Gold & Goldminers: A Time To Buy

 

If it’s not a melt-down, it’s a melt-up. December’s ugly persistent sell-off — with the S&P 500 collapsing – 16% in the month before coming off the worst levels, has turned into a V-shaped swing in the indexes. January’s equity performance is looking like a mirror image of December, with the S&P 500 up over +7% thus far (+13% if you count the rebound from the late December low). Just as in December, equity movements are mainly technical and speculative, as the economic backdrop has changed very little. Federal Reserve member dovish-hawkish nuances in speeches and rumors of nearness-farness of a China trade deal are just fodder to explain why machines are playing yo-yo with stock while waiting for a change in the fundamental landscape. Our two cents is that the economy has not shown enough signs of impending recession to get down in your bunkers (the validity of a central bank-manipulated yield curve inversion remains a question mark), but the equity prices still likely reflect strong earnings growth that a moderating economy will not accommodate. For us, the risk is to the downside in broad market equities.

We had a light week for macroeconomic statistics, with Durable Goods and New Home Sales reports delayed by the U.S. government shutdown. What we did get out of the U.S. was mainly disappointing. Existing Home Sales for December came in at 4.99 million vs 5.10 million forecast. The Leading Economic Index fell -0.1% in December. However, knowing that the S&P 500 is one of the 10 components of the LEIs, this is not a surprise. We’ll wait for the first week of February and the major ISM PMI and Employment reports before revising our macro outlook, which for the moment remains mildly bullish on the economy for 2019.

Gold & Goldminers

On Thursday, the European Central Bank essentially told us that the ‘eurozone economy is slowing’. They left interest rates unchanged at 0.00%, 0.25% and minus 0.40% respectively on the main refinancing operations, the marginal lending facility and the deposit facility.

Although unsustainably low, the ECB repeated their position that rates would remain at these levels for much of 2019.

“The Governing Council expects the key ECB interest rates to remain at their present levels at least
through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained
convergence of inflation to levels that are below, but close to, 2% over the medium term.”

ECB president Mario Draghi noted that continued ECB monetary ease was based on several factors:

  • German auto production slowing;
  • U.S. trade actions are creating greater uncertainty due to tariff threats;
  • China slowdown; and
  • Brexit

The other black swan, and one that could impact markets faster than Draghi might have offered is the growing confrontation in Venezuela this week where U.S. interests in that country’s oil are aligned in direct opposition to the political support for president Maduro by Russia, China, Turkey and Cuba. The so-called “Breaking News” headline of CNN and other media is actually true at the moment as the world is watching closely.

To use street vernacular, the situation in Venezuela has gone nuclear given that president Trump has refused the order from Maduro to remove American diplomats, enabling U.S. media to dwell on the issue of personal security of Americans in that country. Trump has, in his presidency, threatened deployment of U.S. military, including ground troops.

With Maduro’s strong backing of its substantial armed forces and the actionable support from some of that country’s powerful allies, this conflict is far too big for incompetent Trump to manage. Besides, his own presidency is no stronger than Maduro’s at the moment.

The political and economic situation with some 800,000 U.S. government workers today missing a whole month’s wages has reached the breaking point. His presidency is now opening mocked by the majority of Americans, including almost all its media. His pleading that the Mexican border is a national emergency and that he needs $7 billion to complete a barrier wall is falling on deaf ears.

Given that all nine members of the U.S. House of Representatives who represent the districts along the wall from California to Texas are dead-set against extending a barrier wall along the Mexican border via the use of eminent domain to confiscate property owned by Americans and the expenditure of billions of dollars to build a structure that is being climbed over and dug under, rendering it an ineffective solution to border immigration problems, Trump is now cornered.

The fear is that Venezuela could be his excuse to divert the U.S. Congress and the world from impeachment pressures he will, in our view, certainly face this year.

Geopolitics is usually a major factor in the price of Gold, and we believe it is today for these reasons. Normally, these events quickly pass; however, the U.S. had not ever encountered a president the likes of Trump. His selfinflicted trade wars have now escalated to the potential of military wars on different fronts. The situation is dire. Trump is cornered but unyielding because his ego will not permit him to act prudently in typical U.S. presidential behavior.

Gold on Friday morning appears to be breaking out to the upside. Goldminers are attracting capital inflows as volumes are increasing as prices re-gain upside momentum. Gold prices started higher in mid-October as the Democrats became clear favorites to control the House, which became the case in November, now solidly in place under Speaker Nancy Pelosi who will not yield to the bullying tactics of president Trump.

Now, when facing global political turmoil and financial risk, is the time we need to assess the portfolio prospects of the Goldminers.

We have our favorites. Ours happen to be B2Gold, Wesdome Gold, Kirkland Lake Gold, Alamos Gold and McEwen Mining. The larger cap Goldminers are more likely to be acquirers of smaller companies, paying a premium, thereby hurting their own share price at the time, so we avoid those.

Our top choices are small to mid-cap Gold and Silver producers, all with good sized precious metal resources, sound management, no debt and earnings and free cash flow prospects that will ramp higher with Gold prices over $1300/oz. Other companies we like are Fortuna Silver (FSM), Silvercorp (SVM) and Sibanye(SBGL).

B2Gold (BTG)

One of the precious metal miners we like best is B2Gold (BTG), which is a diversified mid-tier company that is becoming a major top-tier producer with 2019 production guidance of 935,000 to 975,000 oz with an All In Sustaining Cost (AISC) of $835 to $875/oz. The key mines are Fekola in Mali (420k-430k oz 2019E), Masbate in Philippines (200k-210k oz 2019E), Otjikoto in Namibia (200k-210k oz 2019E) and the La Libertad and El Limon Mines in Nicaragua (combined 140k-150k oz 2019E). We have known the CEO Clive Johnson since 1981. Excellent management. Continuously developing major new mines and growing its gold reserves. Good balance sheet with obvious very high profitability. A favorite of the buy side analysts.

Wesdome Gold Mines (WDOFF and TSX: WDO).

A continuous favorite of ours as well as a new favorite of the buy-side analysts is Wesdome Gold Mines We have long noted that this small but profitable zero-debt Ontario and Quebec producer and developer is likely to be acquired soon by a much larger acquirer. We hold the stock at a very low cost basis and are hoping for a substantial 30% premium over market if, as and when a buy-out offer is received. The 2018 production was 71,625 oz at an All In Sustaining Cost (AISC) of about US$1,000/oz that generated free cash flow of C$7.3 million, while the 2019 guidance is for 72,000-80,000 oz with an AISC of US$985-$1,040. At Nov. 1, 2018, the cash position was C$30 million and there was no debt.

Kirkland Lake Gold Ltd. (KL)

Kirkland Lake Gold is a favorite of the analysts and of Eric Sprott, a major shareholder. Rapidly growing into a top-tier gold producer, 2018 gold production was 723,477 oz from mines in Australia (356,230 oz from Fosterville) and Canada (Macassa (240,126 oz), Holt (67,770 oz), and Taylor Mines (58,633 oz)). The 2018 company record production was an increase of +21% over 2017. At Dec. 31, 2018, the cash position was US$332 million. Booming growth is expected to continue as guidance is 740,000 – 800,000 oz in 2019, 850,000 – 910,000 oz in 2020 and 945,000 – 1,005,000 oz in 2021.

Alamos Gold Inc (AGI)

Alamos founder (2003) and CEO John McCluskey has been a personal friend since the mid-1980’s. His wellmanaged company is well financed with US$206 million cash and zero debt. Four North American mines (65% Canada and 35% Mexico) produced 505,000 oz in 2018 with good production growth and expanding margins. Guidance for 2019 is for AISC to drop about -5% to US$920-$960/oz and also decline through 2021 although for 2019 production is not anticipated to grow much. However, there are six low-cost development projects (Turkey, US, Mexico and Canada) in the pipeline. The reserves have grown substantially and probably not yet fully priced into the stock.

McEwen Mining Inc. (MUX)

Rob McEwen the principal owner (23% of the company) has been a personal friend and a popular promoter for years. His income is $1/year with no bonus or stock options. See McEwen presentation and factsheet. The mines in Canada, US, Mexico and Argentina have a high growth profile. The stock is well liked by analysts. Production grew from 152,000 oz in 2017 to 176,000 oz in 2018. Guidance is 201,000 oz in 2019 and 206,000 oz in 2020. Growth is coming from the new Gold Bar mine in Nevada, which is 25 miles south and on trend with Barrick’s massive mines.

Fortuna Silver Mines Inc (FSM)

Chairman Simon Ridgway is another promoter I like in this business. His company has had a good track record of sound operations and growth. Full year 2018 production figures from its two underground operating mines, the San Jose Mine in Mexico and the Caylloma Mine in Peru produced 8.9 million oz of silver and 54.2 thousand oz of gold, which is 12.8 million Ag equivalent oz. That was about 8% above guidance. The 2019 silver equivalent production guidance is 11.7 – 12.9 million oz and consolidated AISC is $9.9 – $12.1/oz Ag. Nothing spectacular, but solid. However, growth for 2019 and beyond may not meet investor expectations. See Fortuna’s corporate presentation.

Silvercorp Metals Inc (SVM)

This company is the major silver producer in China. For many years we have been a friend and supporter of founder and CEO Rui Feng and pleased to see how he steered the company away from illegal short-sellers and back onto the NYSE American. As at Sept 30, 2018, the cash position was US$124 million. No debt and strong free cash flow. The corporate presentation shows that since 2005 the company raised US$199 million but spent US$56 million to buy back 14 million shares and to pay out US$97 million in dividends. They also show the lowest AISC of US$2.34 for Ag and a higher Return on Equity (11.93%) than any of its key silverminer peer group. It must be said they “let the rock do the talk” as there are many other favorable peer group comparisons pointed to in the corporate presentation. FY2019 production guidance is substantially greater than 2018 actual. See Silvercorp’s corporate presentation.

Sibanye Stillwater (SBGL)

Not one to invest in South Africa gold mines for various reasons (currency rates, fatal accidents, worker problems, discounted valuations, weak balance sheets) – although at times in the past and recently we have been investors in the top-tier producer Sibanye Stillwater — our fundamental scorecard gives Sibanye a very high growth score among the 58 precious metal miners we track weekly. In terms of Gold Equivalent Oz, the FY2018 production of the company is 4.3 Million oz compared to 5.0 Moz for Newmont (not including 2.5 Moz for Goldcorp) and 4.5 Moz for Barrick. The company is a major player in the Platinum, Palladium, Ruthenium and Rhodium markets as well.

Williams Market Analytics F-scores

For this article, we think our readers will appreciate a presentation of our relative fundamental rankings among 58 Gold and Silver Miners. It is always an eye-opener to see how each company fares relative to the others in its peer group. The data changes weekly after each company reports. We graph the weekly scores over time to determine the trends.

Here are the 58 Gold/Silver Miner Peer Group Rankings based on selected fundamental scores

 

Here are the Gold/Silver Miner rankings out of all 5103 companies we rank every week.

 

Conclusion

The macro backdrop is aligning in favour of the miners and gold. Late expansion inflation seems inevitable, especially with world interest rates below equilibrium and central bank balance sheets (money supplies) many times historical norms. Geopolitics offer additional reason to get into gold and the goldminers. Trump will make the safe-haven value of gold and goldminers a sought-after investment theme. We are seeking out the best miners among the small and midcap names, using our Fundamental scores to guide us to the most likely outperformers over the long-term.

 


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