The Gold Report: You are based in Australia where iron ore
and coal are the dominant mined commodities. A recent Morgans research report
said, "We need to see demand-linked data improve, or at least stop
getting worse, for the Chinese steel industry for us to gain any
confidence" in iron ore market fundamentals. Has there been any
improvement?
James Wilson: Companies with resilient supply, coupled with the
remarkable cost-out performance of Vale S.A. (VALE:NYSE), BHP Billiton
Ltd. (BHP:NYSE; BHPLF:OTCPK), Rio Tinto (RIO:NYSE; RIO:ASX), Fortescue
Metals Group Ltd. (FMG:ASX), Roy Hill (private) and subsidized Chinese
domestic iron ore production, will lower the long-term sustainable price
level needed to encourage new investment in iron ore supply. We estimate this
has reduced the long-term sustainable iron ore price from US$85/ton (62% Fe)
to US$65/ton, capping the upside potential of any eventual recovery. As a
result, we expect those miners burdened with high levels of debt like
Fortescue or large leverage to iron ore like Rio Tinto will remain under
pressure. Our preference remains with BHP, which maintains competitive
exposure to iron ore but is significantly boosting free cash flow across its
business, coupled with attractive leverage to oil and gas, one of our
preferred commodity exposures.
TGR: The World Gold
Council says Australia is second only to China in global gold production.
How is a weak Australian dollar compared to the U.S. dollar changing the
fortunes of the country's gold miners?
JW: A weak Australian dollar means strong leverage for domestic
gold producers. At the start of the June quarter, the gold price in
Australian dollars hovered around AU$1,500 an ounce ($1,500/oz), which is
great considering the average "all-in sustaining cash cost" was
around AU$960/oz in the March quarter compared to AU$1,023/oz in the December
quarter. The bottom line is that cash margins are looking quite healthy for
our Aussie miners. We are certainly seeing investment dollars directed toward
predominantly Aussie domestic producers and explorers, too. One good example
is Gold Road
Resources Ltd. (GOR:ASX), which recently raised $39 million for its
Gruyere development project in the Yamarna Belt in Western Australia.
TGR: Which metrics (i.e., cash flow per share, all-in sustaining
cash costs) are the most telling as you pore over the numbers of the gold
producers?
JW: All-in sustaining cash costs is our favorite metric, but it is
not totally transparent, so the figures are always a bit rubbery. That being
said, it has been a great way to track the sector costs on a more level
playing field than previously.
Source: Morgans
Source: Morgans
TGR: What Australia-listed companies are developing gold projects
with strong stories?
JW: I mentioned Gold Road earlier. It is probably the most
interesting story. The company is a big takeover target thanks to its large
resource base of 5.5 million ounces and growing. The company plans to use the
funds it just raised to complete a prefeasibility study by March 2016 with a
definitive feasibility study calendared for the end of that year.
Evolution
Mining Ltd. (EVN:ASX) is doing great. We currently have an Add rating.
The company recently made its third deal in two months by announcing that it
would acquire the Cowal gold mine in New South Wales from Barrick Gold Corp.
(ABX:NYSE; ABX:TSX). This is a transformational deal. Combined with the recent
acquisition of the La Mancha assets in Kalgoorlie, it will make Evolution the
second largest gold producer on the Australian Securities Exchange. I think
the company's focus on costs will yield further upside value in the not too
distant future. We are looking for future exploration upside at Cowal, La
Mancha and Cracow, which along with possible increases in the gold price and
further weakness in the Australian dollar could result in further upgrades to
our price target of $1.40.
Crusader
Resources Ltd. (CAS:ASX) is also doing well. We recently visited the
Juruena site in Brazil and believe it has significant potential for a
near-term, small-scale operation. Drilling has continued to intercept
high-grade zones at Querosene and an initial resource estimate is in the
works. We are looking forward to Crusader connecting with a bigger funding
partner to capitalize on the opportunity in the historic mining area. The
company continues to operate a cash flow positive iron ore operation where
operating costs have continued to fall due to cost improvements. A new deal
with Vale could expand the operating footprint at Posse. The company is also
moving forward with development at the Borborema project where plans for a
more affordable 1.5–2 million tons per annum operation could be released by
the end of the year.
TGR: What are some Australian graphite companies you have been
following?
JW: There are not many to choose from on the Australian Securities
Exchange, but we have been following Metals of
Africa Ltd. (MTA:ASX) thanks to its location along strike from the
Montepuez Central project in the massive Balama deposit of Syrah Resources
Ltd. (SYR:ASX) in Mozambique. Metals of Africa recently announced a
high-grade, near-surface assay with large average flake size.
We have also been taking a look at Magnis
Resources Ltd. (MNS:ASX) recently. This is a near-term graphite producer
working in southeast Tanzania.
TGR: Please complete this sentence: In the mining sector, 2015 will
be remembered as the year of the. . .
JW: . . .patient investor!!!
TGR: Thank you for your insights.
