In the wake of our article on the direction of gold a fortnight ago, we thought it would be a good idea to take a look at a pair of gold stocks in the TAMIM portfolios. There is potential out there...
Last week we looked at the price of Gold bullion and tried to ascertain whether there might be further momentum left. While we still remain committed to the notion that it is next to impossible to predict the price action in this incredibly complex market with any degree of certainty we also did make clear that we do have some long-gold exposure by way of companies whose cost of production is lower than US$1000. And so, this week we take a look at a couple of these portfolio holdings namely, Westgold Resources (WGX.ASX) and Bellevue Gold (BGL.ASX).
Westgold is a junior with four major operations across WA and the Territory, of these the Murchison based operations offer the greatest prospects. Within this context, the company operates both a series of open-pit and underground mines anchored by processing hubs across central Murchison. The newest of these is Tuckabianna which, once fully operational, will have enough feed from its Blue Bell underground mine to sustain it for the next ten years. One of the notable aspects of Westgold has been their desire to vertically integrate and bring in-house the majority of their operations. This ranges from sourcing right down to the finished product. Though this adds to the operational complexity of the business somewhat, we think that there is a great potential for Westgold to drive future efficiencies by scale and specialisation.
As it currently stands, the company’s activities can broadly be broken down into their gold operations, contract mining and adjacent revenue streams from lithium royalties. The Meekthara operations or MGO is anchored by three processing plants, namely the Bluebird CIP Plant (1.4 -1.8 million tonnes per annum (TPA)), Cue Gold (1.2 - 1.4 million TPA) and fortnum plants (800, 000 to 1 million TPA). The Higginsville gold operations and associated infrastructure will add another 1.3 million in TPA, approvals and operational issues have delayed this somewhat though. It has been the contract mining services that have been the big problem child for Westgold with operational issues and cost blow-outs adding significantly to the cost base of the company though recent years. These have seen it move significantly towards reset and toward internal contracts and consolidation.
The company has also seemingly come to the realisation that it might perhaps make greater commercial sense to consolidate its asset base and rationalise their existing infrastructure. As part of this, Westgold continues to take requisite steps to divest its Northern Territory Exploration assets and their lithium royalty interests which cover some of the pre-existing discoveries over the northern extent of the Mt Marion lithium mine in addition to further exploration rights. We think that these rights could be sold to further enhance the existing business.
Though Westgold has a significantly higher cost of production to its counterparts, especially when compared with the likes of Evolution, we think that this remains an undervalued and overlooked business. Firstly, the business is a classic case of growing too soon and too quickly, we have seen the business gradually narrow down on their competitive strengths, which remain their WA operations, and focus on increasing operational efficiencies which they have a significantly greater capacity to do since they also internalise the processing of ore. Westgold is also interesting given the relatively healthy cash position they have built up and the $250 million in capex that has already been made (meaning that even on a replacement basis most of the capex has been written off already).
In addition, under the current scenario, only 20% of Westgold’s total mineral resource is in reserves meaning that there is great potential for the mine life to be extended and the tenure of the goldfields has exceptional further discovery potential. Although cash flow has been rather volatile in the past, we think that most of this is behind them now. One of the key hurdles for the company has been a spate of luck from an operational perspective and cost blow-outs. However, as the company looks to consolidate its operations while maintaining a healthy cost of production, which currently stands $1,160 AU$/Oz, we think it should be smoother sailing going forward.
At TAMIM we definitely have a preference for companies that are cash flow positive and at the beginning of the article, we mentioned that one of the metrics we use to filter whether we would buy a company is its cost of production. It might seem strange that we should also write off or own a company that is in its pre-production stage. Bellevue is one exception to this and, in any case, we would see this particular company as having a cost of production in competition with the best, including the likes of Resolute, in the next half a decade or so.
Bellevue Gold Mine based out of WA is a pre-existing project that produced approximately 800,000 oz between 1987-1997. It was then closed for about twenty years without further interest until the team at BGL decided to revisit it using some new sampling techniques not available in the 90s and applying for further exploration. At present, the management would have us believe that there is approximately 1,800,000 oz at 11.1 g/t and even if this were to be rather over-ambitious we still think there is potential for a great world-class project.
The key attraction here for us is that the project clearly has potential and proven reserves. The key metric to measure will be a question of cost and management capability when it comes to ensuring that the cost structure stays economical even within the context of shorter-term fluctuations in pricing.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.