If there is one thing that the last couple of months has brought it is increased volatility. Fortunately, in the precious metals space, it has been skewed to the upside. Measures taken to contain the COVID-19 virus have shut down and disrupted vast swathes of the global economy, spurring massive monetary policy interventions by the world’s central banks and financial support packages from most Governments. After an initial liquidity squeeze, we believe we are now seeing the market position itself defensively for the safe-haven trade and a long-term, low interest rate environment. These factors have led to wild swings in valuations across a range of asset classes including gold bullion and gold equities.
We recently completed a sector report reviewing some of the issues facing production companies under our coverage (Opportunities and threats in a fluid market) and in terms of positioning for the safe-haven trade and a long-term, low interest rate environment a number of key factors emerged:
Australia, and in particular Western Australia, is one of the most, if not the most, attractive operating jurisdictions in the world right now. A genuinely collaborative effort is being made by all stakeholders (Government, companies, employees, communities) to enable the continuous operation of mines through the COVID-19 pandemic;
Australian assets are benefitting from all-time high A$ gold prices, a devalued Australian dollar effectively lowering operating costs and lower energy costs due to the oil price collapse. This is resulting in very strong operating margins – illustrated in our Comparison Table – which shows even the highest cost producers generating positive All-In Sustaining-Cost (AISC) margins (December 2019 quarter) and an average margin of A$1,175/oz; and
Balance sheets are generally very strong across the producers, with either relatively manageable levels of debt or net cash positions. Current conditions also point to the capacity for quick debt repayment.
Top recommendations from our coverage include RRL (Buy, TP$5.72/sh), GOR (Hold, TP$1.40/sh) and PNR (Buy, TP$0.16/sh). Across the sector more generally, we would be looking for exposure to Australian assets with minimal hedging and strong balance sheets.