Now more than ever, only select mining companies are attracting investors. Luke Smith, head of mining research for Canaccord Genuity in Melbourne, argues that low costs, increasing cash flows and improved net cash positions are crucial for gold companies. Solid contracts with end-users and strong institutional support are crucial for commodities.
In this interview with The Mining Report, Smith highlights two undervalued Australian gold companies and three Australian companies in graphite and lithium that have already seen explosive share growth and appear poised for even greater gains.
Luke Smith is head of mining research at Canaccord Genuity in Melbourne, Australia. He worked previously as an analyst and fund manager for Ord Minnett and the Lion Selection Group. He holds a Bachelor of Engineering in mining, honors, and a Master of Commerce in finance. Smith was a mining engineering consultant for several years.
The Mining Report: Australian mining shares had a great July. Was that a one-off or indicative of a trend?
Luke Smith: July tends to be good because the fiscal year-end for most personal investors in Australia is June 30, so there is tax-loss selling up to that date. That said, this July was better than average. The gains slowed down at the end of the month, but we've seen a liftoff again from the middle of August. Hopefully, this trend will continue, and we'll see the revival of Australia's small-resources sector.
TMR: Asian countries such as China and Indonesia are moving toward added-value mining. What implications does that have for Australian mining?
LS: Indonesia is a large supplier globally of tin, nickel and pig iron. The decrease in tin from there is counteracted to some degree by Myanmar becoming a tin producer overnight. The decrease of Indonesian nickel has already been positive for Australian nickel producers and explorers and the nickel price on the London Metals Exchange.
TMR: Newcrest Mining Ltd. (NCM:ASX), Australia's biggest gold miner, has suffered a lot of bad news lately, including a $2.5 billion ($2.5B) writedown and a class action suit. To what extent do its woes mirror that of Australia's gold industry as a whole?
LS: Newcrest is the big daddy of Australian mining companies. Because of its size, it is held by retail investors, as well as by institutions. Obviously, the big gold price decline last year did hurt everyone in that sector. And yet, what happened to Newcrest was very company specific.
Despite the much lower gold price, several Australian gold producers have taken that hit in their stride, moved forward and are prospering.
TMR: Newcrest released its year-end financials Aug. 18, reporting a statutory loss of $2.2B and an underlying profit of $432 million ($432M). Did this match your expectations?
LS: Pretty much. We have seen a shake-up of management there, and I think this will continue. The company has announced it will not shelve its Lihir gold project in Papua New Guinea, neither will it put some of its assets on care and maintenance. Marginal levels of free cash flow have appeared, but there is a lot of work to do over the next 12–24 months before Newcrest restores its credibility.