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High gold price a boon for Silver Lake after latest drilling results

Gold nugget on map of Australia
Image source: Getty Images

One company that looks likely to profit from the current high gold price is ASX gold miner Silver Lake Resources Limited. (ASX: SLR). On Friday last week, Silver Lake announced an astounding assay result from its recent exploration drive.

Taken from its Deflector Operation in Western Australia, the significant results included an amazing 7 metres at 98.7 grams per tonne. Silver Lake also disclosed an additional 2.6 metres at over 100 g/t. The company’s high grade assays combined with the high gold price make Silver Lake shares a “buy” in my estimation.

For contrast, exploration company Bellevue Gold Ltd (ASX: BGL) is currently a market darling, in part due to its high grade ore bodies. This includes tonnages at 11.8 g/t and 22.0 g/t, albeit for a higher number of gold ounces.

Economics of gold mining

It is often the case that the gold price falls as equities rise, as investors try to reduce the losses across a portfolio. Most gold large caps fell in share price as the stock market rose last week, despite months of good news.  

The ability of a gold mining company to generate good profits on a regular basis reflects two things. Their all in sustaining costs (AISC) and their ability to hedge the market. For example, for the quarter ended 31 March 2020, Newcrest Mining Limited (ASX: NCM) had an ASIC of $827 and a margin of $742. This implies a gold sales price of $1,569 when the spot price was near $2,500. 

With a high grade deposit, Silver Lake is likely to have a very low AISC value. This means it can withstand a large drop in the gold price and still remain very profitable. 

Will the gold price stay high?

The gold price remains at all time highs in US dollars, although it has fallen in recent weeks in Australian dollars. This is because of the high exchange rate. Our successful management of the COVID-19 pandemic, coupled with surging demand for iron ore from our suppliers, has rekindled investor faith in the Aussie dollar.

I think the gold price will remain at high levels. Unlimited quantitative easing, low interest rates and the increasing tensions internationally and domestically for the US will likely see more new money flowing into gold across ETFs and mining shares.

Regardless of the gold price, the point remains. Silver Lake is likely to have a very profitable mining operation due to the high grades of gold, balanced with high grades of copper. 

Foolish takeaway

Australian gold miners are a high productivity sector with very sophisticated sales and hedging practices. The drilling results at Silver Lake are very positive and in my opinion we will see the Silver Lake share price escalate as it edges closer to production. I believe now is a good time to buy into this company for a good medium-term gain. 

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Motley Fool contributor Daryl Mather owns shares of Bellevue Gold Ltd. 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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