A weak national currency is bad news for importers and consumers but good news for exporters, such as miners. According to Australian analyst Duncan Hughes of GMP Securities, the 24% drop in the value of the Aussie versus the U.S. dollar means that local gold producers can produce big margins even at US$1,200/ounce gold. In this interview with The Gold Report, Hughes names two Aussie gold miners with great cash flow, as well as several with projects in Africa, and he highlights nickel and copper companies that can expect to flourish when prices rise, as he expects they will.
The Gold Report: Where do you see the price of gold going this year?
Duncan Hughes: Gold should remain fairly flat, probably around US$1,225 per ounce (US$1,225/oz), due to the strength of the U.S. dollar. In U.S. dollar terms, gold has underperformed, but when valued in other currencies, gold has actually performed pretty well.
DH: Current spot prices just don't look sustainable to us. The price of nickel is depressed now because there are 400,000 tons stockpiled in the London Metal Exchange (LME), and the global market is about 2 million tons (2 Mt). The expected increase in the price of nickel following Indonesia's ban on the export of unprocessed ore has been delayed because of ore coming from the Philippines. But this substitute ore is a lower-quality product, and stockpiles will eventually fall in China. So the supply crunch that was forecast for early 2015 will now occur later in the year.
At the current price of around US$2.75/pound (US$2.75/lb), a fair amount of the copper industry is underwater. So we expect price increases beginning in the second half of 2015.
TGR: Canadian mining companies have benefited greatly from the strength of the U.S. dollar. How great has the benefit been to Australian miners?
DH: It's huge. The Aussie dollar has fallen from parity last year to US$0.76 today. So, for example, gold at US$1,200/oz translates to AU$1,570/oz, and nickel at US$5.70/lb means AU$7.50/lb. Without this currency premium, we'd see many Australian mine closures.
TGR: So are Australian miners now dependent on this currency premium in order to maintain margins?
DH: There are some high-cost assets that are producing only because of the Aussie gold price. This effect is even greater with nickel miners, as the price of nickel has really surprised to the downside. A number of Australian nickel producers are in trouble even with the weak local currency. Fortunately, they saved cash from the good times, but if it weren't for the exchange rate, half of Australian nickel production would be underwater.
TGR: What's your favorite junior Australian gold producer?
DH: I like Independence Group NL. Now, this is arguably a diversified producer, with three operations in Western Australia. It produces gold from Tropicana in a joint venture (JV) with AngloGold Ashanti Ltd. It produces nickel from a high-grade underground mine called Long, and it produces copper and zinc from its Jaguar mine.
Diversification has allowed this company to ride out these bumpy years in the mining business, but Tropicana, which achieved nameplate capacity last year, has been the driving force. It produces gold at AU$600/oz, and that provides massive margins in any currency. Independence only has a 30% share of Tropicana, but that's 30% of 470,000–490,000 oz (470–490 Koz) per year, which means a significant amount of cash flow.
TGR: Independence Group shares are up 33% over the past year. Can we expect this share rise to continue?
DH: I think its current assets are reasonably close to being priced in at current commodity prices. That said, there is the expectation that base metal prices will rise this year, which would obviously help. Independence had AU$93 million (AU$93M) in cash at the beginning of the year, and I think the company needs to do something with that to provide future sustainable growth. This is a company that has a great opportunity to pursue profitable mergers and acquisitions (M&As).
With commodity prices so low, I expect to see a lot of M&As in this sector generally, with cash-rich companies such as Independence Group taking advantage.