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St Barbara reserves increase in gold bull market

stacks of gold coins growing higher
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This morning, St Barbara Ltd (ASX: SBM) announced results from exploration at its Simberi Operations in Papua New Guinea. It shows an ore reserves increase (the part that can be economically mined) from 1.7 million ounces (Moz) of contained gold to 2.2 Moz of contained gold remaining. This is an increase of 30%.

Meanwhile, its overall mineral resources have increased from 4.2 Moz of contained gold to 4.4 Moz of contained gold remaining. 

This is a very significant overall reserve increase for the company. All gold companies are aggressively hunting for replacement gold production. We see it in the Newcrest Mining Limited (ASX: NCM) pursuit of small-cap exploration partners, as well as the mega merger between Newmont Corp (NYSE: NEM) and Barrick Gold Corp (NYSE: GOLD) recently. 

The value of a reserves increase

After a turbulent week on the ASX last week, the St Barbara share price dropped by 17.8% to finish the week at $2.35. At the time of writing, St Barbara shares have risen by 2.13% so far today, putting them on a price to earnings (P/E) multiple of around 14. 

Based on FY19 full-year earnings, the company has an earnings yield of 10.8% and a return on capital employed (ROCE) of greater than 15% for 2 consecutive years. I believe it is trading at a very reasonable price.

St Barbara has impressive 10-year compound annual growth rates of 17.9% for earnings per share (EPS) and 13.7% for equity. This includes the bear market in gold from 2011 to 2015.

The gold price has been experiencing problems with support levels recently. However, it is still trading at historically high rates. As a hedge against chaos, gold is still the world’s favourite haven investment. Given the current state of the world politically and economically, there is little chance of the gold price falling significantly. 

St Barbara reported a consolidated all in sustaining capital cost (AISC) of $1,391 in February. At the time of writing, the gold price stands at $2,449 and would have to fall by 43% before the company would have to take extreme measures.

Foolish takeaway

St Barbara’s ore reserve increase positions the company to generate a lot of free cash with continued high gold prices; operating at a reasonably low AISC. 

Coronavirus has helped to dampen the company’s share price to a level very reasonable for investors. 

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Motley Fool contributor Daryl Mather 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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Daryl Mather