Australian Gold Companies to Command more ReSPecT

Since January 2008, gold has outperformed other asset classes by a significant margin with a 49 percent price increase.  Over the last year, the precious metals sector and specifically many gold mining companies have demonstrated significantly strong performance relative to overall global equity markets.  Attribution analysis over the previous 12 months, however, indicates that due to the currency appreciation in Canada and Australia, global gold stocks have actually underperformed relative to the physical gold price in US dollars, excluding US index gold stocks.

A significant country discount could certainly have been applied to Australian gold miners, developers, and explorers within the constraints of the Australian Resources Super Profits Tax (RSPT).  Although the proposed tax was first announced in July 2009, the public debate and controversy over the RSPT had been developing in Australia since early January and finally peaked in early May, when Prime Minister Kevin Rudd officially unveiled the tax. Following the most recent positive resolution of this RSPT debate from the perspective of gold producing, exploring, and mining development corporations; it may be worthwhile for gold investors to explore the “land down under” for stocks that could provide strong relative valuations and interesting opportunities.

Investment Considerations

Allied Gold (TSX: ALG) is a mid-tier Australian based gold producer and explorer, currently focused on exclusively owned projects in Papua New Guinea  and the Solomon Islands.  The company operates the Simberi Mine and in December 2009 acquired Australian Solomons Gold Ltd whose principal asset, Gold Ridge mine, is located in the Solomon Islands.  From 1998 to 2000, the mine produced in excess of 200,000 ounces before being closed due to civil unrest. Allied Gold is redeveloping this asset which it expects to add an approximate125,000 ounces of additional production to the group.

The company has 2.1 million ounces of reserves and expects to target 73,000 ounces of gold production from the Simberi mine for the current year and 300,000 ounces from combined projects by the end of 2013.  The balance sheet appears strong with a relatively low debt (recently financed $35 million dollar loan from the World Bank) for its ambitious expansion projects targeting 7.8 million ounces of resources.  Allied Gold’s strategy of not hedging could see the value of its strong resource base climb significantly.  The stock price is currently trading in the $0.33 range with relatively no appreciation on the year to reflect the increased value of the company’s assets in the ground.

Catalpa Resources Limited (ASX:CAU) is an Australia-based gold mining and exploration company operating the Edna Mine in Western Australia and owning 30 percent of the Cracow Gold project in Queensland with joint venture partner Newcrest Mining Limited (PINK: NCMGY).  The company has forward sold position of 352,316 ounces of gold at $1,557.50 AUD per ounce. With a hedge book weighted average gold price of $1,400 AUD per ounce Catalpa expects to realize an operating margin of $72 AUD million per year from the Edna May Gold Project.  The expectation for gold production next year is 126,000 ounces which implies a relatively attractive forward price to earnings multiple of 4.3 times.

Catalpa has a market capitalization of $227.3 AUD million but is carrying $65 AUD million of debt on its balance sheet. The company has raised $20 AUD million in order to focus on accelerating exploration and with the combined projects the company currently has 1.1 million ounces of reserves with 1.9 million ounces of resource potential.

The company has set an aggressive growth target for group production of 270,000 ounces per year in the next 2-3 years. This may be partially possible by increasing organic growth on existing projects; however Catalpa may also be seeking other assets to enhance its portfolio.  The stock price began the year trading at $1.39 AUD and is presently in the range of $ 1.41 AUD, reflecting a modest 1.44 percent increase.

Kingsgate Consolidated Limited (ASX: KCN) is an Australia-based gold mining and exploration company operating a mine in Thailand and mineral exploration projects in Australia and Thailand. The current mining operation is a low cost, relatively efficient gold mine, benefiting from a low tax regime which has resulted in a globally competitive production cost of $332 per ounce including royalties, confirming the company’s position in the lowest quartile of global gold producers. During the last fiscal year, the company reported total production of 93,002 ounces of gold and 293,472 ounces of silver.

Kingsgate has no debt and is generating positive cash flow from its operations paying a $0.15 dividend to its shareholders in March.   The company is expecting to expand its operations and production facility by 2012, after a nervous wait during recent political dramas in Thailand.

Unverified exploration within the province suggests the potential of more than 10 million ounces of resources; however the company’s current proven reserves are reported to be 1.47 million ounces with resource estimates of 3.1 million ounces.  Kingsgate holds more than 1300 square kilometers of property in the region and its aggressive drilling and exploration programs may benefit from reserve grade improvements. The stock price began the year trading at $9.21 AUD and is presently in the range of $ 9.37 AUD, reflecting a slight 1.74 percent increase.

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With help from Assistant Editor Vivien Diniz