Spanked. That’s the only word to describe what happened to shareholders in Prospa Group Ltd [ASX:PGL] yesterday.
The Prospa share price fell 27% after it failed to hit its previous forecasts.
Prospa is a perfect example of why Profit Watch has sounded a more cautious note recently.
Any stock that doesn’t hit its targets, or looking a touch uncertain, is getting sold down harshly.
This is not to say you need to avoid the market altogether. There are plenty of stocks that are getting on with things.
But I’d say that right now it means to make sure your companies are coming from a position of financial strength compared to ‘growth’ stories that eat cash every quarter.
Look no further than the one sector when it comes to strong cash flows and good margins…
I’m talking about gold stocks.
Our publication Profit Watch is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX, in particular growth stocks. Learn all about it here.
Why Gold Stocks?
Look at the difference between Prospa, and say, Saracen Mineral Holdings Ltd [ASX:SAR].
Saracen is a gold miner.
It has a very tidy $196 million in cash, bullion and investments on its books. And a gold price in Aussie dollars currently over $2,000.
It’s confident enough right now to bid US$750 million (AU$1.1 billion) to buy out Barrick Gold’s 50% stake in the Kalgoorlie Super Pit.
This requires an ambitious capital raising of $796 million.
For a while now, we’ve floated the idea of merger and acquisition activity to heat up in the gold sector because cash flows are so strong across the sector.
This year we’ve already seen Silver Lake Resources Ltd [ASX:SLR] make a play for junior gold developer Egan Street Resources Ltd [ASX: EGA].
They even upped the bid after Egan’s shareholders said the first offer was too low.
Can we expect more of this? I’d say yes and very much so.
There are a lot of tailwinds to this general idea…
Old Mines, New Gold
One reason is that new technology is making old mines potentially viable again.
This is part of what’s spurring more gold exploration across Australia.
For example, there are a lot of mines that were worked at various points over the 20th century.
But early miners could not go anywhere as deep as they can today…and potentially left a lot of gold in the ground when they left.
That means there’s a lot of prospective territory in regions already known to hold gold and probably with reasonable infrastructure nearby.
This reduces the risk of drilling compared to ‘greenfield’ exploration where the odds are much worse.
Bellevue Gold Ltd [ASX:BGL] is one stock that rocketed up last year thanks to this sort of play. That’s history now.
Keep an eye on Ora Banda Mining Ltd [ASX:OBM] as a similar idea.
Certainly any junior that can latch onto one of these promising projects is going to look very alluring to bigger players looking to add inventory to their set of books.
Gold miners are always running down their assets and must replace them.
Now, you might be inclined to take a sceptical view of this…
Does this signal a top forming?
Miners in general are notorious for buying assets at the top of the market and the forecast ‘synergies’ and benefits never materialising.
That’s a risk, no doubt. But more so if you’re holding the big companies that are the ones likely to go shopping. They’re the ones taking the punt on it all working out.
If you’re hunting among the juniors, you want the big boys to overpay for your shares. A bit of gold fever across the market can really juice things, too.
We don’t really have the gold fever currently. The gold price has now been consolidating for some time.
However, as above, it’s consolidating in Aussie dollars above $2000. This is an extremely lucrative price.
It’s hard to see it changing much with the RBA determine to pin down the Aussie dollar, too.
This makes a perfect opportunity to pick over good projects that are likely to become takeover targets.
Yesterday we looked at the geopolitical unrest rattling all over the world.
This is bound to put a premium on assets and companies in the gold space that operate in the secure jurisdictions like Australia and Canada.
I happen to have a couple of ASX gold stocks I’m keeping an eye on, but there’s plenty more out there that I can’t track alone.
It’s a full time job itself keeping track of them all.
I can’t do that but, lucky for you and me, my colleague Shae Russell can.
Shae was over in Canada a month or two ago scoping out North American gold assets and last month presented on Australia’s gold industry up in Sydney.
Everything Shae hears and sees suggests exciting times look to be ahead. Stay tuned for more.