Gold misses out on the Santa rally

Gold has been the exception to the commodities rally, but the producers hope a US rate rise will bring some relief.

Saracen’s Thunderbox mine in WA. Gold has fallen from $US1366/oz in July to $US1159 on Friday.

The Santa rally in a broad sweep of commodity prices in response to stronger demand from China and the Donald Trump “rebuilding America’’ thematic has one notable exception — the gold price.

Gold’s retreat from its July peak of $US1366 an ounce (it got to $1819 an ounce in the same month) to $US1159 an ounce on Friday ($1557 an ounce) is a response to this month’s expected US interest rate rise, and the runaway strength of the US dollar.

The hope from here for the producers is that once the rate rise is confirmed, and the US dollar pulls up, there will be a relief rally in the price of the yellow metal. Having said that, there is not much to complain about with gold where it is.

Despite the 9 per cent retreat in the last 30-days of $US118 an ounce, gold is still some $US88 an ounce or 8 per cent higher than its starting point for the (calendar) year. And with the help of the cost-cutting that occurred in 2014 and 2015, margins for the industry remain relatively healthy.

On Macquarie figures, the global gold majors have average all-in sustaining costs of about $US850 an ounce. For the mid-tiers it is about $US860 an ounce, and for the juniors it is about $US885 an ounce.

The Australian industry does better. Newcrest (NCM), our only listed major, comes in with an AISC of $US762 an ounce for 2016 and $US775 an ounce for 2017. Among the mid-tiers, Evolution (EVN) weighs in at $US733/$US689 an ounce, and Northern Star (NST) $US776/$US816 an ounce.

Among the juniors, there is Saracen (SAR) at $US768/$US888 an ounce, Doray (DRM) at $US849/$US984 an ounce, and Perseus (PRU) at $US1044/$US893 an ounce.

From all this it can be seen that there is no need to hit the panic button just yet, particularly if the relief rally in gold comes as suggested once a rise in US interest rates — the great bogey of gold — occurs. Rising US inflation expectations under a Trump administration won’t hurt either.

But there is no doubting that sentiment towards the local gold sector ain’t what it used to be.

The question now for investors is whether gold’s slide — it fell $US11 an ounce on Friday — is over and whether the recent sell-off in gold equities — the average return this year across the global majors is still a more than handy 47 per cent — is overdone?

Dacian a top pick

Ask around town which of the gold equities caught in the recent downdraught might be in the overdone category and more often than not it’s the Mount Morgan gold developer Dacian (DCN) whose name pops up.

Dacian had the misfortune of having set out to raise $150 million for the Mount Morgan development just as the gold price/gold equities hit the brick wall. In the end, it settled for a $26m at a discounted price to that which it started out at.

Deutsche reckons that among all the confusion, the stock (it last traded at $2.42 a share), looks cheap. It has a 12-month price target on the stock of $3.30 a share.

“The reality is that there are few 1.6 million-ounce projects, grading 4.5 grams of gold a tonne, near surface, undeveloped gold deposits left in Western Australia. And this project will be developed (Deutsche assumes Dacian will come back in the new year with a $125m raising at $2.20 a share).

Deutsche believes the high-margin ounces Mount Morgan seems capable of producing would be attractive to a number of potential acquirers. There are five operating mills owned by others with 100km of Mount Morgan that could do with a new source of feed to keep busy. The funds that Dacian was able to pull in would be used to continue early development activities and what to date at least, has been high-reward exploration.

Macquarie’s equities desk has a $4.50 a share price target on Dacian, noting the company has not made any change to its project timeline and plans first production in the third quarter of the 2018 financial year.

“How the expected $220m capital expenditure bill for Mount Morgans is funded has now become a key uncertainty,’’ Macquarie said. Still, it has Dacian among its top Australian picks in the developer’s category along with Gold Road (GOR).

Macquarie’s top picks among the mid-tiers are Evolution, Northern Star, OceanaGold (OGC), Regis (RRL) and St Barbara (SBM). Its top junior producer picks are Alcaer (AQG), Perseus and Beadell (BDR).

Sipa in the hunt

It’s that time of year when the pundits like to do some crystal balling on the year ahead.

And when it comes to where Australia’s next big discovery could be made, it might just be the Proterozoic-aged rocks in WA’s Paterson Range that generate some excitement, particularly to the north of Newcrest’s Telfer gold/copper mine.

A hardy little explorer which has been around since 1987, Sipa Resources (SRI), is among the thick of things in an area where Rio Tinto — long a believer in the Paterson’s ability to host the next big one — and others are planning field programs for 2017.

Sipa last traded at 1.5c a share for a market capitalisation of $14m, or an enterprise value of $9m after taking in to account its cash of $5m. Its phone has been ringing hot since it piqued the interest of the broader industry when its maiden drilling program in the northern Paterson encountered an extensive copper-gold mineral system.

Mineralisation was delineated over a 4km strike length at the Obelisk prospect. It is early days yet but a follow up program early next year will widely watched.

That Sipa has the technically nous for the hunt despite its small market cap was confirmed with its recent grant of up to $300,000 from the WA and federal governments for its exploration initiatives in the Paterson.