Few assets have been as out of favor recently than gold and other precious metals. Though many variables impact the price, many attribute the latest weakness to the strength of the U.S. dollar, rising inflation and selling by both mutual funds and central banks. Despite the headwinds, several MoneyShow.com contributors see value in gold-related shares.
Franco-Nevada is the premier gold company around. Its royalty business model limits risk in the gold mining business, but does not eliminate it, and certainly does not mean that royalty companies are not exposed to lower gold prices.
With its cash at low levels — just $72 million — Franco will draw into its $1 billion credit facility for final payment due later this year on the Cobre Panama stream acquisition. Next year, with revenue starting from that large copper mine in Panama, Franco expects to “easily pay off” the credit line.
Franco’s objective remains to generate at least 80% of its revenue from precious metals, and despite the recent streaming acquisitions in oil and gas, it is still above that goal today.
We consider Franco-Nevada to be the premier gold company around. Diversified assets, a deep pipeline, a strong balance sheet, and disciplined, counter-cyclical management make Franco a sleep-well-at-night gold stock.
Osisko Gold Royalties , another royalty streaming firm, reported good results, particularly a record production quarter at Canadian Malartic, its cornerstone asset. The bad news was the announcement of a blockade at Lydian’s Amulsar project in Armenia which pushes back production to the middle of next year (at the earliest).
This was to have been Osisko’s next major cash-flowing asset, and the news drove Osisko’s share price down sharply ahead of its own results. The balance sheet remains strong. Though cash is down to $189 million, after new investments of $108 million in the quarter (and two of which carry future payment commitments), debt is also down after a $52 million repayment to $450 million.
Osisko also has a large portfolio of junior companies valued around $450 million, and it is expected that Pretium will buy back its royalty, giving Osisko US$119 million before year-end, so the balance sheet remains, and will remain, strong.
Osisko trades at a meaningful discount on several metrics to other large royalty companies, only partly justified (smaller, and higher-risk in exploration), also now at a discount to NAV. Take advantage of the sharp price decline; Osisko is a Strong Buy here.
I think it’s time for gold investors to be bold. I believe we are instead looking at a tradable bottom in gold and miners. And we want to own a stock that is leveraged to the bounce. Why would gold bounce? Because the U.S. and China have agreed to hold low-level trade talks aimed at defusing the escalating rounds of tariffs.
Sentiment indicators show that anyone who wants to sell has done so. Investors who buy gold through ETFs have given up. And it’s not just retail investors. Hedge funds and other large speculators have increased their net short bets on gold. In fact, they raised those bearish bets to the most since at least 2006.
That helped drive gold to a 19-month low recently. But it also laid the groundwork for an incredibly bullish rally. Why? Because there’s no one left to sell. This is so bearish, that it’s now much easier for the market to go up than down.
What might you buy? Well, there’s the VanEck Vectors Gold Miners ETF. The big gold miner ETF is a perfectly fine choice. But I’m not satisfied with fine. Rather, consider gold miners that are trading near 52-week lows. Not explorer or developers, but gold miners. The miners priced like they suddenly ran out of gold.
I’m talking about Goldcorp , Newmont Mining NEM +0.66% and AngloGold Ashanti AU +2.24%. AngloGold Ashanti AU +2.24% carries more risk because it’s a South African miner, sure. But it’s going to produce 3.3 million to 3.5 million ounces of gold this year. Its all-in sustaining cost (AISC) will be between $990 to $1,060 per ounce. What the heck is wrong with that?
Meanwhile, Newmont and Goldcorp are getting beaten like redheaded stepchildren, yet both are mining blue bloods. Goldcorp produces 2.5 million ounces of gold annually. The Canadian miner expects an AISC of $760 to $840 per ounce. And Newmont, for Pete’s sake, is going to produce of 4.9 million to 5.4 million ounces of gold this year, and at an average AISC of $995 per ounce.
I’m not waiting for the bounce to begin. I’m recommending that investors move into gold miner picks now. There is money sitting on the table. Sure, there’s risk, too. But oh, the potential rewards.
Hecla Mining discovers, acquires, develops, and produces precious metals and base metal deposits worldwide. It owns 100% interests in the Greens Creek mine located on Admiralty Island, Alaska; the Lucky Friday mine located in northern Idaho; the Casa Berardi mine located in the Abitibi region of northwestern Quebec, Canada; and the San Sebastian mine located in the state of Durango, Mexico.
Hecla Mining also owns interests in the Fire Creek mine located primarily in Lander County, Nevada; the Hollister mine located in Elko County, Nevada; and the Midas property located northeast of Winnemucca, Nevada.
Insiders own about 2% of the 400 million shares outstanding, and 262 institutions own 62% of the float (shares in public hands). For the quarter ended June 30, 2018, the top ten institutions bought 5.3 million more shares than they sold.
Hecla Mining has a good balance sheet with $247 million ($0.62 per share) in cash, a book value of $3.73 per share and a large debt of $546 million. Negative factors include the price has been trending downward and debt is high, but that’s pretty standard in the industry. Expectations for capital investment in 2018 have increased to $140-$145 million from $95-$105 million.
We’ve seen some nice profits in the past by recommending quality, mid-major mining companies selling near their low, like Hecla Mining. If the company continues to grow its revenues and earnings, it has the potential to move at least 50% over the next couple of years.
With inflation rising, government deficits mounting, tariff wars looming, and political uncertainty at multi-year highs, gold’s traditional function as a safe haven in times of trouble should be more attractive. There is, however, another specific cause of weakness in gold miners, namely the decision by Vanguard VTI +NaN%to restructure its $2.3 billion Vanguard Precious Metals and Mining Fund and rename it the Vanguard Global Capital Cycles Fund.
This involves reducing the percentage of mining stocks from about 80% to 25%. Given that the Vanguard fund is double the size of the next largest precious metals fund in the U.S., this has had a major impact on the larger gold miners that the fund held.
Of course, this is a classic sign of capitulation at exactly the wrong moment. Vanguard has done this once before. In May 2001, Vanguard dropped the word “Gold” from the name of this fund, just before gold rose 650% in the next decade and gold mining stocks gained 1,600%.
Agnico Eagle is a senior Canadian gold mining company that operates eight mines in Canada, Finland, and Mexico. It also has exploration and development activities in each of these countries as well as in the United States and Sweden.
After topping $62 in early July, the share price went into a slump, reflecting what was happening with the price of gold. Gold production was 404,961 oz. at an all-in sustaining cost (AISC) of $921 per oz.
More importantly, the company raised its production guidance for the year. Two major new projects in Nunavut (Amaruq and Meliadine) are coming on stream in 2019, which should increase production substantially.
Agnico remains the best-managed gold major. Increases in production are in politically safe jurisdictions. It should see overall output reaching 1.65 million oz. by 2020. It has a low debt to equity ratio, at 28%.
Goldcorp traded at over $19 early in the year but has been in a slide for the past several weeks. Its portfolio includes mines in Canada, the U.S., and Latin America. It is the second largest global gold miner, with annual production for 2018 estimated at 2.5 million oz. at an AISC of $800/oz. (all +/-5%).
In the second quarter, Goldcorp produced 571,000 oz. at an AISC of $850/oz. That compared to 635,000 oz. at an AISC of $800/oz. in the same period last year. This partially reflected the ramp-up of production at the Eleonore and Cerro Negro mines in Quebec and Mexico.
Goldcorp recorded a loss of $131 million ($0.15 per share, figures in U.S. dollars). This was primarily due to $178 ($0.20 per share)) million of non-cash foreign exchange losses. Operating cash flows and adjusted operating cash flows for the three months to June 30 were $158 million and $310 million respectively compared to $158 million and $320 million in 2017.
CEO David Garofalo has set a 20/20/20 target of reducing AISC costs by 20% while increasing output and reserves also by 20% by 2021. Such projects as the Penasquito Leach program in Mexico and the Musselwhite materials handling project in Canada are on time and on budget to achieve these ends, while the company’s exploration programs are proving successful. Goldcorp remains a Buy. It is one of the largest gold stocks by market cap and should benefit from any buying by investors.