There has been quite a change in sentiment and performance of gold companies this year. Nobody knows for certain when or where the price of bullion will go but, as night follows day, companies that mine gold will follow its price. Depending on the cost of production, a small price change in the metal may bring about a much larger percentage movement in the share price of the company that mines it.
Late last year, as the price of gold plunged, it seemed that many gold miners would be unable to win ore at a profit. This state of affairs led to some companies having to sell reserves and related assets. Those companies that could afford it have made some really good deals and stand to reap strong returns dependent on the price of gold.
St Barbara (ASX: SBM) acquired the large Simberi operating gold mine in Papua New Guinea last year, when it made a successful cash and share offer for Allied Gold Mining. Consequently, St Barbara is capitalised at $1 billion and has ore reserves of 5.7Moz. St Barbara has a target of reaching an annual production rate of 500,000oz from three operations by 2014.
Also last year, Metals X (ASX: MLX) purchased the West Australian gold interests of Alacer Gold (ASX: AQG) at Higginsville for $40 million. Metals X produced 42,400 ounces of gold from the mine in the December quarter. Average grade of production was 5.64g/t, which is high by industry standards. Expectation is for an annual rate of production of 150,000 ounces. It would seem that Alacer needed to sell its local operation to have sufficient cash flow to develop its gold interests in Turkey.
Possibly the best recent deal was the sale by Barrick Gold (TSX: ABX) to Northern Star (ASX: NST) of its 51% stake in the East Kundana joint venture, as well as the Kanowna Belle mine. Both are in West Australia’s Goldfields region. The $75 million deal, which is expected to win Northern Star global investment appeal, comes shortly after the company’s purchase of Barrick’s Plutonic gold mine for $28 million. Northern Star is now set to produce 350,000 ounces of gold a year. Managing Director Bill Beament reported, “The transaction ensures that Northern Star meets the demands of domestic and international investors with respect to critical mass, multiple operations, low costs, consistent dividends and strong growth prospects.”
He said the acquisition was also consistent with Northern Star’s key principle of maximising financial returns. “We are driven by shareholder returns, not by merely adding ounces and tonnes to our balance sheet and we see this transaction as highly accretive in terms of shareholder value,” he added.
All three companies are very well managed. They will profit substantially from their gold operations this year, if the price averages $1,450 or more per ounce (AUD). I believe we have seen the bottom of the correction in the gold price and the way gold has behaved this calendar year suggests prices higher than the current level of $1,475 per ounce can be expected.
Adding icing to the cake, if the Australian dollar drops against the U.S. dollar, earnings for the Australian producers will rise in proportion. I expect all three Australian gold companies to be strong performers this year, at least doubling in price.
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Motley Fool contributor Chris Koenig does have shares in companies mentioned.