Source: Adrian Day for Streetwise Reports 02/24/2021
Money manager Adrian Day reports on the two largest gold miners, both of which recently reported results, and also comments on how precious metals prices have reacted to other market forces, including Bitcoin, since the first of the year.
Gold has seen its worst start to a year in three decades, breaking below its 200-day moving average, reportedly reacting to a higher dollar, higher Treasury yields and a switch from gold to Bitcoin. All this comes against a background of expectations of an economic rally as progress is made in COVID vaccinations.
It’s Not So Bad
All this should be put in context. The gold price is only back to where it was in early July and remains up a healthy 18% over the past year. The widely touted dollar rally, after a drop at the end of the week, has the dollar recovering less than one-fifthof the decline since Biden was elected president. Some recovery! As for the move in interest rates, there has been a steepening in the yield curve. After a move up, the yield on one-year Treasuries is back to record lows, while yields at the long end have indeed moved up, to 1.3% on a 10-year. Some return! And, of course, real yields, after inflation, remain negative. Yields are up with inflation expectations, and that is also positive for gold.
As for Bitcoin, there is no doubt it has soared on the back of strong inflows, nor that there have been outflows from gold exchange-traded funds (ETFs), but the extent to which these are related rather than coincident is not clear. Other than a few high-profile instances, there is no evidence of a mass move out of gold to cryptocurrencies.
At the same time, the central factor that drives gold, global liquidity, remains very strong, with no indication of a reversal in the foreseeable futurequite the opposite! I think we are simply seeing normal market action. After an incredibly strong move in the first half of last year40% from the March low to early Augustgold is simply taking time to consolidate. I venture that we are very close to the low and gold will resume its recovery, which started at the end of 2015, very shortly. It had simply moved too far, too soon, and needed time to consolidate.
Silver Has Diverse Drivers
Silver, which initially fell with gold after the early-August peakit was up an astonishing 143% in just over four months–soon reversed and started to move back up, well before the Reddit-inspired squeeze. It is up a very respectable 24% since its late September low, and there is a lot more to come. Silver has several things going for it:
- It is a monetary metal, responding, just as does gold, to excess global liquidity;
- It tends to respond even more than gold to inflation;
- It is an industrial metal, and will benefit from an economic recovery;
- It is a “green metal,” with growing demand in solar panels, nuclear and batteries;
- Finally, there is a genuine shortage of the metal, with low stockpiles.
In a widely reported move, the largest silver ETF, the iShares Silver Trust, updated its prospectus to state that it may suspend or restrict the issuance of shares since it may be unable to acquire enough of the metal.
The mining stocks have mostly followed the metals, with gold stocks down sharply, the XAU down 12% from its early January high, and that number is distorted since Freeport-McMoRan Inc. (FCX:NYSE), which has rallied strongly this year, is a leading component of the index. Many leading gold stocks are back to early April levelsquite astonishing given the higher gold price since then, and the strong profits being reported. There is no clearer example of the disconnect than Barrick Gold, the second-largest gold miner in the world, and on our list of current holdings.
Barrick: Full Steam Ahead
Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) (19.78) reported its fourth-quarter and annual results on Thursday, and it is firing on all cylinders. It was also a bit of a victory lap, highlighting the achievements since the merger with Randgold two years ago, when Mark Bristow took over the company. Yet the stock fell in response.
CEO Bristow called it “a year of delivery amid unprecedented challenges.” It achieved its targets for 2020, after fourth-quarter production increased 4.4%, largely due to good results from Pueblo Viejo and the ramp-up at Bulyanhulu. Costs also met guidance, with record free cash flow. For the year, the company produced 4.7 million ounces at cash costs of $699, and “all-in sustaining costs” (AISC) of $967. That cash flow plus asset sales, $1.5 billion since the merger, make the company net cash positive at the end of the year. Considering there was over $4 billion of debt two years ago, this is a solid achievement.
Focused on the best
The asset sales, including the recent sale of Lagunas Norte, have been mostly smaller assets or assets where Barrick does not run the mine, or are single assets in an area (such as its stake in Kalgoorlie). Barrick is focused on tier-one assets, as well as strategic tier-two assets, perhaps located near other Barrick mines. Bristow indicated the company was prepared to go to any jurisdiction, and this inevitably means some more challenging jurisdictions. Bristow has demonstrated an ability to deal with such challenges, settling a long-running dispute with Tanzania, and operating successfully in the Democratic Republic of the Congo.
The strong financial position has enabled Barrick to triple its dividend in the last two years; and while maintaining the quarterly for the next payment, it announced a special return of capital of $750 million. This payment, to be made in three tranches this year, which equates to $0.42 per share, compares with a total dividend of $0.31 for 2020. The regular dividend comes from free cash flow, while the return of capital comes from asset sales, specifically the Kalgoorlie stake.
Much growth ahead at mines
Bristowwho said “geology was front and center” for the company in devising mine plansindicated there was a lot of potential for greenfields expansion at many mine sites around the world. Overall, it is better placed than many senior miners for reserve replacement, with several potential new projects in Carlin; and the Hemlo underground is continuing development.
“Every single core asset has clear upside that can be demonstrated,” he said. This was particularly so in Nevada, where he achieved the decades-long goal of combining the assets of Barrick and Newmont Corp. for more efficient operations and cost savings. There was potential for increased production from many mines as well as new world-class discoveries, with many new targets in what was thought to be a maturing district.
At the same time, the solid balance sheet puts Barrick in a strong position to take part in further consolidation, which Bristow believes is essential for the gold industry.
Looking ahead, well placed for continued performance
Looking ahead, the company’s five-year targets include steady production and significantly lower AISC on the back of lower capital expenditures. The company’s gold reserves, at 68 million ounces, were slightly down; Barrick calculated year-end reserves at a very conservative $1,200, the same as last year and the same as several other leading companies, including Newmont. Significantly, the company maintained its reserve grade.
The company is also expecting its copper production, which currently accounts for just under 6% of total revenue, to steadily increase over the next five years. Bristow said Barrick would pursue copper where the geology combines copper and gold (such as in large porphyries), or in countries where it has a competitive advantage, such as the central African belt. But it is not looking to become a diversified mining company.
Barrick is best in class, with top management, rock-solid balance sheet, world-class assets, a strong pipeline and low valuations. It is trading at 1.5 times book and 10.5 times free cash flow. These multiples are lower than the entire XAU index, which trades at over 2 times book and has a free cash flow multiple of 24 times. The yield of 1.8%, not including the return of payment this year, is more than twice that of the XAU (and higher than the S&P). Barrick is a strong buy.
Newmont Meets Expectations and Boosts Dividend
Newmont Corp. (NEM:NYSE) (56.67) also reported a good quarter, if not as stunning as Barrick’s. Gold production of 1.6 million for the quarter was as expected, with mines recovering from COVID restrictions, with Peñasquito recovering to its strongest quarter since Newmont acquired the project (in its takeover of Goldcorp); there is now potential to extend the mine life to 2040. If earnings were stronger than expected, it was largely
because of lower taxes. Costs were good (though again not as good as Barrick’s), with cash costs of $739 and AISC of $1,043. Because of its positive cash flow, Newmont increased its dividend again, by 38%, for a yield of 3.9%, the higher of North American gold companies (and well over twice that of the S&P).
Stable production outlook, at lower costs
Newmont’s revenue from silver, copper and other metals is low, with gold contributing 90%. Net debt was reduced to about half a billion dollars. It had reported its reserves earlier, recording 94 million ounces at year-end, down 1.5 million ounces from a year ago. Newmont’s guidance for the year ahead is for 6.5 million ounces, at slightly higher cash costs and AISC under $1,000. Over the next five years, Newmont expects stable levels of production, even as costs move lower, with a pickup in production in 2024 and 2025.
Newmont initiated a $1 billion share repurchase program over the next 18 months. In 2020, Newmont repurchased 22 million shares at an average price of $45 per share.
Like other gold miners, its stock is down, from almost $66 in early January. The valuation is good, but (other than the yield) not as compelling as Barrick, trading at virtually two times book, and a free cash flow multiple of almost 13 times. Newmont is a buy.
In coming bulletins, we shall be looking at some of the junior resource companies on our list, as well as the non-resource companies.
Best Buys right now, in addition to above, are Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) (11.09); Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) (37.65); Nestle SA (NESN:VX; NSRGY:OTC) (98.21); Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) (111.26); Lara Exploration Ltd. (LRA:TSX.V) (0.71); and Orogen Royalties Inc. (OGN:TSX.V) (0.295).
With our recent sale of Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE), at a loss, our average return on all exited positions is now 93.6%, with an average holding period of 44 months. We plan more sells in the coming weeks or months to make room for some new buys.
Originally posted on February 20, 2021.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”
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