Gold shines in resource desert but beware all that glitters

The optimism about gold, nickel and zinc is typical of what it takes to survive and carry on in the cyclic mining industry.

One of the more colourful events in the business calendar is the ­annual Diggers & Dealers mining conference, held recently in ­Kalgoorlie in Western Australia.

That’s if you can call it a ­“conference”. It’s more like a networking forum and a knees-up for the industry, where the antics at the town’s hotels add an overlay of notoriety to the deals done between industry players.

This year’s D&D must go down as exceptional. Since last year’s gathering, base metals are down between 20 and 40 per cent, while gold is down about 15 per cent and iron ore has dropped a staggering 50 per cent.

Yet, even after that precipitous fall, there was no new good news on iron ore, the commodity that dominates most SMSF resource stock portfolios via BHP Billiton, Rio Tinto and Fortescue Metals.

Indeed, Fortescue chief executive Nev Power was a no-show at the event despite being scheduled to speak, perhaps because he was talking with Chinese interests about selling stakes in Fortescue’s infrastructure.

Speculation has pushed Fortescue’s share price higher in recent sessions because cash inflows could be used to reduce the debt burden. Any major investment in Fortescue that shored up its ­balance sheet would be a negative for BHP and Rio as it would help fund Fortescue’s supply growth into the already oversupplied iron ore market.

Elsewhere, despite gold sinking to five-year lows in US dollar terms, the lower Australian dollar has provided a buffer for Australian goldminers and allowed them to generate enough free cash to consider growth options.

Sentiment on gold at the forum was surprisingly upbeat. Goldminer Northern Star Resources spent up on exploration last year and announced a 44 per cent increase in resources count to 9 million ounces.

There have also been multiple acquisitions in gold. About 23 per cent of Australia’s gold production has changed hands in the past four years.

Another interesting commodity was zinc, which attracted attention from investors looking for strong long-term fundamentals. The metal is down more than 20 per cent from a recent high in July 2014.

Demand in China seems to be waning but zinc miner Heron ­Resources was upbeat, predicting an improvement in fundamentals. Heron said supply is coming off but global consumption is rising, so prices are set to surge.

The nickel price is down about 20 per cent over the last three months. Once again the lower local currency is buffering Australian producers, with the price down about 13 per cent in local currency.

Probably only half of world producers are making money at the moment, suggesting uneconomic supply will drop out and advantage miners like Western Areas with high grades. Any rally in the nickel price would also ­assist South 32. It was pleasing to see gold, nickel and zinc miners ­taking ­advantage of price downturns to acquire assets cheaply. These miners will be relative winners. Firms that made acquisitions at the top of the market, like Rio Tinto after it bought Alcan, will destroy value.

The optimism about gold, nickel and zinc is typical of what it takes to survive and carry on in the cyclic mining industry.

Just remember that these ­companies need to raise capital to fund deals and exploration, so you would expect them to talk up their fortunes — don’t get carried away.

David Walker is senior analyst at StocksInValue, which provides model portfolios, stock valuations and research covering Australian and international markets.