June 04, 2021
The gold price fell -1.3% this week to US$1,871/oz, although for most of the week it was strong and holding above US$1,900/oz until 'taper talk' from the Fed that it could be ending its epic monetary expansion earlier than expected, drove the price down.
This week we outline the projects and Resources of the mid-tier TSX-listed Africa gold producers and developers, recent production and cost levels and guidance for this year, relative valuations and upside to their consensus target prices.
Gold was down -1.3% this week to US$1,871/oz, although it was actually overall
quite a strong week where gold held above US$1,900/oz until 'taper talk' by the Fed
knocked back the earlier move. A Fed board member suggested that the economy
was becoming robust enough for a pull back on the epic monetary tsunami of the
past year earlier than originally planned, especially after inflation in the US spiked
unexpectedly in April 2021. This led to concerns that a reduction in liquidity could hit
a stock market already at very high valuations versus historical levels. While this
overvaluation has not actually reached gold stocks, which are overall rated by the
market as still substantially undervalued, the concern is that a broader market decline
could drag down all stocks, including gold, regardless of relative valuations.
The Fed will be in a difficult situation if inflation continues to rise; if it hikes rates, it could crash markets and the economic recovery, but if it doesn't, given the record levels of monetary expansion, inflation could get completely out of control. While the Fed may continue to hint at tapering, we do not expect it to crack down hard, or if it does, it will be very temporary, and gold will continue to be supported. We believe that even if inflation surges it could take years before a Paul Volcker-ian type figure emerges and crushes it with a major rate hike (Paul Volcker was a Fed Chairman that smashed inflation in the early-1980s, but this also drove a recession, and was only after inflation had raged for over five years, from the mid-1970s). Interestingly, while the Fed is talking tapering, other major central banks in the EU and UK this week were indicating that it was likely too early for them to pull back on monetary expansion, although this is understandable given that the monetary expansion in these regions, while aggressive, have been nowhere near the size of that in the US.
There is already some evidence in recent weeks that the major rebound in the economy might be slowing down a bit already, even before accounting for the effects of a potential taper by the Fed. We can see this is in the prices of some of the base metals, which surged over the past year on the worldwide economic recovery, especially picking from H2/20 until April 2021, but have cooled moderately in recent weeks. Iron ore especially has retreated from YTD highs set on May 12, 2021, with a 38% gain, down to a 25% gain (Figure 4) as China, one of the largest global consumers of iron ore, suggested that it could crack down on what it sees as excessive speculation in this metal. The major rip in the tin price, the top performer of the major metals YTD, up 48%, is taking a pause, platinum has declined off its most recent peak set on May 10, 2021, and the zinc price has also generally flattened from around the same time. As we discussed last week, the US Fed was expecting that a broader commodities ramp-up globally might slow as supply chains caught up to demand, and since May 2021, the slowdown in these metals suggests that this may be the case.
As the base metals slow, gold and silver, which had been the two worst performing metals of this group, have been picking up, with gold declining to a trough of -14.0% on March 8, 2021, but now up to only a -4% decline, and silver, down -12.0% on March 30, 2021, now having recovered to 0% gain for the year. In contrast to the base metals, which are mainly a function of the industrial cycle, gold is mainly a monetary substitute and tends to be driven more by the expansion of the money supply. Silver is a mix between the two, with wide industrial use similar to the base metals, but also having a strong component as a monetary metal like gold. As we might start seeing a slowdown year-on-year in global economic growth heading into Q4/21, with the recovery having already started by Q4/20, we could also see a continued flattening or even downturn base metal prices as a result. However, as we do not expect a major slowdown in the monetary expansion any time soon, the monetary metals could continue to pick up, even as base metals face some pressure.
While we expect that that gold and silver may move into a period of outperformance compared to the base metals, we can also take a look at the relative performance between gold and silver. The gold to silver ratio provides an indicator of the relative under or overvaluation between the two, and while a crude measure, can at least provide a likely direction for the metals over time (Figure 5). However, currently the relative direction is not particularly clear, as the ratio is now close to the medium-term average of 1998 of 64.4x, in contrast to its peak at 126.0x in March 2020, when it was clear that silver had become substantially undervalued relative to gold.
This week we look at the TSX-listed mid-tier gold producers and developers with entirely Africa operations, with market caps ranging from $2,267mn to $155mn, shown in Figure 6. Most are already producing, with Centamin operating the producing Sukari Mine in Egypt and exploration projects in Burkina Faso and Cote D'Ivoire and Perseus operating a producing mine and a development project in Cote D'Ivoire and a producing mine in Ghana. Golden Star operates the producing Wassa mine in Ghana, and Galiano has a 50/50 JV for the Asanko mine in Ghana with Gold Fields, and an early-stage exploration project in Mali. Tanazanian Gold is the only developer of the group, with first oxide pour reached at its Buckreef project in 2020.
The performance of these companies over the past year has been relatively weak compared to many global gold producers, developers and juniors which have seen substantial gains on higher average gold prices. Even the top gainer Perseus Mining has risen just 15% over the past year (Figure 7). The company has 7,347k oz Au in Resources across its two producing projects Sissingue in Cote D'Ivoire and Edikan in Ghana, at the middle of the group (Figure 8), but has an EV/Resource of $231/oz, more than double the group average $91/oz (Figure 9). This is likely because the market is starting to incorporate into Perseus' share price a major rise in production that the company has guided for from 190k oz Au in 2021 to 500k oz Au in 2022 (Figure 12). Meanwhile its costs, based on AISC/oz Au, are broadly inline with the rest of the group (Figure 13). This also likely explains its high EV/EBITDA multiple of 7.6X versus the 4.6x average for the rest of the group (Figure 11). However, given these relatively high multiples the market is viewing the stock are nearly fairly valued, with only a moderate 14% upside to its current target price (Figure 10)
The second-best performer has been Golden Star, up just 6%, with the company currently looking to expand its Wassa producing mine, which has 11,193k oz in gold Resources with in-mine, near-mine and standalone targets being explored this year, and a PEA targeting an expansion that could double the project's NPV. The company produced 168k oz Au in 2020 and targets increasing this to 175k in 2021, and its costs are expected to be broadly flat year-on-year with an AISC around US$1,000/oz. The company trades around the middle of the group with an EV/Resource at U$61/oz and EV/EBITDA of 4.2x, and the market seems to expect that it can deliver progress on the expansion plan this year, with a 44% upside to the consensus target price.
The share price performance of Galiano Gold has been flat, with the company operating the producing Asanko gold mine through a 50/50 joint-venture with Gold Fields, and a very early-stage exploration project Asumura in Mali. The company guides for production to decline marginally from 250k oz in 2020 to 245k oz in 2021, with AISC expected to fall from $1,115/oz Au to $1,110/oz Au. Given this relatively flat expected operating performance, the company has the lowest EV/Resource of the group at $46/oz Au, trades around the middle of the group on EV/EBITDA at 4.1x, and has the lowest upside to its target price, at 13%.
The largest of the group Centamin has declined -29% over the past year, with its
producing mine Sukari in Egypt with 14,300k oz in Resources at the highest of the
group. The company expects to see a decline in production from 452k in 2020 to
430k in 2021 and a rise in costs, while costs are rising with AISC targeted to increase
from $1,036/oz Au to $1,150/oz Au over the same period. This has pulled down
Centamin's EV/EBITDA to the lowest of the group, at 2.3x, and its EV/Resource is
$70/oz Au, and the market is looking for just 14% upside to the target price.
The smallest of the group, and the only one still in development, Tanzanian, with 2,672k oz Au in Resources, has declined -46% over the past year, although it reached first oxide gold pour in 2020, and a Feasibility Study is currently ongoing for a standalone sulphide treating plant that is considerably larger than previously estimated. The market appears to be expecting that Tanzanian will be able to advance the project towards production, with an upside to its target price of 213%, the highest of the group by far, while its EV/Resource remains relatively low at $48/oz Au.
The major gold producers were mixed this week even as the gold price passed the $1,900/oz mark, as markets remain concerned about high inflation driving higher interest rates and driving down stock markets, including gold stocks (Figure 14). News flows included Barrick's completion of its divestiture of its 100% holding in the Lagunas Note Mine, Alamos reported a US$0.025/share quarterly dividend, Centerra filed for bankruptcy for its Kyrgyz Republic companies in response to the Kyrgyz government's seizure of the Kumtor Mine, and Iamgold announced that it planned to approve Dundee Precious Metals' acquisition of INV Metals, of which Iamgold holds 35.5% (Figure 16).
The Canadian juniors were actually mostly up this week, as company specific issues offset the decline in the gold price (Figure 15). For the Canadian juniors operating domestically, Victoria announced a normal course issuer bid for the cancellation of up to 5% of its shares over the next year, Great Bear announced key management changes, Artemis Gold signed an impact benefits agreement with the Nazko First Nation and Probe Metals reported a 16% rise in its total gold Resources (Figure 17). For the Canadian juniors operating mainly internationally, Novo received approval for warrant distribution, Orezone signed a hybrid LNG solar power purchase agreement with Genser Energy Burkina, Chesapeake announced the appointment of a new CFO and issued related incentive stock options, and Lion One restarted exploration and development activities at Tuvatu after a lockdown in Fiji because of the global health crisis and appointed a new Chief Operating Officer and Senior exploration team. (Figure 18).
Disclaimer: This report is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.