Cash flows to explorers amid gold price surge

The booming gold price is helping to drive capital raising among Australian explorers with the latest research from business advisory firm BDO revealing a 60 per cent increase in cash inflows in the June quarter.

Sep 08, 2020, updated Sep 08, 2020
Marmota is ramping up drilling at its Aurora Tank project in South Australia as world gold prices surge.

Marmota is ramping up drilling at its Aurora Tank project in South Australia as world gold prices surge.

The research into the cash position of ASX-listed explorers showed financing inflows of $1.34 billion, exceeding the five-year average of $1.22 billion per quarter.

The 60 per cent increase in financing cash inflows in the June quarter offset the four-year low of $834 million observed in the March 2020 quarter.

It also represented a 12 per cent increase from the $1.20 billion financing inflows recorded in the June 2019 quarter.

The quarter saw 28 Australian companies raise funds of $10 million or more – up from 12 companies in the March 2020 quarter – with gold companies leading the field.

Adelaide-based BDO Associate Director, Advisory, Jason Foster said there were positive signs showing that financing inflows may increase to levels even higher than those pre-COVID, which would help the sector to bounce back strongly.

“Traditionally a solid performer during times of crisis, the gold sector is again leading the recovery,” he said.

“Buoyed by a strong price in recent times, gold companies represent almost half of the 28 companies that raised $10m or more this quarter.

The price of gold has boomed in recent months from $USD1474 per ounce in March to more than $USD2000/Oz in early August. It was trading at about $USD1940 per ounce on Friday.

A number of South Australian-based mining businesses are scouring Australia and the world for the precious metal in places as far-flung as South Korea and the United States.

Adelaide-based Marmota set up a semi-permanent camp at its Aurora Tank site 50km from the former Challenger gold mine in South Australia in July to begin the next phase of gold drilling.

Earlier this year, Barton Gold took control of three outback South Australian gold assets: the Tarcoola project, the Tunkilla gold deposit and the Challenger gold mine and processing plant.

The company has flagged plans to raise further funds for drilling this year, an extension of the Tarcoola deposit and the recommencement of the mine.

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Junior resources company Southern Gold operates an underground operation with Westgold Resources at the Cannon project near Kalgoorlie. The company has also developed a portfolio of high-grade gold projects in South Korea, where it’s searching for epithermal gold deposits.

Similarly, ASX-listed minerals exploration development company Rex Minerals is behind the copper-gold Hillside Project on the Yorke Peninsula as well as Hog Ranch Gold Property in the American state of Nevada.

Oil and gas companies, however, appear to have fallen out of favour in the June quarter, reporting a lower-than-usual level of funds raised due to the low level of demand experienced by the sector resulting from COVID-19.

“Copper, oil and gas are all experiencing less success in raising funds, which in the case of oil and gas is largely due to the impact of low demand, a drop in the oil price and industry tensions,” Foster said.

Consistent with the overall rise in financing is the improved cash position of the exploration sector with 62 per cent of companies reporting a cash balance of $1 million or more at 30 June 2020, up from 57 per cent in the March quarter.

However, the BDO research shows that this upturn has not translated to an increase in spending by exploration companies, with net investing cash outflows decreasing by 21 per cent, net operating cash flows decreasing by 27 per cent and exploration expenditure decreasing by 17 per cent.

“We expect the exploration companies that have been focused on cash preservation will be more willing to invest in the short to medium term,” Foster said.

“However, this will be highly dependent on the easing of travel restrictions and whether supply chain issues with services and equipment start to free up.

“Investors have been generally less willing to take risks, favouring projects that are more advanced.”

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