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Why this dog in the ASX gold sector is starting to look interesting

The dog of the gold ASX sector is finally enjoying a bit of a reprieve this morning. The St Barbara Ltd (ASX: SBM) share price is outperforming the market and its peers after posting a downbeat quarterly production report.

The bad news was preannounced last week and the absence of new disappointing details is probably the key reason why the St Barbara share price is rallying 1.6% to $2.57 at the time of writing.

That’s significantly ahead of other gold miners. The Newcrest Mining Limited (ASX: NCM) share price inched up 0.3% to $33.22, the Evolution Mining Ltd (ASX: EVN) share price flatlined at $4.17 and the Northern Star Resources Ltd (ASX: NST) share price fell 0.6% to $10.09.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index lost 0.3% of its value as banks and IT stocks dragged the market lower.

Every dog has its day

Bargain hunters may be stepping in to give St Barbara some much needed support as the stock crashed nearly 40% over the past year when peers like Newcrest Mining and Evolution Mining have raced ahead by 61% and 33%, respectively.

Management reported drop in production and increased costs across all just about all its mines for the September quarter this morning, but as I mentioned, the miner had softened the ground by flagging the bad news on Friday (which triggered a drop in the stock).

While total gold production for the September quarter increased slightly to 87,569 ounces compared to the 86,197 ounces it produced in the previous quarter, the increase was due to the acquisition of Atlantic Gold.

If not for that, output would have fallen as its Gwalia mine in Australia and Simberi in PNG suffered materially lower production levels.

What’s also disappointing is that Consolidated All-In Sustaining Cost (AISC) increased to $1,421 an ounce – or a 17% increase over the June quarter.

St Barbara warned that FY20 output from Gwalia will also be lower than initially forecasted. It’s flagship mine is tipped to produce between 175,000 and 190,000 ounces of gold compared to the previous forecast of 200,000 to 210,000 ounces.

Silver-lining turns gold

But this isn’t enough to put off JP Morgan, which continues to rate the stock as “overweight” (buy recommendation) even as it lowered its price target by 9% to $3.20 a share.

“Not a great start to FY20 and it leads to 15% lower earnings on our numbers. However, the issues of constrained ventilation are related to the Gwalia Extension Project (GEP) which once complete in March Q FY20 sets the mine up for its current 2031 mine life,” said JP Morgan.

“With visibility to 2030 on 2 x~200kozpa mines and potentially 3rd decent life ~100kozpa mine, SBM has a competitive platform for a mid-cap gold miner.”

Also, given the lack of value in the gold sector (no thanks to the big run-up in the share prices of its peers), St Barbara may not look like such a bad option for those who believe that the gold price will stay higher for longer.

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Motley Fool contributor Brendon Lau owns shares of Evolution Mining Ltd. Connect with him on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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