Gold and other metals:June Q production preview -Gold cooling,Other Metals warming up

Gold sector appealing, but base metals to deliver stronger June Q results.

    The Gold & Other Metals sector continues to deliver mixed results. The ASXgolds delivered +6% returns in the first half, despite NCM underperforming,but gave up those gains in the first two weeks of July. The ASX base metalsspace has weakened throughout the year as positive macro sentiment hassoftened & supply has responded. Given the recent de-rate, ASX goldvaluations are not stretched, but we expect the June Q to bring cost inflationacross the sector, partly driven by moderating grades. Conversely, the basemetals producers are set to lift output & should deliver good June Q results.

    Our top picks are SFR, IGO & SYR in other metals and EVN and SBM in golds.

    Which companies are likely to outperform? SFR, OZL, IGO, AQG, RRL.

    SFR should deliver a strong June Q and reach the top end of guidance for bothFY17 gold and copper production. We expect the Company to end FY17 withA$140m net cash, making the Company 15% cash-backed. OZL should reporta stronger June Q (+13% QoQ) following a rain affected March Q; we don’texpect any major updates on Carrapateena until later this quarter (September).

    IGO can improve production rates at Tropicana (pushing towards the top endof FY17 guidance) & Jaguar; a downgrade to Nova FY18 production guidanceis likely, but well flagged. AQG can also improve QoQ performance after pitaccess issues impacted the March Q, and RRL should continue to lift output ashigher grade ore from Erlistoun and Glouster displaces lower grade ore. SYRrecently updated the market on Balama project construction (90% complete),but any progress on offtakes/debt financing could be short term catalysts.

    Which companies are likely to disappoint? NCM, NST, OGC, ORE.

    NCM’s recent issues at Cadia have been discussed at length, and the stock hasunderperformed since the seismic event occurred in April. We expect Cadia toproduce 616koz in FY17 (below original guidance of 730-820koz) & AISC couldlift materially from US$178/oz in the March Q to over US$1,160/oz if all sitecosts are expensed. NCM will likely hold off until the August results to provideFY18 guidance. We expect NST to report flat gold output QoQ, but Jundee willlikely miss full year guidance and we expect group production to just make thebottom end of guidance (485-515koz). OGC recently updated the market onHaile commissioning issues which has seen the stock underperform, but Haileaside, Group AISC should increase by around 20% as grade falls at Didipio.

    Finally, ORE has flagged a further downgrade to June Q output due to severeweather. The lower output could lead to a 20% QoQ cost increase.

    Quarterly pricing