Gold investors see Trump (and Clinton) as money for jam
Exploration drilling at West African Resources' Tanlouka gold project.
Recent weakness in the gold price has the gold bugs latching on to the next big event that could force the yellow metal higher, the US election. And there is no surprise in knowing that a Donald Trump victory would be a big plus for the price.
Funny thing is though, so too would a Hillary Clinton victory, albeit not to the same extent that a Trump inauguration would serve up.
That’s according to ABN Amro analyst Georgette Boele, the winner of the coveted Metal Bulletin precious metals analyst of the year award for 2015.
One of the few out there to stick her neck out and make a call on the impact on gold of the Trump/Clinton contest, Boele’s base case scenario is that Hillary wins the day and that gold will likely rise at a moderate pace towards $US1650 an ounce, compared with Friday’s New York close of $US1332 ($1770) an ounce.
Under the Democrats it seems, US economic growth would remain below trend, improving only slightly in 2017. Such a result would be supportive for gold prices because inflation would be higher than growth, real interest rates would remain negative, and the dollar would weaken.
The one hell of ride that a Trump victory would deliver (Boele emphasises it is a low probability) would see a more substantial rise in gold prices towards $US1850 an ounce, something that would warm the hearts of the gold producers because at current exchange rates, it would make for a money-making $2466 an ounce.
“We expect that his policies will be inward-looking and will weaken the fundamentals of the US economy. In addition, his rhetoric and possibly policy actions could create domestic and international uncertainty at best, and upheaval at worst,’’ Boele said. West African Resources
This time next week the gold industry will be toasting its good health at one of Kalgoorlie’s many watering holes on day one of the Diggers & Dealers bash.
But there will some nervousness behind the celebrations given the huge run up in gold equities since the start of the year. Any cracks in the gold price from here on in will trigger big share price falls for those that have run the hardest.
And while there will be some crossing their fingers that Trump does in fact get up, the broader hope will be that gold at least holds on to $US1300 an ounce. It is a good price and one at which there is no excuse for not making decent returns.
The big trend in recent weeks though has been the dive down by gold equity investors into stocks that have not had the massive run the likes of Northern Star (NST), Evolution (EVN) and St Barbara (SBM) have had so far this year.
Nothing wrong with that lot. It’s just that everyone is full as a boot on them, and that leverage to the upside, either to the gold price or exploration results, probably rests with stocks lower down the ASX pecking order.
And as mentioned here back in March, a subset of all that is the African gold explorers/developers such as West African Resources (WAF).
It was an 8.5c stock back in mid-March but has since powered ahead to 23c since high grade hits at its Tanlouka gold project in Burkina Faso convinced it to ditch a 50,000 ounce-a-year “starter” heap-leach project based on oxide resources in preference to a much bigger carbon-in-leach (CIL) project.
Canada’s Clarus Securities likes the story. It has just initiated coverage of the stock with a 65c price target.
It estimates Tanlouka could become a 145,000 ounce-a-year producer with all-in sustaining costs of less than $US800 an ounce, starting in 2019.
Clarus reckons that would generate an annual pre-tax operating cash flow of more than $US100 million and an after-tax internal rate of return (IRR) of 31 per cent at a $US1300 an ounce gold price. All that assumes WAF remains an independent company, with Clarus noting that there are two development projects within 35km of Tanlouka owned by fellow Canadian stocks (WAF is dual listed).
Across all three, there is probably 10 million ounces of reserves and resources. “We believe that the economics of these projects could be significantly enhanced towards 40 per cent-plus IRR by accessing a common CIL plant at the Tanlouka site,’’ Clarus said.
The other deposits are owned by the $150m Orezone Gold, and the $3.4 billion B2Gold. WAF is the smaller of the three at $94m. Vital Metals
The diving down for leveraged upside, and the African gold subset theme, are two reasons that Vital Metals (VML) could be worth watching in the next couple of months.
It last traded at 1.6c for a market value of $8.4m and has just kicked off a gold exploration program at its Kollo gold project, also in Burkina Faso.
Although better known for its Watershed tungsten project in Queensland, the drilling campaign at Kollo is a case of back to the future for Vital.
Previous work at Kollo returned some impressive hits but West African gold was on the nose at the time so the focus became Watershed, which also has gold potential that is now being followed up.
The world is not much interested in tungsten at the moment, even with China stomping around the South China Sea.
But it would certainly be interested in the type of gold hits returned at Kollo in the past if they were being reported to the ASX today. Best results in the past included a 5m hit grading 60.3 grams of gold a tonne.
Preliminary work at Kollo has extended the strike length of the zone of gold anomalism to almost 6km.
Drilling contractor Ausdrill (ASL) must like the potential at Kollo as the African exploration specialist took up a $500,000 placement of Vital shares leading in to the campaign.
WAF Price at posting:
23.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
