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Gold Is an Alternative to Money

By John R. Ing
President and CEO,
Maison Placements Canada Inc.

The current administration views the COVID-19 pandemic through rose coloured glasses, as it eases the lockdown, while the virus deaths continue to spike. Similarly then, investors’ rose coloured lenses see an economic recovery whilst half the population is unemployed. And, despite record amounts of debt, the government believes they can always spend more. These rose coloured views are wrong. Politics are at play and thus the rosy outlook.

Most important, it is wrong to dismiss the pile of debt and that the savings, which lent to governments, companies and now handed to households will remain intact. The surge in debt that drove rates down, fuelled a stock market boom and widened the wealth gap, has left taxpayers and households paying interest on a debt that keeps piling up, while the government prints its obligations away. This cannot last.

A collapse in the dollar, stock market and bond market is the new reality. It doesn’t take rose coloured glasses to show that gold is a barometer of investor anxiety – it will be a good thing to have. Gold’s rally is built on fear.

We believe that the steady erosion in the value of the dollar and gold’s uptick is a sign that the market is worried that the Fed has lost control in its ability to manage the nation’s needs. Gold is priced in dollars and recently hit an eight-year high. The rise in gold can be seen as a devaluation of the dollar. Gold has also posted record highs in other currencies. Since year-end, gold has risen almost 13 percent in terms of dollars outpacing stock markets. That revaluation has further to go.

Central banks led by Russia and China have been a big buyer of gold. Global broad money supply (M3) or stock of money has soared to an estimated $90.4 trillion and that is before the recent massive stimulus programmes.

The US has a serious problem with its deficits and overvalued dollar. If they continue to print money, whether by economic stimulus or to stave off corporate bailouts, the fear of currency debasement and consequential inflation will undermine the dollar. The Fed remains the largest holder of gold.

If gold is a finite currency, its value not just against the dollar, but euros and yen too should rise in value. The total gold supply is some 170,000 metric tonnes. Scaling the money supply today and deflating by the gold supply, the price of gold would be in excess of $15,000 an ounce. We are not so optimistic but continue to view $2,200 an ounce as a reasonable near term target.

And there are technical reasons for gold posting new highs. The gap between the physical and future markets is closing as the bullion banks, such as HSBC and Scotia Mocatta have exited the market, after taking millions of losses. The bullion banks were often on the “short” side of the market and instrumental in capping the physical market with an onslaught of futures contracts on the Comex, the futures exchange. Their net short positions to hedge positions in London blew up when Swiss refineries closed down because of Covid-19 and at the same time there was a surge in physical gold demand, which caused a spike in the gold price. Bullion bank players, HSBC took a $200 million loss and Scotia Mocatta started in 1684 closed down with a $160 million writedown by Bank of Nova Scotia. At last, the physical market without the future overhang saw a pickup in demand as the Shanghai Gold Exchange, now the largest physical player in the world saw record demand. Covid-19 has unwittingly disrupted the supply chain of the market and today there is a solid underpinning to the market. This bull market has just begun.

Recommendation

The Covid-19 pandemic triggered closures of mining operations but much of the protocols were temporary. In the uncertainty, the major producers also drew down their credit lines producing balance sheet flexibility. Others like Lundin Gold, Osisko Mining and Great Bear issued equity to shore up their balance sheets. As the panic subsided, the majority have reopened their mines and changed guidance but the impact won’t be seen until the second quarter numbers. The first quarter numbers were good due to the higher gold prices and most recorded free cash flow and stronger balance sheets.

Deal making was light as miners focused on their operations. The Chinese were the exception with Shandong buying distressed TMAC and Zijin buying Guyana Goldfields, who were plagued with start-up problems. However, while gold prices flirted with $1,700 an ounce close to an eight-year high, more consolidation is expected as producers focus on reserve replacement. It is cheaper to buy ounces on Bay Street than to explore. The mid-tier players are also expected to bulk up, feasting on the non-core assets of the bigger miners. Exploration spending has yet to edge up but we expect a pickup driven by the need to boost reserves.

Among the seniors we like Barrick Gold and Agnico Eagle for their excellent management, healthy reserves and balance sheets. We also like B2Gold and Lundin Gold for a rising production and reserve profile. Potential takeover targets are Centamin (CEE) and Eldorado (ELD). Junior developers like McEwen Mining (MUX) are favoured.

Agnico-Eagle Mines Ltd. (NYSE/TSX: AEM) – Agnico had a decent quarter generating free cash flow. Agnico lowered their capex from $740 million to $690 million, and drew down a $1 billion revolver as a precautionary move, likely to be paid off as they ramp up production. Nunavut is its key strategic platform with Meliadine and Amuruq joining Meadowbank. Flagship LaRonde keeps on giving, with the West area having potential at depth and the expansion at LZ5 (zone 5) paying off. At Kittila in Finland, the mine expansion was delayed because of Covid-19, but operations in the midterm could continue at 2,000,000 tonnes per year rate. The four year expansion could boost ounces by 60,000 annually. We like the shares here. Agnico will release its second quarter 2020 results by webcast on Wednesday, July 29, 2020 at www.agnicoeagle.com.

B2Gold Corp. (TSX: BTO) – B2Gold generated free cash flow and retained annual production guidance of 1,000,000 ounces at AISC of $800 an ounce. B2 Gold is virtually debt-free with $200 million of cash. Flagship Fekola mill expansion is on track and to be completed later this year. The sale of the Nicaraguan mines lowered B2Gold’s cost profile. Hedges on fuel resulted in a book loss, Fekola’s AISC was $519 an ounce, Masbate $908 an ounce and Otjikoto $850 an ounce in the first quarter. We like B2Gold`s production profile here. For more information on B2Gold visit www.b2gold.com.

Barrick Gold Corporation (NYSE: GOLD; TSX: ABX) – Barrick had a solid quarter, continuing its string of successes. Barrick produced 1.22 million ounces in the quarter with a solid contribution from Nevada Gold Mines, Barrick`s sixth Tier One mine. Barrick also resumed exports from the long idled Tanzanian operations after the protracted government settlement negotiated by Barrick. With that stalemate settled, a new one surfaced as the Papua New Guinea (PNG) government threatened not to renew the joint venture license in a shakedown move so popular today. Consequently the mine was shutdown and the playbook of protracted negotiations will begin. Nonetheless, Barrick’s other operations are fine with Nevada on track and the Latin American operations much better. Key for Barrick is a now rock solid balance sheet and cash flow generation. From a peak at $12 billion, net debt has been slashed to less than $2 billion with cash and equivalents at $3.3 billion and a $3 billion undrawn credit facility. With quality core mines in Nevada, Africa and Latin America, excellent management and huge cash generating capability, Barrick is a buy here. For more information on Barrick Gold, visit www.barrick.com.

Centerra Gold Inc. (TSX: CG) – Centerra generated free cash flow of $77 million from the Kumtor mine in Kyrgyz Republic, Mt Milligan in British Columbia and from the Öksüt Mine in Turkey which just came on stream producing almost 5,000 ounces. Centerra plans to spend $32 million on brownfield projects and Öksüt is about 95 percent complete. A new life of mine 43-101 is expected in the second half at Kumtor, which should boost reserves over the midterm. At current levels, we prefer more growth oriented B2Gold with a safer geographic risk profile. Centerra will host a conference call and webcast of its second quarter financial and operating results at 9:00 am on Friday July 31, 2020 at www.centerragold.com.

Eldorado Gold Corp. (TSX: ELD) – Eldorado maintained guidance of 520,000 – 550,000 ounces at an AISC between $850-$950 an ounce despite a temporary Covid-19 closure. Eldorado ended the quarter with $400 million of liquidity against total debt of $635 million. At Efemcukuru in Turkey, production was lower due to grade. At Olympias in Greece, the mine had the highest output in 18 months but costs remain a problem. At Lamaque in Québec, operations were restarted but grade was lower. Eldorado plans to mine the Triangle deposit, building a decline to be processed at the Sigma mill, to be completed in 2022. Nonetheless, Eldorado is a mid-tier player in need of some good news from Greece which is either its potential future or an albatross. At current levels, the shares are a hold as the Greek assets are not reflected in Eldorado’s share price. Hold. For more information on Eldorado Gold visit www.eldoradogold.com.

IAMGold Corp. (NYSE: IAG; TSX: IMG) – New CEO, Gordon Stothart reported a so-so quarter with improved output from Rosebel in Suriname, but lower output from Essakane operations. However, production was down slightly and costs were up. Westwood was put on care and maintenance though in need of a redesign. Guidance was lowered slightly to 685,000 – 740,000 ounces this year at AISC between $1,195- 1,245 per ounces, one of the highest among its peers. While IAMGold talks up its healthy reserves at 16.7 million ounces, this is due more to inclusion of Côté Lake, the off and now on again project. The company is to spend $45 million on engineering but details and capex are missing. We are skeptical that this project will ever get into production because of grade, costs and continuity questions. Nonetheless, IAMGold has a stellar balance sheet with $829 million in liquidity against $419 million of senior debt but with an ill-advised $170 million forward gold sale (Côté Lake). Many Chinese companies have kicked the tires but passed because of their asset and cost profile. We agree. Sell. IAMGOLD will release its second quarter 2020 financial results on Wednesday August 5th, 2020. A webcast of the conference call will be available at www.iamgold.com.

Kinross Gold Corporation (NYSE: KGC; TSX: K) – Kinross` three core mines, Paracatu in Brazil, Kupol-Dvoinoye in Russia and Tasiast in West Africa had a good quarter, generating $110 million of free cash flow from 567,000 gold equivalent ounces. At Tasiast, labour problems surfaced and despite a three year labour agreement negotiated last year, the walkout will hurt output. Although Kinross is continuing with the Tasiast expansion with contractors and an agreement with the government is a go, Kinross had to double the royalty payments. Nonetheless, capex was reduced slightly and their balance sheet is good. However, Kinross’ exposure to Russia and Tasiast in Mauritania ensures that the political risk is higher than its peers. As such, we prefer B2Gold here. Kinross plans to release its financial statements and operating results for the second quarter of 2020 on Thursday, July 30, 2020 at 8:am ET. A webcast will be available at www.kinross.com.

Kirkland Lake Gold Ltd. (NYSE/TSX: KL) – Kirkland had an excellent quarter producing 330,000 ounces at AISC of $770 an ounce. Importantly they generated about $190 million of free cash flow, allowing them to end the quarter with $530 million of cash and no debt. Kirkland`s purchase of Detour was timely producing 92,000 ounces at AISC of $1,108 an ounce, offset by stellar high grade Fosterville in Australia which produced gold at only $313 an ounce AISC. The key was that Kirkland was able to buy Detour with paper, extend its short reserve life by almost 5 times while generating huge cash flow. Kirkland’s other core asset, Macassa performed well and the shaft expansion was resumed in April. Kirkland has wisely allocated the Holt complex, Cosmo and Union in Australia as non-core assets, focussing on its three core mines. We like Kirkland here. Kirkland Lake Gold reported solid second quarter 2020 production on July 7, 2020. Results are available at www.klgold.com.

Lundin Gold Inc. (TSX: LUG) – Lundin Gold is in the midst of developing Fruta del Norte (FDN) in Ecuador, the richest gold mine in the world. Although commissioned in February, Covid-19 caused a work stoppage. Annually Lundin will produce 350,000 ounces at AISC under $800 an ounce. Newcrest of Australia recently upped its stake in Lundin, and we believe that the Lundin family will harvest their stake in opportunistic fashion. As such with both production and reserve upside, and with little downside risk (FDN almost fully built), the shares are an attractive buy for the eventual takeout. Lundin Gold provided a 2020 production outlook on July 5th, 2020 at www.lundingold.com.

New Gold Inc. (TSX: NGD) – New Gold is one of the few gold miners that can lose money at today’s prices. Cash costs in the quarter increased due to lower grades (again) and higher capex spending. New Gold produced 103,000 gold equivalent ounces from Rainy River and New Afton. Part of the reason for higher costs is New Gold’s habit of reporting gold equivalency (gold/copper), which in our view the ratios can be misleading. Rainy River still doesn’t work and is mostly copper, New Afton reported more dilution. Blackwater in British Columbia was sold for $190 million cash or $20 an ounce allowing New Gold to monetize a capital intensive project. The company has again lowered guidance. Costs were higher. Still, this did not bother the Ontario Teachers’ Pension Plan which invested $300 million in a strategic partnership, allowing New Gold freedom to refinance its heavy debt load at $750 million. While we do not share OTPP’s optimism and would not pour good money after bad money for a mine that can’t make money at today’s prices, the shares are an option on higher gold prices and we believe that this miner is being dressed up for sale likely to a major looking for cheap ounces. Hold. For more information on New Gold visit www.newgold.com.

Newmont Corporation (NYSE: NEM; TSX: NGT) – The world’s largest gold producer and a producer of copper, silver, zinc and lead, reported a strong quarter producing almost 1.5 million ounces generating $611 million of free cash flow. Guidance still stands at 6 million ounces of gold per year and Newmont ended the quarter with total liquidity of $6.6 billion, including $3.7 billion of cash and an undrawn $3 billion credit facility. Newmont also completed about 80 percent of its $1 billion share buyback to offset the Goldcorp acquisition. With 12 operating mines, Newmont is focusing on turning around Goldcorp’s problem assets, including Eleonore, Cerro Negro and Musselwhite. Newmont will spend about $1.4 billion, delaying the Tanami 2 expansion project. We believe that while Newmont is a cash machine, they still have their hands full digesting the Goldcorp assets. In the interim, we prefer Barrick here. Newmont will report second quarter 2020 operations and financial results on Thursday, July 30th and will hold a conference call at 9:00 am ET the same day. The earnings call will also be carried on www.newmont.com.

Editor’s Note: John Ing is President and CEO of Maison Placements Canada, an independent, Toronto-based investment dealer providing a comprehensive array of financial services to institutional investors and small to midsize corporate clients. Throughout his career of 50 years, Mr. Ing has been an advocate of gold investment and authored numerous articles, appearing regularly in the media together with speeches around the world in support of his golden views. For more information on Maison Placements Canada, visit www.maisonplacements.com.

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