Diggers and Dealers unveils more precious gems on day 2

The stars aligned for Day 2 of Diggers and Dealers in Kalgoorlie with a robust uptick in futures markets indicating that the market was poised for a strong day and some upbeat activity was occurring in the commodities space.

Gold was sitting around the US$1930 per ounce mark which implied an Australian dollar gold price of about $2700 per ounce.

On the base metals front, copper continued its positive momentum, increasing to US$3.05 per pound.

After finishing the week with strong gains on Thursday and Friday, the nickel price edged up slightly.

It was a similar story with lead - after a strong week it had pushed up above US$0.82 per pound, implying an increase of more than 4% on a week-on-week basis.

Zinc had also continued its strong run, reclaiming more than half of the lost ground that occurred when it slumped from about US$1.13 per pound in mid-September to hit a low of US$1.05 per pound.

Monday night’s gain was its fourth consecutive increase as it pushed above US$1.10 per pound.

Similar to yesterday, we have examined some of the leading companies that presented on Tuesday.

West African Resources (ASX:WAF) kicked off the day, and while it is a compelling story it could be argued that the upside is already built into the share price.

The company’s shares have rallied about 200% since March, a rerating that was arguably justified as visibility around the company’s transition from explorer to a serious producer became evident.

The transition has occurred in relatively quick time with the company progressing from discovery to first gold in four years.

This is a particularly strong endorsement of management’s expertise given that the mine is located in Burkina Faso, a region that can present its challenges.

Setting that aside though, it is all about the future now and the company is set up nicely, targeting annual production of 217,000 ounces of gold over the next five years at all in sustaining costs (AISC) of less than US$600 per ounce.

This implies a hefty margin of about US$1300 per ounce based on the prevailing spot price.

The strong gold price is of particular significance for WAF as the group is unhedged, which compares with the majority of other companies that have locked in prospective sales at prices lower than the current spot price.

It is also worth noting that the company has recently acquired the Toega gold deposit from B2Gold and GAMS for US$45 million.

The non-JORC resource of 1.1 million ounces gold at 2.1 g/t gold is likely to grow significantly as the company undertakes an aggressive exploration program.

WAF had cash of US$73.5 million as at September 30 and gold to the value of US$12.3 million.

Mount Gibson Iron Ltd (ASX: MGX) was next to present, but it too found little joy despite the buoyant iron ore price which was instrumental in providing solid share price momentum in the September quarter.

The group’s Koolan Island project in Western Australia is Australia’s highest grade direct shipping ore haematite iron ore mine with ore reserves of 18.7 million tonnes grading 65.2% Fe.

Management provided ore sales guidance of 1.95 million wet metric tonnes for fiscal 2021 and noted that sales and cash flow would rise significantly from fiscal 2022.

Brokers are painting the company as more of a fiscal 2022 story with consensus earnings per share forecasts increasing from 9.6 cents in FY21 to 17.8 cents in FY22, implying a conservative PE multiple of 4 relative to Tuesday afternoon’s closing price.

Analysts are also expecting the company to pay a dividend in both fiscal years 2021 and 2022.

The company will benefit from the Shine Iron Ore Project which is expected to come on stream in mid-2021.

MGX has a robust balance sheet - as at June 30, 2020 the company had cash and liquid investments of $423 million and zero borrowings.

Consequently, it could be argued that the group’s market capitalisation of $860 million is conservative, particularly bearing in mind that the group generated a pre-tax profit from continuing operations of $121 million in fiscal 2020 with significant upside to come in the near term.

After MGX, it was back to gold as St Barbara Ltd’s (ASX: SBM) head of business development, Meryl Jones provided an update on the group’s operations.

It is also shaping up as more of a 2022/2023 story with consensus earnings per share (EPS) forecasts indicating an increase in EPS from 37.5 cents in 2021 to 50 cents in 2023, implying a forward PE multiple of about 6.

The company has operations in Australia (Leonora), Papua New Guinea (Simberi) and Canada (Atalantic Gold Operations Touquoy mine).

From a group perspective, management is forecasting gold production in a range between 370,000 ounces and 410,000 ounces in fiscal 2021.

It was a good year for Leonora as the mine delivered record production in the June quarter.

While it is up higher on the cost curve with AISC of $1435 per ounce, that still provides substantial margins at the spot price.

A growing proportion of gold from the group’s low-cost Canadian operations and diminishing production from the low grade/high cost Simberi mine (AISC $1631 per ounce) should work in the company’s favour.

The next presenter was Capricorn Metals Ltd (ASX: CMM), another company that has experienced strong share price momentum since March.

Its shares more than doubled between March and September when it hit a 12 month high of $2.37, but it has retraced over the last month, perhaps presenting a buying opportunity.

However, Capricorn is a stock for more patient investors as it is just in the process of constructing the wholly owned Karlawinda Gold Project (KGP), 65 kilometres south-east of Newman in the Pilbara region of Western Australia.

Capricorn’s significant plant design and equipment selection efforts have led to the potential for a higher throughput processing capacity.

With the potential to process up to 5 million tonnes of ore per annum in the first three years of the project this should have positive implications for production, payback and overall project economics.

The implications of this work and the decision to pursue operational efficiencies through the construction of a site airstrip are definitely positive.

In April 2020 the company released an updated reserve and resource statement for the KGP.

Drilling at both Bibra and Tramore deposits contributed to a significant increase in KGP Ore Reserves to 1.2 million ounces.

Based on the updated ore reserve estimate, contained gold increased to 309,000 ounces, resulting in the expected project life increasing from 9 years to 12 years.

Development is fully funded with commissioning targeted for the March quarter of 2021.

Management is laying claim to be the only ASX developer constructing a domestic gold project with a production profile of more than 100,000 ounces per annum with first production in fiscal 2021.

Western Australian gold producer, Pantoro Ltd (ASX:PNR) was next off the blocks, and the presentation coincided with the release of the group’s definitive feasibility study (DFS) for its Norseman Gold Project.

Based on the DFS metrics, the mine should produce 108,000 ounces of gold per annum on average at an AISC of $1292 per ounce, implying strong margins.

Management’s plan is to increase production by replacing low grade ore with additional sources.

The Halls Creek Project is the company’s established operation having commenced in February 2015.

Approximately 200,000 ounces have been produced over the last five years or so, and the company is currently operating two underground mines producing up to 40,000 ounces per annum.

Consequently, bringing the Norseman project online is an important development as it will represent a step change in the company’s production profile.

Saturn Metals Ltd (ASX:STN) presented just before lunch, and it is another company that has experienced strong share price momentum in the last six months or so.

Between March and August the company’s shares increased more than three-fold from 30 cents to about 90 cents with exploration success being a strong driver.

As recently as this week the company released further promising drilling results from its Apollo Hill Gold Project near Leonora in Western Australia which has a mineral resource of 781,000 ounces.

A further resource upgrade is targeted for late 2020, incorporating results from drilling conducted since October 2019 when the resource estimate was last updated.

Management has been encouraged by the delineation of some higher grade ore to the east of the existing resource.

Consequently, Saturn is very much a news-driven story, heavily reliant on exploration results.

Peel Mining Ltd (ASX: PEX) presented shortly after lunch, and as a copper-gold group looking to transition from exploration to production in the Cobar region of New South Wales it is an interesting story as both commodities are faring well price wise.

The group’s May Day VMS deposit is an early stage exploration opportunity where the group will be conducting further drilling to increase the resource of 1.12 million tonnes with gold of 1.3 g/t gold, nominal grade silver and lower grade zinc, lead and copper.

Management is looking to establish an in-pit gold-dominant indicated classified resource at May Day.

The group’s Mallee Bull project is one of Australia’s highest grade undeveloped copper deposits.

It boasts 6.8 million tonnes at 1.8% copper, 31 g/t silver, 0.4 g/t gold, as well as relatively low grade zinc and lead for a 2.6% copper equivalent grade.

It appears to have a high grade copper rich core with drill results featuring hits such as 11 metres at 9% copper, 114 g/t silver and 0.4 g/t gold from 296 metres.

There will be plenty of exploration taking place during the remainder of 2020 and throughout 2021, indicating that the group’s fortunes will be driven by drilling results.

There weren’t all that many nickel stocks presenting, but Poseidon Nickel (ASX: POS) has certainly made its mark in the last three months with its share price increasing three-fold on the back of outstanding exploration success.

The group is advancing nickel projects in Western Australia with a combined resource of 395,000 tonnes nickel.

Black Swan accounts for 195,000 tonnes in resources, and it has a 2.2 million tonnes per annum processing plant at its disposal.

However, the real buzz around this project has been a high-grade discovery at nearby Golden Swan.

This prompted a significant share price run at the start of the week and there is the potential for this momentum to be sustained as further exploration is undertaken.

Musgrave Minerals Ltd (ASX: MGV) was another company that came to Diggers with plenty to talk about after just last week announcing exploration success at its flagship Cue Gold Project in Western Australia’s Murchison district.

The project has a resource of more than 600,000 ounces, but it is the new near-surface high-grade Starlight discovery that has drawn investors to the stock.

Exploration results have included 14 metres at 191 g/t gold from 4 metres and 31 metres at 44.8 g/t gold from 37 metres.

The group has third-party mills nearby with the capacity to process high grade feed, indicating that the group could generate early stage cash flow from high margin ounces

The exploration program is testing for new Starlight analogue targets on trend with the new high-grade Starlight gold discovery at the Break of Day deposit.

At a very early stage in an extensive exploration program the company delineated 5 metres at 13.4 g/t gold from 28 metres and 8 metres at 8.4 g/t gold from 41 metres.

There has not been any historical drilling in this area, suggesting further success could be imminent.

The group’s shares increased seven-fold between May and August and recent news flow indicates that it is looking even better now than it was in August.

Consequently, the share price retracement from about 76 cents per share to 58 cents may represent a buying opportunity.