Star Resources (ASX: NST)

ASX Share price: $16.43

Market cap: $12.2bn

Net cash: $70m

Dividend yield: 1.2%

We said in our last couple of reports after the acquisition of 50% of the Kalgoorlie Super Pit late last year that Northern Star Resources would be in a position to grow into its valuation. Fourth-quarter record mining and strong margins illustrate what a value adding acquisition this has been. While the acquisition was reasonable value when the gold price was US$1523/oz, having increased to over US$2,000, the acquisition has been exquisitely timed, proving the adage, you have to be in it to win it with ASX gold. 

ASX NST resources project

The June quarter all-in sustaining cost (AISC) of US$969/oz was made up of Australian operations at less than US$900/oz and Pogo operations in Alaska at US$1276/oz. FY20 production was 928k per ounce including 201k from Pogo. 4Q20 underlying free cash flow was A$200m, with an average selling price of almost A$2500/oz, against A$2,208/oz for the full year. This included sales of 271k oz into hedged positions, reducing the hedge book to 536k oz, equal to about 15% of the next three years’ production

ASX NST issued equity to raise cash for acquisition

Having issued equity to raise cash for the Kalgoorlie acquisition, Northern Star Resources has net cash of $70m. Northern Star Resources expects to publish FY21 production and cost guidance in the coming weeks. The cost of additional COVID-19 measures was $10m. Pogo had 36 confirmed COVID-19 cases; while the pandemic continues there has been around a 25% negative effect on output there.

Operational progress

Northern Star Resources has made operational project progress at its Super Pit acquisition, while other operations are performing as forecast for relatively mature operations. Pogo remains a work in progress.

NST dividend yield of 7.5 cents

The 7.5 cent interim dividend that had previously been delayed to October was brought forward and paid in mid-July, and the company expects to pay 6% of revenue as normal. This suggests that the final dividend will be higher than was expected, despite the shares issued for the Kalgoorlie super pit acquisition.

NST geared towards gold price movement

We said previously that Northern Star Resources would be geared towards any gold price move, with a conservative balance sheet, Tier 1 assets and very limited sovereign risk protecting the downside. With medium term growth plans intact, the recent record price run has allowed this mining company to grow into its valuation very quickly, and we will keep a close eye on progress.

Should investors buy NST?

Another strong operational performance together with partially hedged exposure to a rising price makes Northern Star Resources one of the most attractive investments in the yellow metal sector. We cannot upgrade at the current valuation but will return for another look on any weakness.

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OceanaGold (ASX: OGC)

ASX Share price: $4.01

Market cap: $622.3xm

Net debt: US$121m

Dividend yield: 0%

The first quarter (1Q20) results to March were in fact better than we expected. Revenue was US$188m and EBITDA $42m, for a net loss of $10m. Operating cash flow was US$121m. FY19 EBITDA had been $214m for a historical enterprise value/EBITDA multiple of 11 times. Net debt of US$121m reflects steps taken to increase cash conversion. The making of 80,700 ounces was at an all-in sustaining cost (AISC) of $1218/oz, which is on the high side but still produces strong cash flow at the current gold price.

OGC increasing operations

The Australian company is increasing mining production at Haile in USA, where two thirds of its output is expected in 2H20 with the fourth quarter the strongest. New Zealand operations are back to capacity after pandemic disruption and production is rebounding. Despite the difficulties, management maintained its FY20 forecast production guidance of 360k-380k ounce at an AISC of US$1050-US$1130.

OGC project Challenges

In the Philippines, the renewal of the key license remains with the office of the President, which leaves the resource company with a difficult decision. If the project is put into care and maintenance to save ongoing operating costs, the time to resume full production goes from a few weeks up to a year. If there were a simple solution to the local government standoff, it might have been found already.

Should investors buy OGC?

OceanaGold has been a big beneficiary of the price rise and its South Carolina mine Haile is starting to perform. The uncertainty triggered by the Philippines operation shut down has continued for too long and is a shadow over the ASX company. We suggested keeping investment positions very small to reflect the Philippines risk. 

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About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

Under the Radar Report is licensed to give general financial advice only (ASFL: 409518). The author does not own shares in any of the stocks mentioned.

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