Motley Fool Australia

Why this emerging ASX gold producer is in the buy zone

gold mining shares
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With the spot price of gold currently sitting at US$1,642.90 an ounce and recently reaching seven-year highs at US$1,645.95 an ounce, gold-based stocks on the ASX have been booming. The commodity has had enormous upward momentum due to global economic factors such as the recent trade war between the United States and China, and the coronavirus outbreak. Gold prices rise as economic conditions worsen and investors look to hedge their portfolios. Large macroeconomic events such as the trade war and coronavirus outbreak impact a significant number of markets resulting in a chain reaction of negative effects on impacted industries.

Analysts at Bloomberg have forecasted the continuing rise of gold prices in the foreseeable future, as the coronavirus outbreak remains ongoing.

What does this mean for gold miners in Australia?

Historically, as gold prices rise, Australian gold stocks gain an influx of investors looking to hedge their portfolios. As the spot price of gold rises, so does the profits of gold producers. Producers can sell their product (gold) for higher prices into a market with growing demand.

As a result, the overall share price of gold-reliant companies generally increases.

Opportunity in West Africa

A gold related ASX share I would buy is West African Resources Ltd (ASX: WAF). West African Resources is an Australian gold developer operating out of Burkina Faso, West Africa. The company’s current project, Sanbrado, is West Africa’s highest margin gold project in construction.

Sanbrado is an open pit and underground mining operation with a total 10-year life of mine. An updated feasibility study listed the estimated production of the mine as following:

  • 300,000 ounces of gold in year 1
  • 217,000 ounces of gold in years 2–5
  • 153,000 ounces of gold in years 5–10

West African Resources expects total costs to be <US$600/oz over the first 5 years, and US$650 over the remaining life of the mine, resulting in an extremely economical project at the current spot price of gold. Calculations using US$1500/ounce of gold resulted in an after-tax net present value of US$599 million, an internal rate of return of 78.8%, and 12 months post-tax payback on capital expenditure. As the price of gold continues to rise, these values will also improve.

Construction for Sanbrado is 90% complete with its first gold pour expected in early Q2 2020, ahead of its initial Q3 schedule. West African Resources has fully funded the remainder of construction with $83.5 million cash in bank.

Off the back of its Sanbrado project, West African Resources has enjoyed a 117% share price gain over the last 12 months and has a current market cap of $548.4 million.

Foolish takeaway

As global economic sentiment remains volatile, investors will continue to value the benefits of gold investments to their portfolios.

West African Resources is well positioned and on-track to becoming a gold producer with its Sanbrado project. The economics of the project are robust with low capital costs and high returns as the price of gold continues to rise.

For these reasons, I would buy West African Resources shares.

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Returns As of 6th October 2020

Motley Fool contributor Jordan Liu has no position in any of the stocks mentioned. 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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