A High US Dollar And Low Fuel Costs Spur Profits for Australian Miners

Palisade Global Investments |


The US dollar has been on a tear. And for miners in certain jurisdictions, this has helped operators immensely, especially when coupled with lower fuel prices, which typically accounts for 15-20% of overhead.

With traditional inputs being purchased with the weakening local currency, and gold being sold for the appreciating dollar, some operators in Australia have been able to improve their bottom line by more than 30%.

Why Australia And Not Canada or West Africa?

Two reasons:

  1. Political stability – Obviously, this applies to both Australia and Canada.
  2. Environment – Due to Australia’s warmer climate and geology (oxide mineralization), there is an abundance of companies operating smaller pits.

Although the same can be said for West Africa and Mexico in terms of weather, they are not as politically stable. Canada, on the other hand, is politically safe, but is cold and lacks oxide material, which means more hard-rock mining via underground (small tonnage and high grade) and low yield open pit mines with very high capex (ex. Osisko Mine’s Canadian Malartic).

Smaller underground producers have higher sunk costs, i.e. shafts and underground development, lower staffing and material consumption, which means less leverage and exposure to gains made with currency movements.

Thus, Australia comes out on top to benefit from a strong US dollar: geopolitical stability, warm climate, and the ability to have small open pit operations which have higher material inputs.

How To Play This Currency Disparity

No one could have predicted that oil and the Australian dollar would simultaneously self-destruct. As a result, operators saw instantaneous lifts on their respective balance sheets.

Intuitively, buying an Australian miner is the safest way to take advantage of this while gaining exposure to gold; however, this currently offers very little in way of leverage. The market has already priced in this disparity; Evolution Mining (CAHPF) recently acquired the Cowel and Mugari mines from Barrick Gold (ABX), increasing annual production from 440,000 to 800,000 ounces per year, and decreasing cash costs to ~$500/oz.

While the metrics look impressive, Evolution Mining’s market cap is more than 4.5 times greater than its sister company, Endeavour Mining (EDVVF), a company expecting to produce 544,000 ounces in 2016 at a cash cost of ~$740/oz. Although Endeavour’s operations are in West Africa, its enterprise value to production is $950 per ounce is considerably less than Evolution’s $2,080 per ounce. The higher this multiple is, the more expensive the company is considered.

We are seeing similar valuations across the board, giving us the conclusion that investment in these larger Australian players is more about free cash flow and limiting volatility, offering less potential returns than its non-Australian peers. Accordingly, taking advantage of this disparity is a great way of mitigating some risk in your current gold portfolio.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
ABX Barrick Gold Corporation 15.66 0.64 4.26 19,261,412

Comments

Emerging Growth

Nano One Materials Corp.

Nano One Materials Corp is a technology company. The Company manufactures storage materials for lithium ion batteries.

Private Markets

Santo Diablo Mezcal

Santo Diablo Mezcal has been created to capitalize on a boom sector of the beverage market currently full of many small unmemorable products by producing one sexy, household, easily recognizable…

Snapchat

Snapchat is the fastest way to share a moment with friends. The mobile app, allows users to not only share photos with friends but also control how long they can…