Bonkers! That describes the price action of Aussie gold miners over the last few weeks.
No wonder. Aussie gold has recently jumped from AU$1,775 in April to around AU$2,050…leaving nothing but a trail of glitter behind it.
No doubt many investors are surprised.
Can you still take advantage of this?
No promises. But today’s Profit Watch contains one Aussie mining company that could be a good one for your watch list at least.
Westgold Resources Limited [ASX:WGX] has already risen 120% this year alone.
Don’t be put off by that… There’s no telling how high any gold stock could go should gold keep running up.
At the very least, Westgold provides a great example of how you can ride a commodity boom in the stock market…
Who is Westgold Resources?
Westgold is an exploration and gold mining company. It currently owns and operates four gold mines and has a market cap of $760 million.
The company produces around 300,000 ounces of gold per year. It should also have a decent slab of cash on the books shortly.
That’s because it recently sold its fifth mine, Higginsville Gold Operations, to a company called RNC Minerals.
RNC has paid $25 million in cash along with 56.9 million shares. The total consideration for the mine totalled $50 million.
WGX is now RNC Minerals’ largest single shareholder. WGX also has zero debt.
Consider all that a bit of an introduction. What we are really interested in is the company’s exposure to the gold price right now…
As with gold, so goes WGX!
It’s no secret that the outlook for any gold mining company derives from the action in the underlying gold price.
And producing miners are best placed to directly cash in when gold’s running hot, as it is now. WGX should be earning good margins at today’s gold price.
Consider that its Fortnum mine is producing around 70,000 ounces, with a cost at roughly AU$1,350 an ounce.
The Meekatharra mine is slightly bigger and produces up to 140,000 ounces. And this mine’s cost per ounce is also around AU$1,350.
Lastly, the company’s Cue mine sits at around 110,000 ounces and has a cost slightly lower at AU$1,250 an ounce.
Of interest is that the company’s gold operation costs reduced by 18% quarter on quarter. That’s generally a positive sign.
Point being: The higher gold goes, the more money WGX can earn per ounce of gold.
Do be aware of one thing: WGX has hedged 190,000 ounces at $1,825 per ounce.
That means it receives a fixed price for these.
The remaining production above 190,000 should receive the market price… As above, that’s currently over $2,000…and trending higher currently.
This dynamic gives the stock some downside protection for its cash flow but further upside too, if gold keeps running.
If you’re a gold bull, WGX is one to follow…
The correlation to watch
Take a look at this chart.
It becomes instantly apparent here that the Aussie gold price and the price of WGX are closely linked, especially in 2019.
This is a good trick to have up your sleeve.
Just simply overlay the price of gold onto the chart of a gold miner and you will see how the price of the miner correlates to the price of gold. You could do it with other gold plays like Newcrest Mining Limited [ASX:NCM] and St Barbara Limited [ASX:SBM].
(You can do this with any producing miner and its related commodity.)
However, do be aware that your risk profile changes when you buy gold shares instead of physical gold.
Miners can run into operational or personnel trouble, for example, which can dent the share price.
It’s possible physical gold rises in value but a gold share falls for an unrelated reason. Dacian Gold Limited [ASX:DCN] is a torrid example of that recently.
It all depends on what type of investor you are and the risks you’re prepared to run.
Please bear in mind this article is not a recommendation to buy or sell WGX. It’s a look at how gold’s move is playing out for one stock currently and some lessons we can draw from that. I hope you found it helpful.
Until next time,