Pick the right side of gold and win big: Maple-Brown Abbott

Opportunities have abounded for investors in the ‘right’ areas of gold, according to boutique manager Maple-Brown Abbott, with merger and acquisition (M&A) activity also on the rise.

Phillip Hudak and Matt Griffin, co-portfolio managers of the Maple-Brown Abbott Australian Small Companies fund, said gold production companies emerged from earnings season victorious over gold developers.

“The gold price has done very well over the past two years, despite rising real bond yields which are normally not good for gold. However the impact of bond yields has been offset by high levels of central bank buying and we see value emerging for gold producers,” Hudak said.

“Those companies that are producing gold right now, such as Perseus and Genesis Minerals, and can take advantage of the “scarcity value”, have outperformed the gold price. Combined with easing cost inflation, profits have been boosted.

“This contrasts to gold developers, which have underperformed the gold price, as they are seeing higher funding costs, project cost blowouts and delays.

“We believe there is still significant upside in select gold companies, especially those companies that are increasing their resource base and have low-cost options to bring gold production on, including Spartan Resources, as well as those developers that have high-quality well-funded projects, such as De Grey Mining.”

With the gold price now trading near record levels at US$2,500 per ounce, Hudak and Griffin said M&A activity was likely to surge as producers adopt a “buy over build” strategy to continue growth as explorations decline.

“Gold sector M&A activity is heating up, for both global and local small cap gold miners,” Hudak said.

“It is now becoming cheaper to buy gold miners rather than build gold mines. We’ve seen Newmont and Newcrest get together, Goldfields has been active and that has flowed through to Australian small cap gold companies, including Ramelius taking a stake in Spartan, Perseus taking a stake in Predictive Discoveries, and Red 5 and Silverlake Resources merging.

“We believe this M&A activity will continue, particularly at the smaller end of the market.