Are Small-Cap Players the New Market Darlings?

  • Jul 21, 2019 AEST
  • Team Kalkine
Are Small-Cap Players the New Market Darlings?

A balanced equity portfolio is exposed to large cap, mid and small-cap companies with good prospects. Large cap companies are comparatively safe and less prone to any systemic risk. Small cap companies with good fundamentals and expected decent future growth shall be included to keep the momentum of the portfolio going. These small cap companies always have higher risk as compared to large cap ones. Entry and exit points to/from a company is also an essential parameter to benefit from a stock.

Let’s have a look at the Small-Cap Index to understand the past performance and fundamentals in terms of valuation parameters.

The S&P/ASX Small Ordinaries Index (XSO) is used as an institutional benchmark for small-cap Australian equity portfolios and the index is designed to measure companies included in the S&P/ASX300, but not in the S&P/ASX 100. The XSO comprises 196 companies with the largest total market cap of $8792.58 million and the smallest total market cap of $81.8 million as of 28th June 2019.

Looking at the historical performance of S&P/ASX Small Ordinaries Index, we infer that the index has been underperforming the S&P/ASX 300 and S&P/ASX 200. The graph shows that from the mid of 2012-2013, the gap has started to widen which broadly, has sustained.

Historical Performance of S&P/ASX Small Ordinaries Index (Source: Fact Sheet as of June 2019)

Comparing XSO with S&P/ASX 300 benchmark, XSO has given a price returns of 0.64% in the last one month, and 15.32% on YTD, whereas the index lost 0.85% in the last one year. The S&P/ASX 300 has given price returns of 3.41% in the last one month, 17.36% on YTD and 6.76% in the last one year.

Index Performance (Source: Fact Sheet of S&P/XSO as of June 2019)

Fundamentals: XSO is trading at a trailing price-to-earnings of 21.85x and projected price-to-earnings of 18.3x. Price-to-book multiple for the index comes in at 1.56x, with price-to-sales at 1.23x and price-to-cash flow at 11.35x. Indicated dividend yield comes in at 3.24% as on 28th June 2019.

Let’s discuss a small cap company from resource space, which may generate a handsome return in the coming years.

A look at Gold miner Bellevue Gold

Bellevue Gold Limited (ASX: BGL) is engaged in the exploration of the Bellevue Gold Project. Bellevue was once one of Australia’s richest gold mines, producing 800,000 ounces of gold at an impressive grade of 15 grams per tonne over a mine life that spanned a century. However, gold production ceased at the mine in 1997, and has effectively been ‘parked’ since then. Bellevue had missed out on major advances in the exploration techniques and the gold price resurgence over the past decade. The company acquired the Bellevue Project during 2017 and FY18 and declared a maiden JORC inferred gold resource of 1.9 million tonnes at 8.2g/t gold for 500,000 oz for the project.

Project Details:

  • Bellevue Gold Project, Western Australia (BGL 100%) is located in the northern part of the Norseman-Wiluna Greenstone belt in the Yilgarn Craton. Approximately 800,000 oz of gold production was witnessed at a reported head grade of 15g/t from a narrow vein operation.
  • South Yandal Gold Project (BGL 100%) is highly prospective and underexplored project. Bellevue Gold exercised its option agreement to acquire 100% stake in this project.
  • Kathleen Valley Gold Project (BGL 100%) was acquired by Bellevue Gold (only mining tenements) from Liontown Resources Limited (ASX: LTR). The consideration for the acquisition was $25,000 and 1,000,000 Bellevue Gold shares.
  • North Jundee, South Yandal and Fisher West Projects (BGL 100%) is located between the Jundee and Milrose Greenstone Belts with the southern tenement.

Capital Raising Program: During FY18, the company raised capital to fund the exploration drilling at Bellevue, complete the resource estimate, and for general working purposes. The capital raised amounted to $3.4 million in August 2017, $5.0 million in November 2017, and $8.0 million in March 2018. The company as on 22nd February 2019, announced that it has commenced a ~$20 million placement of around 37 million shares at a price of $0.55 per share. The Placement was supported by institutional and sophisticated investors based in Australia. The Placement was well supported by North American institutional investors, which also includes a number of specialist global gold funds. The Placement price was a discount of – (a) 9.8% to the stocks’ last closing price of $0.61 per share on 19th February 2019; and (b) 5.8% to the 10-day volume weighted average price of $0.58 per share. The company will deploy the raised fund for ongoing exploration at the BGL’s flagship Bellevue Gold Project and for general working capital purposes. The Management also stated that the company is fully funded to undertake drilling activities at its flagship project for the next one-year.

Financial Performance in FY18: The company posted losses of $5,090,374 in FY18 as compared to $1,791,733 in FY17. Group’s net assets at the end of the period were significantly higher at $19,848,796 as compared to $5,090,374 at the end of FY17. Cash outflows from operating and investing activities, respectively, equated to $1,558,303 and $7,387,002.

Historical Bottom Line of the Company (Source: Company Reports)

During FY18, the company achieved few milestones with regards to the exploration of the Bellevue Gold Project, underpinned by a successful drilling campaign, which returned significant high grade results, discovery of the high grade Tribune Lode, a second high-grade discovery known as Viago Lode, a rapid delineation of a resource estimate at the Tribune Lode discovery. The company has acquired a dominant project portfolio around the Bellevue Gold Mine in a well-endowed mining district and within close proximity of the existing gold operations. It currently holds more than 4500km for gold and potentially base metals.

1H FY19 Performance Highlights: During the period, the loss after income tax incurred by the Group was $3,056,017 against the loss of $3,906,278 in the corresponding period last year. Cash and cash equivalents as at 31st December 2018 stood at $13,734,442.

Recent Updates and Developments:

  • Dow Jones Indices announced rebalancing of S&P/ASX indices as on 08th March 2019 and added Bellevue Gold to the S&P/ASX 300 Index, which came into effect at the open on 18th March 2019.
  • The company on 15th July 2019, updated independent JORC Inferred Resource Estimate at Bellevue Gold Project. It announced 5.0 mt of gold discovery for 1,800,000 oz at 11.80 g/t from adjacent existing historical underground development. Excellent gold recoveries at 98.8% were made from the surface to maximum depth drilled of 600 metres at Bellevue Gold Project.

Bellevue global Inferred category resources July 2019 update (Source: Company Reports)

It also included a very high-grade Viago Lode Drill results of 4.3m at 58.8 g/t of gold, 3.0m at 85.9 g/t of gold, 6.4m at 27.9 g/t of gold and 3.35m at 37.4 g/t of gold. Resources are open and currently, there are 6x drill rigs on-site. The Management pointed out that with $20 million, the company is well funded for the exploration success to be continued in 2019.

Numerous recent significant results outside the current resource update include 1.7 metres at 34.6 gold per tonne gold from 624 metres at Viago South; 4.8 metres at 14.8 gold per tonne gold from 544.6 metres at Viago/Bellevue; and 3.5 metres at 13.4 gold/tonne gold from 528 metres at Viago/Bellevue.

The project has seen a rapid resource growth with multiple drill rigs turning with low discovery costs of $15 oz. The project in last 18 months has reached from discovery drill hole of [email protected] 27.4 g/t as on 20th November 2017 to 1.8 m oz @ 11.1 g/t of gold in the third quarter of FY19.

Rapid Resource Growth (Source: Company Reports)

  • As at 30th June 2019, the company had a strong cash position of $19.8 million in cash as compared to $28.7 million in March 2019.

Shareholder Summary: As per the latest report on 15th July 2019, total global and domestic institutions hold 41%. Major substantial shareholders, 1832 Asset Management LP accounted for 11% of the total shareholding, followed by Tolga Kumova at 9%. The Board and Management, on a fully diluted basis, hold approximately 11% of the total outstanding shares.

The company has unique opportunity to unlock the full potential of one of the oldest, high grade gold mines. The company, since the acquisition of Bellevue Gold Project, has witnessed a significant progress with uncovering potentials.

Currently, the stock of the company is trading at $0.610, inching toward the higher end of 52-week range which stands at $0.165 to $0.735. At CMP, market capitalisation stands at $313.14 million. The stock, in last one year has witnessed significant gains of ~247.22%. On YTD basis, the stock has risen 43.68% and in last 6-months, it has gained ~19.05%.


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