Bells Gold Tracker: December 2020

Sell in September and Buy in December?

We don’t know about relying on this as an adage for the gold market (given that December quarterly performances for the US$ gold price saw gains of 7.6% and 3.0% for 2018 and 2019 respectively), but recent history reinforces the notion that the December quarter is traditionally a weak one for gold. Over the last 10 years December quarterly returns have averaged -2.8% and so far we are down -2.4% in the December 2020 quarter to date.

Unsurprisingly, this carries through to the equities which have displayed leveraged performance in both directions to the US$ gold price (a key sentiment driver, typically overshadowing A$ gold). On average, the ASX Gold Index has returned -6.2% over the same December quarters and delivered outperformance in the other quarters.

While this appears to be a negative influence in the market as 2020 draws to a close, we can see other dislocations in the market that are indicative of other contributing factors.

• The silver price has outperformed gold in a falling market over the last quarter (Figure 10) and managed to hold onto more of its gains this year (up 34% ytd vs gold up 21% ytd, US$ terms). We have formed the view that silver is benefitting from the industrial demand outlook and, in particular, its exposure to investment in renewables via its use in solar cells.
• The reflation trade also appears to be driving a degree of asset re-allocation to risk assets / cyclicals and overriding the influences of a weakening US dollar and lower real interest rates. These are typically two of the strongest negative correlations for the US$ gold price. Yet, over the last couple of months we have noticed an emerging disconnect that has seen both weaker US$ and lower real interest rates coincide with a dropping US$ gold price since mid-September.

With this in mind we see a couple of positive factors for the medium term. Firstly, we see potential for the gold price to play catch up against these two indicators in 2021. They are strong gold price drivers and dislocations are typically short-lived. Secondly, we see potential for inflation to be driven higher in 2021, yet for nominal yields to stay low. As such, we could see real interest rates drop further in 2021 and support a higher gold price. Furthermore, the reflation trade looks crowded and seemingly priced for perfection. Any falter of the post-COVID recovery could well see a return to gold as a safe haven.

Bell Potter Precious Metals Coverage

Regis Resources Ltd (RRL)

Market Cap: $$1,908m

Price: $3.73/sh

Target Price: $5.72/sh

Recommendation: Buy

RRL is one of our top picks among the ASX-listed gold producers due to its strong balance sheet, low costs, capital efficient growth and high shareholder returns. Furthermore, we view RRL’s 100%-owned organic growth options as a strategic advantage vs peers and the McPhillamys development project in NSW as undervalued by the market.

Gold Road Resources Ltd (GOR)

Market Cap: $1,074m

Price: $1.22/sh

Target Price: $1.85/sh

Recommendation: Buy

Gruyere’s ore production is at design levels and has transitioned to fresh rock as ongoing optimisations continuing. In-fill and extension drilling below the previous pit outline upgraded the total Gruyere Resource to 6.6Moz at a gold price of A$1,850/oz ahead of an updated Reserve in due course. The staged addition of a renewable energy hybrid microgrid aims to lift the ore processing rate from current nameplate of 8.2Mtpa and about 300koz (100% basis) to a target rate of 10Mtpa of ore by late 2021. GOR 100% owned regional exploration continues and the company is about to start paying franked dividends.

Westgold Resources Ltd (WGX)

Market Cap: $1,178m

Price: $2.78/sh

Target Price: $3.15/sh

Recommendation: Buy

Production from sub-level caving at Big Bell is ramping-up to the target rate of 1Mtpa by the end of 2020, marking the completion of WGX’s four year mine refurbishment program. WGX is now generating meaningful free cash flow from its focus on the three Murchison operations and has indicated it is about to commence paying franked dividends.

De Grey Mining Ltd (DEG)

Market Cap: $1,330m

Price: $1.04/sh

Target Price: $1.58/sh

Recommendation: Buy (Spec)

DEG is a gold exploration and development company, focussed on the Mallina Gold Project (MGP) in WA. Over the last four years, DEG has expanded the area of the MGP to 1,600km2 and grown the Resource base ~525%, from 346koz @ 1.6g/t Au to 2.2Moz @ 1.8g/t Au as at April 2020. In late 2019, a new style of intrusion-related gold mineralisation was recognised and a significant discovery made at the Hemi prospect. DEG materially ramped up its exploration efforts, with the objective of delivering significant Resource growth in 2021.

Chalice Mining Ltd (CHN)

Market Cap: $1,305m

Price: $3.89/sh

Target Price: $5.35/sh

Recommendation: Buy (Spec)

CHN continues drilling programs across its two main projects with six rigs at its 100% owned Julimar Project expanding and infilling the extensive and shallow, world class palladium-nickel-copper discovery at the Gonneville Prospect. Metallurgical testwork programs to build on initial positive results continue and a Maiden open pittable Mineral Resource for Gonneville is planned for mid-2021. Two rigs at CHN’s large Pyramid Hill Gold Project in Victoria are evaluating the Karri discovery. CHN is well funded with about $140m in cash and investments after having recently purchased key Gonneville farming properties.

Pantoro Limited (PNR)

Market Cap: $324m

Price: $0.23/sh

Target Price: $0.27/sh

Recommendation: Buy

Following a tough FY20 during which its Nicolsons mine underperformed, we continue to look for delivery vs guidance to drive a valuation uplift. The acquisition of a 50% managing interest in the Norseman Gold Project (NGP) and recent completion of a Feasibility Study outlines the production of ~108kozpa at AISC of $1,292/oz over 7 years is a key value driver.

Aeris Resources Ltd (AIS)

Market Cap: $175m

Price: $0.09/sh

Target Price: $0.11/sh

Recommendation: Buy

AIS had a transformational year in 2020, primarily due to the acquisition of the Cracow Gold Mine but also the strengthening of its balance sheet, a share register re-structure and exploration success at its Tritton copper mine. From a single-asset copper company it is now a multi-mine copper-gold producer offering strong earnings and cash flow growth into FY21.

Breaker Resources NL (BRB)

Market Cap: $62m

Price: $0.19/sh

Target Price: $0.65/sh

Recommendation: Buy (Spec)

BRB is continuing to advance its 100% owned Lake Roe Gold Project, located 100km east of Kalgoorlie, 60km south-southeast of the operating 3.5Moz Carosue Dam gold mine. In September 2019 an updated Resource of 23.2Mt @ 1.3g/t Au for 981koz contained gold was announced, including 803koz @ 1.4g/t Au in the Indicated category. Resource growth has been slower than expected and we await the key catalyst of a Resource update, which has been targeted for April 2021.

S2 Resources Ltd (S2R)

Market Cap: $43m

Price: $0.14/sh

Target Price: $0.40/sh

Recommendation: Buy (Spec)

S2R’s focus has moved back onto gold with several recent developments including agreement to earn a majority interest in the large prospective Jillewarra Project in the Murchison district of WA, where shallow high grade gold mineralisation has been defined by limited historic exploration. S2R plans to start drilling at Jillewarra early in 2021. The company recently received very positive assay results from its broad-spaced follow-up drilling at its Aarnivalkea Gold Prospect in Finland, where drilling had been restricted by winter logistical aspects but will resume in 2021.