November 26, 2021
Gold fell -4.2% this week to US$1,784/oz, after two weeks holding above US$1,850/oz, with the renomination of Fed Chair Powell, who is viewed by the market as relatively hawkish and ready to proceed soon with a taper of monetary stimulus.
This week Orezone Gold is In Focus, with its share price seeing momentum this year on its advancing construction of the Bombore project in Burkina Faso, with first gold pour targeted for Q3/22 and its valuations not excessive versus comparables.
Gold dipped this week -4.2% US$1,784/oz, mainly on the renomination of Fed Chair
Powell, who is viewed by the market as relatively hawkish, and ready to begin
tapering the major monetary stimulus that has run for over a year and half. The decline
in gold was partly because the renomination news drove up the US$, and inversely,
drove down gold. However, it was also because of a release of the most recent Fed
meeting minutes, which showed that most members were prepared to hike rates
earlier than expected if inflation were to remain high. We expect that any Fed taper
will be subdued, that rate hikes are still very far off, and that inflation will continue to
run hotter than expected, even as supply chain constraints, which are part of the
current inflation rise, ease in 2022.
We view the main driver of inflation as still being the huge monetary tsunami unleashed globally over the past year which will continue to work its way through the system for an extended period in our view, with the Fed's taper only likely to mop up a limited amount of the liquidity. If our expectations prove correct, we expect to see more bounces in gold heading into 2022. For now, though, we continue to see strong support for gold at the US$1,800/oz level, with an average so far in 2021 of US$1,799/oz. This level is enough for most gold producers to enjoy strong profitability and continue acquisitions in the space and encourage investors to continue to support the juniors with capital.
Looking at the main metals' price performances overall suggests some inflationary
pressure continues in the economy, although it has probably eased from its mid-2021
peak. The rise in these base metals prices tends to lead the economic cycle, and
rising prices take some months to cycle through to consumer prices, suggesting that
the rise in prices we are seeing now for the metals sector may not show up in CPI
numbers until well into 2022. Conversely, an abrupt decline in the metals' prices may
indicate an eventual fall in consumer prices. We are seeing mixed outcomes for the
metals' prices in H2/21, compared to H1/21, when nearly all the metals related to the
industrial sector soared, but monetary-driven metals gold and silver weakened.
To the inflationary side has certainly been tin, surging 117% over the past year and showing little signs of slowing down, as demand has surged dramatically as the world economy has exited the global health crisis, but supply growth has been extremely limited (Figure 4). An electricity crisis in China, the largest global producer of tin, decreased production capacity, while lockdowns in countries with key global tin mines including Indonesia and Malaysia limited supply earlier in the year. In contrast, iron ore is now down -23.1%, with a drop in demand from China, the largest source of global demand for the metal, especially for steel.
The decline has been driven by both the Chinese government's measures to curb commodity price increases and slowing demand from the country's previously booming real estate sector. Aluminum prices have risen a strong 37.4% this year, but they have eased off a peak in October 2021, and lead prices have remained relatively steady, rising 11.9%.
Copper, which is considered a key indicator of industrial demand given its wide range
of uses and often viewed as a leading indicator for the overall global economic cycle,
seems to be indicating some stagnation, with the price peaking in May 2021, sliding
to around June, and then remaining relatively flat through to September (Figure 5).
While there has been a pickup in the copper price since, it has only been moderate,
and there really has been no clear up or down trend now for six months, suggesting
some balance may have returned to the global economy.
Nickel prices, which had jumped in early 2021, but then declined substantially by February, have continued to increase since, trending above the early year highs since August 2021 and are now up 30.8%. Zinc had trended up gradually until October, when it saw a brief spike as major European smelters for the metal cut capacity on surging energy prices. However, zinc prices have come down since more in-line with the year-long trend and are now up 22.3%.
Precious metals continue to remain the clear underperformers of the metals, with
most near flat for the year. Gold is down just -1.3% and has not been volatile over
the past year as the market seems to have settled into a tight consensus valuation
(Figure 6). Investors continue to hold gold as an inflation and overall risk hedge, but
with the after-effects of the global health crisis lingering in a chronic, but no longer
acute, form, the market sees limited need to move aggressively into gold for now.
Silver has fared a bit better, up 0.4%, as it is driven by monetary and general risk,
similar to gold, but sees stronger industrial demand in comparison to gold.
Platinum and palladium, which had seen strong gains earlier in the year, being up over 20% through to May 2021, have declined substantially since. The core demand for both metals comes from their use in catalytic convertors for the automotive industry, which had seen a strong pickup over H1/21. However, in H2/21 global shortages of computer chips, which are crucial in automotive manufacturing, have slowed down the sector, and in turn demand for platinum and palladium. Palladium has especially taken a hit, down -21.9%, as nearly all of its demand, over 85%, is from the automotive industry. Platinum has actually held up the best of the precious metals, although even this was just a 0.6% gain, as it sees only 32% of its demand from the automotive sector, with 23% from jewellery demand, 14% from the petroleum and chemicals industry and 13% from investment demand.
The producing gold miners were all down as gold declined (Figure 8). Newmont reported that it would sell its Kalgoorlie power business to Australia's Northern Star and Alamos announced a quarterly dividend of US$0.025/share and that it had repurchased 383k shares for $2.9mn, or $7.55/share under its Normal Course Issuer Bid so far in November. Centerra reported that heavy rains, flooding and mud slides had disrupted the rail service between the Vancouver west coast terminals and its Mount Mulligan Mine, and that it had deconsolidated the Kumtor Mine in the Krygyz Republic from its financial statements and written down the project value (Figure 10).
The Canadian juniors were almost all down after gold's slide (Figure 9). For the Canadian juniors operating mainly domestically, Great Bear reported drilling results from the newly discovered Midwest Zone, New Found Gold announced that it had closed its previously announced non-brokered private placement of $48mn, Tudor reported its fourth significant gold-silver discovery at Treaty Creek, the Calm Before the Storm Zone, and Galway reported drill results from the remaining gap between the Richard and George Murphy Zones at Clarence Stream (Figure 11). For the Canadian juniors operating mainly internationally, Novo reported that it is continuing its brownfields exploration at Nullagine with a 15,000 reverse circulation drilling program and Mako was granted a ten-year exploration permit for Potrerillos, renewable for and additional 20 years, from Nicaragua's Ministry of Environmental and Natural Resources (Figure 12).
Orezone has seen strong progress on the construction of its Bombore mine in Burkina Faso and is on track for first gold pour by Q3/22. The company has remained within the limits of its 2019 Feasibility Study, having avoided much of the recent inflation with orders for equipment made before the major prices increases began. As of mid2021, it has awarded contracts for mine construction and an off-channel reservoir for water storage, started early civil works to provide access to the construction area all year and signed LNG and solar generated power purchase agreements. The company has also closed project financing for Bombore comprising US$95mn in senior secured debt at 8.0%-9.0%, US$35mn in 8.5% convertible debentures and a silver stream for 50% of Bombore silver production for US$7.15mn.
The Bombore Feasibility Study outlines 1.6mn oz Au of total production over a 13- year mine life, with 123.1k oz Au production on average per year, one of the smaller projects among the other major TSXV-listed developers (Figure 13). However, it stands out for its relatively low cost, with an initial capex of just $153mn, expansion capex of $63.2mn and sustaining capex of $66.2mn and an AISC of US$681/oz, the third lowest of the group.
The base case in the company's FS uses only US$1,300/oz gold, which is the lowest gold price factored into any of these eight projects, which leads to an after-tax NPV of just $316mn. However, using a gold price of US$1,750 oz, moderately below the average gold price of this year, generates an NPV of US$732.7mn. Comparing the projects' market cap to project NPV, Orezone looks quite highly valued versus its closest five development peers using the US$1,300/oz gold price assumption, at 131.1% of its NPV (Figure 14). However, it looks much more reasonably valued under the US$1,750 assumption, at just 56.5% of its NPV. While the market is paying a premium versus the comparables for Orezone on a price to book multiple of 6.70x, the Bombore total resource estimate, at 6.2mn oz Au, is around the middle of the peer group, and its EV/Resource valuation is the second lowest, at just $67.2mn (Figure 15). Taken as a whole, the three valuation methods do no indicate excessive overvaluation for Orezone versus the peer group.
Over the past year, Orezone has been the strongest performer of its development peers, up 13.8%, ahead of Artemis and Probe, which have also reported strong progress in advancing their projects, while Bluestone, Osisko Development and Lumina have seen considerable declines over the past year (Figure 15). Even after the relatively strong performance, the market is looking for 90.4% upside for Orezone to its target price, ahead of Probe and Artemis. While the market is looking for higher longer-term upside for Bluestone, Osisko Development and Lumina, they have seen limited catalysts and momentum to move towards these theoretical values. There was also a recent 'test' of which TSXV gold juniors have the most interest from the market, with the gold price rise from October to mid-November to above US$1,860 acting as catalyst for several, with Orezone in the top half of the group (Figure 16).
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.