Just Follow the Cash
It is an old metric but remains a golden one in picking stocks in the gold sector – follow the cash!
In an industry which has become increasingly capital intensive (and in many cases prohibitively so) it has become difficult for a gold businesses to build up cash on their balance sheets. In our view, those gold companies that are able to build up cash would appear to be doing a better job of things.
As gold companies continue to receive a good price for their product (particularly on an Australian dollar basis) and have done an admirable job of reigning in operating costs (with a drop in fuel prices helping the situation also) this is reflected in significant operating surpluses across the board. However, after the costs of capital, royalties, taxes and interest (to service various amounts of debt) there does not seem to be too much net cash flow left to grow the business or even pay a dividend to shareholders.
With this sort of theme in mind Katana Asset Management’s core gold stocks include Ramelius Resources (RMS) and Regis Resources (RRL). Both appear able to run their respective gold businesses at a decent profit and deliver solid free cash flow.
Take Ramelius which this time last year had $35m in the bank (no debt) and was looking to produce a modest 100,000 ounces of gold from the less than straightforward Mt Magnet operations in WA. Fast forward twelve months and the cash has built up to $95m on the back of a modest 120,000 ounces of gold production and after bringing on stream the high grade Vivian underground mine just outside Leinster in WA. Being shareholders we are watching carefully to see what the company does with its cash, although the company does have a track record of rewarding shareholders via a dividend in the past (when it mined the unusually high grade Wattle Dam deposit in WA a number of years back).
Regis is better known and has a solid track record of running a profitable gold business and also admirably rewarding shareholders via dividends (and has been able to get on top of flood related issues at its operations). Although we generally don’t invest in a gold stock for a dividend the ability to pay one appears a good proxy of the robustness of the underlying business.
This time last year Regis had $77m in the bank (and debt at $20m) and was looking to increase gold production to around the 300,000 ounces per annum level at its relatively low grade Duketon gold operations, in WA. Fast forward twelve months and the cash has built up to $130m (with debt retired). This has been done whilst paying out a meaningful $65m in dividends to shareholders during this period. With a reasonable growth path in front of Regis it is likely to remain a core holding for Katana for quite a while to come.
Authored by Steve Thomas (Katana Asset Management – Senior Analyst)
Romano Sala Tenna is a Portfolio Manager at Katana Asset Management. The Katana Australian Equity Fund is a long-only, broad-cap Australian Equity fund focused on maximizing risk adjusted returns for clients. This article is general information and does not consider the circumstances of any individual. To learn more about the Katana Funds, please click here.