Skip to main content

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.

Gold Tracker April 2020 charts for Volatility - A$ gold price, ASX gold and GDXJ

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.

Authored by .
Important Disclaimer—This may affect your legal rights: Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives, a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the proper authority of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be consulted before any investment decision is made. While this document is based on the information from sources which are considered reliable, Bell Potter Securities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. This is general investment advice only and does not constitute advice to any person.
Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. Bell Potter Securities and its associates may hold shares in the companies recommended.
Pantoro Limited (PNR):
Disclosure: Bell Potter Securities acted as Lead Manager to Pantoro Limited’s (PNR) $43m equity raise of May 2019 and received fees for that service.
Breaker Resources (BRB):
Disclosure: Bell Potter Securities acted as Lead Manager to Breaker Resources (BRB) $6.4m equity raise of May 2019 and received fees for that service.
Millennium Minerals (MOY):
Disclosure: Bell Potter Securities acted as Lead Manager to Millennium Minerals (MOY) $15m equity raise in February 2019 and received fees for that service.
David Coates holds long positions in shares in EVN, NST, OGC, RRL, SBM, RSG, GOR, PNR WGX, and SLR.