Boutique investment manager Maple-Brown Abbott believes select Australian small cap gold miners offer attractive valuation and earnings metrics.

Phillip Hudak, co-portfolio manager, Australian small companies at Maple-Brown Abbott, says the Australian small cap gold sector is set to attract increased investor interest given it represents approximately 9 per cent (by market capitalisation) of the S&P/ASX Small Ordinaries Index and has the potential to react positively to the recent increase in gold prices.

Matt Griffin, co-portfolio manager, Australian small companies, adds there is upside potential for companies in the sector that can deliver on production guidance, effectively manage costs and offer significant operating leverage.

“If the gold price remains higher for longer, this has the potential to result in material positive earnings revisions for companies at the smaller end of the Australian gold mining sector,” Mr Griffin said.

The Maple-Brown Abbott small companies team believe some stock valuations look compelling at the current gold spot price and valuations for select producers remain relatively undemanding, particularly in the context of all-time high gold prices.

“Current stock valuations broadly imply gold prices around long-term pricing, which is well below the current spot price. Valuations have held up best for producers with high quality projects, for example Perseus Mining, that continue to deliver production growth, meet cost guidance and build cash reserves,” Mr Hudak said.

The Maple-Brown Abbott small companies team believes Spartan Resources (SPR) is an attractive high-grade, low-cost gold prospect in Western Australia in an increasingly acquisitive local small cap gold market. Genesis Minerals (GMD) is another favoured stock, run by a high quality management team. The company is turning around an underperforming asset base and leveraging other deposits in the Leonora and Laverton regions in Western Australia.

Declining exploration spend and depleting reserves means there is a limited organic growth profile for many gold miners. Given the recent strong gold price and rising producer margins, this promotes merger activity to backfill declining production profiles. In addition, increasing complexity and time taken to permit new projects means it is likely now cheaper and easier to buy versus build.

“We have also seen early-stage explorers continuing to struggle to attract new capital with the number of global junior fund raisings in February 2024 being lower by 33 per cent relative to the previous period last year and the lowest reported since January 2022 which makes them easy targets in the current environment,” Mr Griffin said.

Both the VanEyk Gold Miners and Junior Gold Miners ETFs have materially underperformed the gold price over the past three years, which emphasises how hard delivery from both a production and cost perspective has been. However, select emerging Australian small cap gold developers and producers such as De Grey Mining, Emerald Resources and Genesis Minerals have recently delivered strong returns above the underlying commodity.

“Over the past few years, the smaller end of the Australian gold mining sector has been plagued by higher costs from both a capital and operating perspective given cost inflation pressures and labour constraints, particularly in Western Australia. Our industry channel checks and a review of mining costs across Australian mines point to a stabilisation and even an improvement in mining costs over the past 12 months.

“Our discussions with gold miners indicate labour pressure is easing, validated by the decline in job advertisements in the mining services industry. This has been assisted by the recent closure of nickel and lithium mines given commodity price pressures which is easing mining industry labour constraints,” Mr Hudak said.

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