Fund managers at the ResourceStocks conference in Sydney believe the time is right for Australia's cashed-up midtier gold producers to diversify their portfolio base by looking abroad — something they seem unwilling to do.
The consensus among the keynote panel, which opened day two of the conference May 17, was that they should look at cross-border transactions, partly because there appear to be so few left in Australia.
It is also an opportune time as Australian companies did not suffer from as much competition for capital as Canadian companies who are seeing capital being "sucked away from them" by cannabis and cryptocurrency, as one panelist, former Prospectors & Developers Association of Canada President Robert Schafer, said.
Yet the midtiers don't appear to be willing at the moment, as they are doing so well in Australia.
"There's not a hell of a lot left in terms of assets which appear to be available," another panelist, Lion Selection Group Fund Manager Hedley Widdup, said.
He added that while Northern Star Resources Ltd.'s acquisition of the Plutonic mine in Western Australia from Barrick Gold Corp. "didn't shoot the lights out," it was a stepping stone for the Australian company to make bigger acquisitions.
Northern Star and others then set about buying bigger acquisitions from stressed majors believing they could operate it better and were materially re-rated as a result. They also sought to invest in the future of that asset in a different way to what the majors were prepared to do — to explore, expand and add life to it.
"There are still assets owned by majors in Australia which you could probably transact on, but their price has gone up as the sellers aren't nearly as stressed," Widdup said.
Yet the midtiers also have "shareholders breathing down their necks," but are reluctant to take risks having seen bigger companies before them whose decisions took the market to its previous peak but led to "massive value destruction," including BHP Billiton Group and Rio Tinto
Yet Widdup agreed they should take the risk overseas, and another panelist, Resource Capital Funds' Joe Bishop, agreed.
"Australia is only 5% of the world's surface area — and yes, the Aussie rocks punch above their weight — but I think you've got to be looking offshore to emerging markets. There's a lot of opportunity out there and that's where the future is for a lot of Aussie companies," Bishop said.
Investment options up for grabs
While Schafer said it appears that the asset acquisition part of the cycle has "pretty much played itself out" in Australia, mining consultancy CSA Global's Manager - Eastern Australia and Pac-Rim, Patrick Maher, said there had been a "definite turnaround in the market, and people are looking at areas to invest money."
"If companies were looking at foreign investment close to home, Papua New Guinea is definitely worth having a very close look at," Maher told S&P Global Market Intelligence on the conference sidelines.
"A lot of Papua New Guinea hasn't been that well-explored, but we know there are some really superb deposits. [Midtier] companies could joint venture with other [smaller] Australian ones already there to make life easier for themselves and seek out new license areas."
"As those companies drill and get good results, you will see the midtiers come in for a closer look. All the big deals have already been done in Western Australia; and now people are starting to think where else to go to find more fortune."
PCF Capital Group Managing Director Liam Twigger, who chaired the panel, agreed that while Papua New Guinea is "high-risk, high-reward," the key is investing capital in a small but high-grade project that would guarantee a quick payback in no more than three years.
"The market is focused on putting pressure on companies to be more disciplined with their capital allocation," he told S&P Global Market Intelligence on the sidelines.
Elsewhere, an option would be to fund a junior to explore in an emerging market like Africa so they would not be a "big fat target."
However, Twigger said a less riskier option would be North America, with some "fabulous" gold assets coming on the market in Nevada along the Carlin Trend which would be a "nice fit for some of the mid-caps in Australia."
"Geologically the prospectivity of the Philippines, PNG and the Democratic Republic of the Congo would be the best in the world, and Ecuador, but there's a reason [certain large] deposits haven't been mined: the risks that come with it," he said.
"The Philippines have had some success with B2Gold Corp., but there you have a hot political situation, and Red 5 Ltd. has struggled; then the DRC also has a tough political environment with changes in royalty and ownership."