Global gold prices finished a tough year further depressed. Craigs Investment Partners broker Peter McIntyre talks with senior business reporter Simon Hartley about the companies and their outlook for 2016.
Gold delivered another volatile year for investors, the price towards the end of 2015 being down 9.99% for the year rolling, and the waning value increased pressure on gold producers.
Such a year of political upheaval over immigration in Europe and the various acts of terrorism would usually nudge investors towards the safe haven of gold, a historic haven against inflation.
However,that did not happen, with inflation generally depressed and a strengthening US dollar also accounting for depressed global spot prices.
During 2015, gold hit a high of $US1302 in January and a low of $US1049 in mid-December, with the average across the year to December 31 at $US1153.
For miners, the relatively new accounting procedure to capture "all in sustaining costs'', or overall mine costs per ounce of gold produced, remains the crucial benchmark for success.
High production costs when gold was hovering around $US1100 ($NZ1656) per ounce meant only the most efficient companies were maintaining anything close to a healthy profit margin, Craigs Investment Partners broker Peter McIntyre said.
Craigs' research of seven Australasian miners showed that in 2014, the all in sustaining costs fell 12% and for 2015 a decline of 5% was expected, but in 2016 there would be a 12% rise in costs.
Throughout much of the year ahead, Mr McIntyre has spot gold trading in a narrow range above or below $US1100.
"Against this backdrop of volatility, gold companies have been controlling costs, with reductions in operating expenditure, sustaining capital capital expenditure, exploration and corporate costs,'' he said.
From an investment point of view, recent Craigs research on strategic asset allocation suggested a 5% allocation to gold, within a balanced portfolio, could improve the risk-adjusted returns.
"Gold prices are notoriously difficult to forecast. However, we believe it also possible to build a tactical case for purchasing gold at current levels,'' the research said.
With gold underperforming markets materially for several years, investor sentiment was probably approaching bearish extremes.
At the same time, Craigs saw the potential for increased investor uncertainty regarding the path of future inflation and for increased market volatility, as the US Federal Reserve attempted to normalise monetary policy.
"Both of these market backdrops are usually positive for gold,'' the research said.
In general, the commodity and mining sectors were now back to global financial crisis levels.
Mr McIntyre said the sector was under severe stress, which should culminate in increased cuts to capital expenditure, project deferrals, asset sales, capital raisings and merger and acquisitions during 2016.
He said the "crescendo of activity'' in the sector was likely to mark the bottom, with most companies trading below replacement value, an indication the sector is oversold.
The New Year has been kind to Oceana Gold, with its share price lifting more than 20% from $2.81 to touch $3.28 this week, before easing back slightly.
Mr McIntyre said other Craigs research showed Oceana Gold, Evolution Mining and Independence Group were among the lowest of the all in sustaining costs group for 2015-16.
However, he cautioned there would be a shift of positions after 2016 with those three producers "vying significantly'' as their respective project dynamics changed.
The face of mining changed hugely in New Zealand during 2015, with Oceana taking over Newmont's Waihi gold mine in the central North Island volcanic plateau.
About 99% of the country's gold production is now under the Oceana umbrella.
Oceana is going into 2016 as one of Craigs' top stock picks, along with Alacer Gold, Independence Mining and Evolution Mining.
The latter owns seven mines in Australia, producing 437,570 ounces of gold equivalent for its year to June.
Several months ago, Evolution acquired the Puhipuhi epithermal gold-silver prospect near Whangarei from Australian junior De Grey Mining Ltd, which required a capital injection.
Evolution's newly acquired Cowal gold mine in New South Wales produced 46,419oz from the first 69 days of ownership, while there was also strong cash generation from the recently acquired Mungari gold project near Coolgardie in Western Australia's eastern goldfield, with net mine cashflow of $A19million from 37 days of ownership, NZResources.com reported.
Most notably in New Zealand, Evolution's plans in Northland have attracted criticism, with many groups declining to even engage with the company to discuss its plans.
Oceana remains one of the best news stories of the year, clinching a script-only more than $996million takeover of a US development mine then gaining Australia's top mining award in Kalgoorlie.
That was followed shortly after by its 25th anniversary at Macraes in East Otago - its mainstay mine which has produced more than 4.4million ounces.
Mr McIntyre said both Oceana's assets, at Macraes and Waihi, were benefitting from strong operating cost discipline and a "robust'' New Zealand dollar gold price, which ensured cashflow was maximised.
"With a reasonably well defined two to three years of mine life, further exploration success could see New Zealand remain in Oceana Gold's asset portfolio for some time to come,'' he said.
Despite Oceana owning Waihi only since October, significant changes were being made which were starting to reveal Waihi's potential, Mr McIntyre said.
"Under previous ownership, the asset received little attention and was therefore not well capitalised or mandated to do too much forward planning,'' he said.
Oceana was now assessing various improvement opportunities in operating costs, mine design, contractors and synergies with its other New Zealand assets.
Importantly, exploration was extending the underground Correnso deposit at depth with further potential to the north.
The historic Martha open pit mine remains closed, with Oceana looking more closely at underground operations.
Based on current extraction of 500,000 tonnes of ore annually, Correnso has a mine life of around 18 months to two years,
but Craigs believed Correnso Deeps exploration would add at least another year.
Mr McIntyre said the "turnaround'' at Macraes during the past two years was "commendable'', having reduced operating costs and generated additional mine life from the low grade ore bodies.
The weak New Zealand dollar and lower fuel prices had helped, he said.
He noted Frasers underground had once been tagged to have closed mid-2015 and the open pit by the end of 2017, but there was now ore available "for at least three years'' production, he said.
"Oceana was one of the first gold companies to make the difficult decision to rationalise its New Zealand workforce following the gold price decline in 2013,'' Mr McIntyre said.
Oceana has indicated it is almost doubling its New Zealand exploration spend, to $10million.
Mr McIntyre said Macraes was valued at $140.6million and Waihi at $160.4million.
Because the cost base of the New Zealand assets was improving and there were further opportunities to extend mine life, Craigs had rated Oceana stock as a "buy'' recommendation.
While its recent US acquisition of the Haile gold development mine in South Carolina was not included in that valuation, Craigs had since researched Haile.
Oceana gave its open-pit Macraes site a new lease of life by developing its Frasers underground mine in 2008, and is expanding Philippines open-pit Didipio operations with a push underground.
The Haile development mine was bought for $NZ996.9million in July, in a swap for new Oceana shares, which included acquisition of $C254million cash, from Romarco Minerals Inc.
While the analysis has mainly been around open-pit mining, with about $US100million ($NZ152million) already spent from a $US333million budget, the opportunities to mine underground are now emerging.
Mr McIntyre said he believed the Haile project could be much larger, with the inclusion of both open-pit and underground operations delivering 237,000oz at all in sustaining costs of $US510 per ounce, for 12 years.
Oceana is targeting overall annual gold production of 550,000 oz in 2017 from combined New Zealand, the Philippines and the US, at an all in sustaining cost of $US600 - likely to be the cheapest in the world, if targets can be maintained.
Mr McIntyre said for the year ahead, the "all in sustaining costs'' remained the best indicator of cash margins.
With no control over gold prices except hedging, operating costs remained the key "controllable part'' for any mining business.
"The coincident downturn in the Australian and global mining industry, weaker foreign exchange, as well as falling fuel costs has allowed domestic Australian miners to continue lowering their cost base,'' Mr McIntyre said.
He said 2017 would see some curtailing in the present capital cycle.
In calendar 2017, a number of projects now under development would begin to yield strong returns, such as Newcrest Mining's Cadia East, Oceana's Didipio underground and Regis Resources' Erlistoun project.
"However, the clearest trend is the lack of major greenfields projects in the short to medium term. We believe this is the result of a lack of shareholder/capital market support for new gold projects in a declining US dollar gold price environment,'' Mr McIntyre said.
Balance sheets were also constraining further investment, debt having been used to fund the previous capital cycle, while exploration budget cuts would also result in a limited project pipeline in 2017, Mr McIntyre said.
- Additional reporting nzresources.com
