Central Banks are pump priming the Gold price
After launching at $1.00 on 20 September 2019, the unit price of the Montgomery Small Companies Fund peaked at $1.066 on 21 February 2020, declined to $0.675 (-37 per cent) on 23 March, and has since rallied to yesterday’s $0.985 (+46 per cent), leaving it 8 per cent from its peak.
Since inception, the Montgomery Small Companies Fund has out-performed the S&P/ ASX Small Ordinaries Accumulation Index by over 10 per cent, after expenses and I am very pleased with the way the Portfolio Managers, Gary Rollo and Dominic Rose, have structured the portfolio.
One of the contributors to this sharp retracement rally has been from Gold stocks, which account for around 10 per cent of the benchmark. (For the S&P/ ASX 300 Index, the Gold Sector represents only four per cent). At the current US$1,747 /ounce or A$2,650/ ounce (assuming the current exchange rate of US$0.6581), Australian gold producers’ margins have never been so elevated. The US dollar gold price has rallied 38 per cent in the past 12 months and is trading at an eight-year high.
One company in the Montgomery Small Companies Fund is Ramelius Resources (ASX: RMS), and at the current $1.74 it has a market capitalisation $1.375 billion. RMS has a recent history of acquisitions including Marda ($13 million), Tampia ($64 million) and the soon to complete Spectrum (ASX: SPX) for $230 million. Cash and gold on hand, net of debt, at 31 March 2020 stood at $93 million, for an Enterprise Value of $1.28 billion. Capital expenditure is expected to decline from $90 million in Fiscal 2020, to $70 million in fiscal 2021 before normalising at around $30 million from Fiscal 2022.
Production from the Mt Magnet operation (including Vivien) and the Edna May operation (including Marda) is expected to hit 210,000 ounces in Fiscal 2020 and the All-In Sustaining Cost (AISC) is running at sub A$1,250 /ounce, implying a current margin of A$1,400/ ounce or 53 per cent.
Forward sales of 263,000 ounces of gold at an average price of A$2,100/ounce covers the period to December 2022; an average of nearly 100,000 ounces per annum, or around 40 per cent of expected production.
In Fiscal 2021, RMS is expected to produce 250,000 ounces of Gold for a theoretical revenue, excluding forward gold sales, of A$662.5 million and a margin, after the All-In Sustaining Cost, of A$350 million. In terms of a simple Enterprise Value to Production metric, RMS looks relatively cheap compared with many gold companies and this, as well as the strongly appreciating gold price, has supported the Company’s recent sharp share price rally.
The Montgomery Small Companies Fund owns shares in Ramelius Resources. This article was prepared 21 May with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Ramelius Resources you should seek financial advice.
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