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Gold is good but these 3 ASX gold stocks are better

Janus Henderson’s Darko Kuzmanovic makes the case for resource companies.

Darko Kuzmanovic | Janus Henderson

It has been a great year for the spot gold price. The price of gold's benchmark continuous contract has topped US$2,000/ounce twice this year on a nominal basis. Each time, it was preceded by a bottom and one almighty rally. 

The reasons for the rally in March 2023 included the collapse of Silicon Valley Bank (and fears around more contagion in the global financial sector), a weakening US Dollar, and the prospect of lower interest rates.

Some of those trends have stuck around - the weakening US Dollar and lower interest rates chief among them. But other buyers have now come to the party and this is fuelling prices. 

But after the gold price has made such extraordinary highs, we think that now is the time to look at some of the ASX gold miners - all of whom have the leverage and potential to capitalise on these higher prices. In this wire, we'll discuss why the gold price has performed so strongly of late and look at three names for your watchlist.


Why has the gold price seen bullish action lately?

Gold has historically been a great store of wealth, particularly against sovereign currencies which generally have a long history of failure. In the past 10 years, gold is up 58%. 

Of 20 major currencies compared to US dollars (USD, base = 100), only Swiss currency is ahead (+4%), and Singaporean (-7%), and Chinese currency (-15%) have come close to holding their value. All the others are down -20% to -65%, with the Australian Dollar down 30% in that time.

Short term inflationary expectations have diminished, with 10Y Treasuries Yield and USD staging the reversal, real rates are declining and gold is therefore rallying as the “cost of carry” has fallen. Another strong driver has been rising investment demand, especially from China, Russia and other BRICS countries. 

Some developing and emerging central banks are also participating. Physical gold appears to be shifting to the “east”. There is talk that some central banks are looking at commodity/gold-backed currencies to support the growing trade amongst these non-OECD countries.


Will the gold price continue to rally?

Astute investors know that physical gold is a store of wealth and will be accepted all over the world trade for property and goods. Sovereign countries buy bullion to have a defensive asset against a currency crisis. Gold appears to be on the verge of a multi-year breakout on the upside. If it can hold the US$2050-2100/oz level, any breakout is very positive for continued momentum.

Source: TradingView


How you should play the rally

We view commodities as good, but we believe resource companies are better placed as their earnings/cashflows are materially leveraged to a rising gold price, especially as most are now not hedged. Gold equities can add additional value through discoveries, adding to resources and eventually additional volume growth by bringing profitable mines into production. 

Gold equities are a very small part of the global equity universe, perhaps only half of one percent (0.5% or <US$ 400 billion). In the 1990’s many gold equities traded at double their net present value (2x NPV), some at 3x. Decades of alternate returns from other assets have dulled investor appetite for gold, with many companies trading at 0.5 to 1.0x NPV, so the potential for a re-rating to premium status would be very significant.

Gold equities are cheap on most metrics such as price/NPV, P/CF and EV/EBITDA compared to their historical multiples. At the same time, the industry is generating robust cashflows and many with free cash flow whilst also paying dividends (something they did not focus on historically). Some have also bought back shares due to the low valuation. 

More importantly, their balance sheets are typically very strong with many sitting on noticeable cash levels and essentially debt-free.

As an equity investor, we’ll discuss several names that cover a broad spectrum of value creation, for example:

Northern Star Resources (ASX: NST): With a market cap of A$14.2 billion, Northern Star Resources has been an asset aggregator over the last 10 years. Having produced 1.5 million oz in FY23, it is targeting over 2 million oz pa within five years from its core assets driven by the expansion at KCGM (Big Pit) to ~900koz pa. 

This will see it transition into the second quartile of industry AISC. With 20.2Moz of reserves, it has more than 10 years of production at these levels, but with mineral inventory of 57.4Moz, it provides exceptional optionality. Northern Star Resources continues to generate free cash flow whilst paying a modest dividend. Valuation is at an industry average EV/EBITDA multiple, so not expensive given its scale, leverage, and growth potential.

De Grey Mining (ASX: DEG): with a market cap of A$2.5 billion, De Grey Mining is a classic example of value creation driven by exploration. Over the past 3 years, it has discovered HEMI; a Tier-1 deposit in an under-explored greenstone belt in the Pilbara Region. The resource has rapidly increased to 10.5Moz making it one of the largest Australian gold discoveries in decades. 

Market capitalisation has increased significantly from ~$100 million at discovery. A recent feasibility study highlights a globally significant gold project producing 500-550koz pa at AISC <A$1,300/oz in the first 10 years. 

It is trading at 0.6X NAV as it transitions to project final investment decisions (FIDs), construction and then production. Once in production, there is no reason why it should not trade at a premium to NAV. Highlighting its leverage to gold, the feasibility study was done at a gold price of A$2,400/oz whilst the spot price is at A$3,090/oz.

Perseus Mining (ASX: PRU): with a market cap of A$2.6 billion it has been one of the best turnaround stories in the past 7 years. Despite its problems, the Edikan mine in Ghana has increased production 4-5 fold (to +500koz pa) in that period by developing two additional mines in Western Africa. With stable operations, it has been able to generate +A$900 million cash (34% of market cap) on the balance sheet and no debt. It has commenced modest dividends (dividend yield of 1.7%) that will increase with cash flow. 

It is trading at a significant discount to ASX-listed peers or 0.5-0.6X industry average EV/EBITDA. It is now in the position to grow organically via exploration success or the development of its high-quality project in Sudan. At the same time, its strong balance sheet and development track record allow it to consider inorganic opportunities.


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All prices and analysis at 13 December 2023.  This document was originally published on Livewire Markets website on 13 December 2023. This information has been prepared by Janus Henderson Investors (Australia) Funds Management Limited ABN 43 164 177 244 AFSL 444268.

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