Good afternoon
A month has gone by! Gold is trading almost where it was at the end of July / equity indices, especially in the US, continued to be strong / base metals are generally sharply higher / same for iron ore / and perhaps most importantly, the US$ continues to weaken! Bonds have started to weaken as well - not only in the US, as markets are sort of expecting inflation to go higher as a consequence of fiscal- and monetary politics around the world.
Corona is still the big story - cases are up by roughly 50% in Australia over August, from a very low base, and following a new breakout ( followed by a lockdown ) in Victoria. Over the last few days, things have started to improve again in Australia, with about 100 cases/day.
In the US, cases are up by about 2,4 mill over August, also roughly 50% 7 up by about 33.000 or less than 15% in Germany - but a lot worse in Spain, France and some other European holiday-countries in Europe - interestingly not in Italy, though. These numbers are not always comparable with early numbers back in March/April, as the number of tests being done have increased substantially everywhere. So overall, the situation seems to be much betetr in hand than a few month agao, but at the price of still severe impact on many industries, like pleasure&entertainement, sports, tourism, hospitality etc. Many businesses around the world will still go bust, also in retail - especially stationary retail. So things are still tough out there, and very tough indeed for quite a few people! Yet many Indices, especially in the States, are at - or around all time highs!
The FEDhas contributed a fair part to this, basically cementing the current, ultra-loose policiy for years to come, and other central banks are doing the same. Governments are announcing one support program after the other - to a degree, I have going along with government spending plans lately - but these things are starting to become ridicilous, and you wonder, what the harsh reality without these programs will look like in 12 month! Very bleak for many, that´s for sure! But more positive for some, like businesses with exposure to digital, like many NASDAQ-listed companies.
Perhaps a liitle surprising is the ultra strong performance of iron ore, and most base metals. China is obviously the driving force here. Government spending is doing it´s part - but they also have the corona situation pretty much under control. And supply issues have hit markets, with many mines being run down, or producing below capacity. New cases in Peru are stll ballooning, and Chile is also still pretty much up there - even though with substantially reduced numbers.
Gold equities in Australia are all down, basically. The larger producers like Evolution etc, are down by 10% or more, the smaller developers in many cases are down by 20% or so. To some degree, the rising A$ has taken some of the shine off, as the A$ gold price is down by about 100$/oz to a still very nice 2670 A$/oz - but demand for gold equities has been satisfied by a myriad of placements in larger as well as in small- and very small stocks. Berkshire Hathaway have excited the market not only with a 600 mill $ investment in Barrick, but also a much larger investment in the seix large, Japanese trading houses like Sumitomo etc, which are among the biggest metal traders in the world. Buffett previously had been very negative on gold!
So generally, gold developers are very well cashed up, and as a consequence, the availibility of drill rigs has become an issue. I guess teh same applies to people in the mining sector, although I have not really heard complaints about that as yet. And no doubt, gold production in Australia will go up.
Nevertheless, gold might well have started a new era, as government spending and central bank printing are making normal currencies fundamentally worth a lot less!!! Where do you invest your moeny these days as a high net worth individual, or a generalist fund? Interest rates are going to stay very low for a very long time - if not, the world will go bust! Both would be good for gold!
So this gold story has seen the first big wave of investment - but the numbers are still small compared to what´s happening with the market caps of the large internet- and software stocks in the States. And the longer gold stays up here, the more investors will get used to it. I still believe in gold at current levels, and especially, while the world is a crazy as it is and probably will be for years to come. So Australian gold producers ofefr some value, again, at current levels, and the developing space is still very good value, in many cases. My favourite stocks for gold exposure liek for example Evolution, West African, Tietto, Apollo Consolidated, Oklo or Horizon Gold are all cashed up and ready to find more!
I will spend some time on Evolution later this week - tehy have their investor day tomorrow, and I think the market will come back very bullish on Cowal and Red Lake from this - the latter looking increasingly like the next aquiisition bargain for EVN, and a large mine for many years to come.
Base metal stocks are also becoming of great interest to me! Only very few have performed really well over the last few month and in line with the underlying base metals, like OZ Minerals, which is trading at all time high ( for good reasons, I might add ). But while copper, zinc, nickel and also aluminium have done very well, equity investors are kind of watching the price development with disbelief! Having said this, disappointing outlook statements from Western Areas and Independence did not help the sector, either. I would highlight here, that company-valuations for my holdings Foran Mining and Panoramic Resources have hardly responded to great base metal prices as yet, and privately, I have added to both holdings. By straw hats in winter!
I will catch up on some of our stocks over the next few days and will concentrate today on companies, which reported news today.
Strike Energy - lots of things happening here recently! The nearby project Waitsia finalized a contract with the gian North-West-Shelf LNG JV, to deliver it´s gas to that project. This not only shows the demand for cheap , additional gas from the big boys, but also removes this supply from the West Australian market, which most probably will be in shortage a few years out without West Erregulla gas from STX/WGO. The West Australian government have announced, that further exports of onshore gas will not be allowed.
While this announcement shows the expected tightness of the gas market in WA, it reduces the optionality for Strike to deliver ( at probably higher prices ) into export gas. It is believed, though, that WA will rethink this ban, as it has already impacted on local exploration programs, which is certainly very counterproductive. Today, Strike announced a firm offtake agreement with Wesfarmers, one of Australia´s largest companies, to deliver them about half of the gas produced in Stage 1 at firm, escalating pricing. While prices have not been announced, Strike stated, that the delivered price would be very much cash flow generating and would support bank financing for the growth of the project into Stage2. Also, Strike announced, what must be very satisfying for the MD: They will finally receive the government subsidy for exploration , which they were initially denied. The company should receive 6 mill A$ shortly, and about 3 Mill A$ in a few month time. This will give them close to 30 Mill A$ to play with, incl current cash The cost for each of the next two wells drilled by the 50:50 JV has increased somehwat from the 10-15 mill A$/ well I was expecting ( STX never stated these amounts ) , and is now close to 20 mill A$ for each well. Strike should have no problems to pay for the next two wells - their share being 20 mill A$ approx, plus headoffice costs. For Warrego, this will make things very tight! I have heard , though that the working relationship between the two JV partners has been much improved, which is certainly a positive and important as well! Overall, the new offtake agreement at firm prices will make financing of Stage1 and Stage2 of the WestErregulla project much easier to do for the banks involved, and should give Strike a chance to gear up any proejct finance much more.
The most important of all, though: Strike/Warrego will start drilling in less than 2 weeks, I believe. The next two wells are very important to derisk their initial success, and increase the size of the resource. Remember, that the consultants of Warrego had come up with a lower resource estimate than Strike - all uncertainty with regards to the estimate should also be put to to bed. Brokers have unrisked valuations for Strike at above 40ct - and this level could nearly be reached, if the two wells are successfull. The chances for this are high - but one never knows, before it´s done! Next target for me in the shorter term is the recent high of 30ct ( adjusted for the rights issue ). So exciting times for us as long term shareholders, and the company!
Foran Mining - one of my two Canadian investments ( the other one being highly successfull Osino Resources ) has struggled over the last year. Expectations had been high , as Glencore had been closely involved in the pre-feasibility study, which has been done as a very detailed study, using roughly current metal prices. The feasiility study has put an NPV of nearly 10x the current share price on the project. While more equity will be needed to develope Mcilvenna Bay, the resource is indicating, that ultimate production will potentially be larger, of alternatively, the 9 year mine life much longer than the 9 years from the feasibility study.! This little, 27 mill$ company is a big sleeper, and will ultimately make a lot of money for current shareholders. The stock was trading at above 30ct last year, at very similar metal prices, and not as advanced as at today!
Oklo Resources - you will have read about the political situation in Mali, which has had something like a military coup. Certainly not good, and I don´t want to downplay it. But military coups in Western Africa are nothing that unusual! Nevertheless, it´s not good for the investment climate in Mali, and in Western Africa. All related companies are trading at levels, which are probably 10% below price levels they would probably trade otherwise. This also applies to Oklo! In actual fact, probably more than 10%! Priror to the coup, OKU trated at 35ct/share ( vs 28ct today ), also helped by the fact, that Resolute bought a 10,7% stake in the company to become the 2nd largest shareholder behind BlackRock. Production of all larger gold mines has been unaffected by the coup - as usual in these countries! Nobody wants to kill the golden goose! OKU announced some nice drilling results . From SK North, good deeper results from about 200m of 23m at 2,57g / 50m at 1,43g, which will extend the resource at depth. Two mettalurgical hoels drilled at SK North had 18m with 9g and 33m with 3,1g from 44m and 121 m resp.. And drilling from SK South had several 10-14m intersections from about 45m at grades of between 1,4g and 2,7g. Overall, they will add to the first resource estimate, due this half. Some estimates believe the fist resource to be around 600-700.000 oz at good grades…but we will need confirmation of this over the next 2-3 month. Due to the current wet season, drilling will only resume in 4 weeks time.
Apollo Consolidated - AOP announced another set of drilling results from their Rebecca Gold Project east of Kalgoorlie. Cleo, which is about 1 km west of the 775.000oz Rebecca desposit. returned results of 38m with 2g gold and 2m with 9,4g. Duchess, which is 4 km South of Rebecca, had results of 35m with 0,9g and several intescts of about 10 w withbetween 1,15g and 1,83g gold. Duchess, which so far has an inferred resource of 180.000oz, will increase the resource and probably also the resource classification, while Cloe does not have a resource so far ( but I guess will have so at the next estimate ). 18 of 19 Duchess holes intersected worthwhle mineralisation - some very long, low grade intersections like 73m with 0,73g gold / 73m with 0m6g , and 100m with 0,43g, indicating good tonnage potential. The proejct has some strong resources at good grades, surrounded by what probably is a relatively large , but economic and mineable low-grade resource. The 1 mill oz project will increase, and further drilling is in progress. AOP still have about 20 mill A$ in cash + a royalty, which shoudl be worth north of 15 mill A$ on Roxgolds main project in Ivory Coast, which should get the go-ahead relatively shortly. I continue to be a shareholder here.
So far so good for the first full day back in the office!
Have a nice evening!
WS