Golden mood hits the mining sector

Prashant Mehra | 10 Aug 2017

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KALGOORLIE - [AAP] A year can be a long time, just ask executives in Australia's gold sector.

At this week's Diggers and Dealers conference in Kalgoorlie--considered to be the country's golden heartland--the mood among executives seemed much more buoyant than in 2016.

More gold sector executives were in attendance, which probably accounted for the best turnout at the annual event since 2012.

But the sentiment was apparent even before the show began, given the flurry of announcements in the sector last week.

These included both Northern Star Resources (ASX: NST) and Saracen Mineral Holdings (ASX: SAR) announcing significant upgrades of their reserves, and Evolution Mining (ASX: EVN) striking a deal to take a minority stake in new exploration venture Riversgold.

Australia's gold sector, a key part of the country's mining industry, finds itself in an unusually strong position that has resulted in higher share prices and growing investor interest from North America, Europe, and China.

A lot of that is the result of a stable market and favourable prices, says Ian Skelton, partner at advisory firm Deloitte.

The benchmark global gold price has been hovering between $US1,250 and $US1,280 an ounce through the last year, and the lack of volatility has buoyed the sector, he says.

"When you actually have that consistency people will come into the market because you have a steady cash flow," Mr Skelton said.

A weaker Australian dollar has also been beneficial for local producers, as it translates into a higher price of US dollar-denominated gold.

At current levels, Australian miners realise $A1600 an ounce. With all-in costs for most of them at $A1000 or less, this is a hefty margin.

Saracen Mining managing director Raleigh Finlayson attributes the strength in the sector to "the capital discipline shown by local producers".

This has been a key differentiator from global producers and particularly those in North America, who have seen high production but little change in margins, he says.

A senior investment banker at the conference says strong cash balances are a good sign.

"They are spending it in a remarkably sensible way--which is in exploration," the banker, who declined to be identified, said.

"It is terrible for our business but it's good for theirs."

A lack of significant merger and acquisition activity has sparked concerns about where the next big wave of supply growth will come from, but top executives say there is enough exploration work at hand.

Evolution Mining chairman Jake Klein, whose company made its reputation on the back of acquisitions, says the focus on exploration investment is good for the sector and will yield results.

"A lot of assets for which you are seeing these (reserve) upgrades are rejuvenated, having been sold by majors who hadn't done much exploration on them and you are really seeing money being spent on them for the first time," he said.

"The stuff that's being done now on these assets was largely known to the geological teams. They just didn't get access to spend money on it."


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This report appeared on 2017 Morningstar Australasia Pty Limited

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