It’s been a rocky couple of weeks for the junior gold space (GDXJ), as we’ve seen most explorers suffer 30% plus corrections. The Australian gold juniors haven’t been spared, especially given that they had the highest valuations on a per-country basis heading into the brief stint of speculative mania we saw in August. Regardless of the jurisdiction premium in Australia, all ounces aren’t created equal, which is why it’s essential to separate the wheat from the chaff. This article compares valuations across the Australian gold sector to help outline which juniors deserve the premiums they command, and which are discounted for a reason. All figures are in US Dollars unless otherwise noted.
(Source: De Grey Mining Company Presentation)
We’ve seen a surge in demand for the Australian junior gold space this year as many names have enjoyed triple-digit returns, and two names are up more than 700%. The reinvigorated interest in the sector is a result of record gold prices and an extremely low COVID-19 case count for Australia on a relative basis, which has allowed juniors to continue their aggressive drill programs. It also doesn’t hurt that Western Australia is the #1 ranked mining jurisdiction globally, thanks to its massive gold endowment, existing infrastructure, and fairly straight forward permitting. This demand for Australian gold juniors has pushed the average enterprise value per ounce for the group up to $44.74, a hefty premium relative to Canadian gold explorers at $29.81/oz. Let’s take a closer look below:
The chart below compares the enterprise value per ounce and resource size for Australian gold producers, with valuations deviating significantly from one end of the spectrum to the other. This is evidenced by the lowest enterprise value per ounce being $22.87, while the highest is $527.12. Some investors might assume that it is best to buy the cheapest names and avoid the most expensive ones, but this basic analysis doesn’t always work. Typically, the most expensive names command a premium as their resource is set to grow massively and is based on an outdated resource, and because they have world-class projects with a high probability of being developed. Conversely, the lowest price names sometimes have caretaker management with low ambition and high salaries and or projects that just aren’t anything special. I have shown two charts below: one including De Grey Mining (OTC:DGMLF) and one excluding the stock. I have purposely done this to help with viewing the chart as the stock is a massive outlier to its peer group.
Digging into the chart further, we can see that the three lowest price names are Prodigy Gold (OTC:ABMMF) (PRX.ASX), Bardoc Gold (BDC.ASX), and Ausgold (AUC.ASX), valued at $22.87/oz, $28.42/oz, and $29.17/oz, respectively. Prodigy Gold’s discount likely stems from the fact that while it has a reasonable resource of 1.01 million ounces, the resource is spread across two different projects, Hyperion and Bluebush-Bonanza. While resource size is important, it’s ideal to have at least 1 million ounces at a single project, as juniors typically need a minimum of 1.25 million ounces to even bother developing a project. Therefore, while Prodigy has two decent projects it’s working on and a few different joint ventures, I believe most of this discount is justified until they can prove up over 1 million ounces at a single project.
In Bardoc Gold’s case, the discount is a bit of a head-scratcher as the company has the largest project among its peers, yet trades at the second-lowest valuation. Meanwhile, the company also has a Pre-Feasibility Study in place with solid economics. The company’s PEA envisions average annual gold production of 135,000 ounces per year, with very modest initial capex of $98 million, stacking up very well relative to peers. The market has yet to re-rate the company, but if Bardoc can finance the project without too much dilution, a re-rating to A$0.12, or a market cap of over A$160 million maybe likely. Personally, I see better opportunities out there, but the valuation here remains attractive.
Finally, in Ausgold’s case, the discount for the company’s Kattanning project could be due to the relatively low portion of the resource in the measured & indicated [M&I] category, with the resource just 47% M&I currently. Meanwhile, the average gold grade is quite a bit lower than the 1.75 grams per tonne gold average for the peer group, and while grade isn’t everything, the market does often pay up for grade in the exploration stage. The key for the company will be its resource upgrade expected in Q1 2021 with new higher-grade core intercepts that could help to push up the resource grade slightly, and command a slight re-rating here. For low-grade 1 million-ounce projects, I personally prefer Saturn Metals (STN.ASX). While both Saturn and Ausgold have similar size and grades, Saturn is better funded and is a little further along in its development stage.
If we look at the most expensive explorers, the premiums are gargantuan, with De Grey Mining (DEG.ASX) valued at $527.12/oz, Capricorn Metals (CMM.ASX) valued at $256.97/oz, and Bellevue Gold (BGL.ASX) trading at $227.70/oz. While all three names have defining characteristics that would make them excellent bolt-on acquisitions for mid-tier gold producers, the current valuations remain quite lofty. However, we’ll dig into them a bit deeper to help explain the premiums.
Beginning with De Grey Mining, the premium is massive, but so is its Mallina Gold Project [MGP] in the Pilbara Craton. De Grey’s current resource is based on drilling previous to 2020 was 2.17 million ounces, but the recent Hemi discovery is a complete game-changer for the project. The Hemi discovery lies just east of the central portion of the project, and to date, drilling has defined a 3 kilometer by 2 kilometer area with four separate zones (Brolga, Crow, Falcon, Aquila), with a potential gold grade of up to 2.0 grams per tonne gold. Based on the new discovery, I have raised my resource target to 5.9 million ounces within 18 months. I would argue that this is one of the most significant finds since Fronteer Gold’s Long Canyon in Nevada, eventually purchased by Newmont Corporation (NEM) for over $1.8 billion.
Given that De Grey’s resource should grow by at least 100% and up to 150%, the $527.12/oz valuation is misleading, as it accounts for none of these added ounces. However, even accounting for these added ounces, $1.40 billion is a lot to pay for an explorer. Therefore, while I think Mallina is an incredible project, I don’t see any safety margin for buying the stock unless the stock trades back below A$0.90.
Moving over to Capricorn Metals, the premium looks very high at above $255.00/oz, and there’s no disputing this fact. However, Capricorn Metals is one of only two emerging producers in the chart, defined by the company being on track to pour first gold within 9 months. Capricorn’s Karlawinda Project is currently more than 50% complete as of July, and the company is set to become a 100,000 plus ounce producer at industry-leading costs. Therefore, while the premium is a little misleading as Capricorn is transforming into a producer, $256.97/oz is still a lot to pay even for an emerging producer. As the chart below highlights, we have yet to see any M&A above $260.00/oz for gold producers, so Capricorn trading at a premium pre-production would suggest the easy money has been made here.
Finally, Bellevue Gold is not cheap either, but the market has assigned a premium for grades in this case. As the chart below shows, Bellevue Gold is in its own world from a grade standpoint, as its average resource grade comes in at 10.11 grams per tonne gold. This is more than 400% above the average resource grade for peers with 1 million-ounce gold projects of 1.75 grams per tonne gold. Bellevue Gold also benefits from exceptional infrastructure with sealed roads, services less than 40 kilometers away at Leinster, and 28 kilometers of existing underground infrastructure. This superior infrastructure and the fact that Bellevue was a past producing project should help with keeping upfront capital down to move into production. On the production cost side, the bonanza grades should lead to all-in sustaining costs of below $800/oz.
The other reason for the premium is the cash balance of over $100 million, which gives Bellevue Gold lots of room to aggressively explore, begin development activities, and carry out any economic studies without further share dilution. Currently, I see the valuation as a little lofty, but when it comes to high-grade stories in Australia, there are few other options for investors. Therefore, this might explain the premium. For now, I see the stock as a Hold, as there’s not much of a margin of safety for starting new positions at a valuation of above $220.00/oz.
While the recent sharp correction in the gold space has significantly improved valuations across the Australian gold space, I don’t see a ton of value out there currently, and I prefer the Canadian gold juniors on a valuation basis. However, I see Saturn Metals as an exception. The company is in the sweet spot with a sub $50.00/oz enterprise value, the potential to prove up over 1.85 million ounces of gold within 15 months, and one of the only Australian gold juniors with an extremely tight share structure (88 million shares outstanding vs. a peer average of 600 million shares). Therefore, for investors looking for under the radar names in the Australian gold space, the above list is a good starting point, with Saturn Metals being my favorite currently.
Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.