April 30, 2021
The gold price edged down -0.5%, hit by a report of strong Q1/21 US GDP growth, which sent bonds yields spiking. While yields may continue to pressure gold shortterm, we expect that a massive monetary expansion will support it medium-term.
This week we start to dive into mid-cap TSX-listed gold companies, with a look at the main players focused on Latin America that have reached gold production, or are in the later stage of exploration and mine development.
Gold was hit by a US GDP print for Q1/21 at 6.4% growth in real terms, which sent
yields once again spiking, as high as 1.69%, before pulling back somewhat, driving
down gold to close at $US1,773/oz for the week. While we aren't convinced that there
really is much of a link between gold and bond yields based on the historical evidence,
the market is clearly embracing this story for now. So while gold may face some
short-term pressure from this effect, we believe that medium to long-term it will be
supported by a continued epic monetary expansion that is unlikely to slowdown
anytime soon, given recent statements by the U.S. Fed Chairman Powell. For those
interested in our analysis of bonds yields versus gold, and why there really isn't
much of a correlation, please see our last several weeklies, where we cover this
issue in detail
Gold and silver have had a rough start to 2021, and since February are down -5% and -11%, respectively, while other metals, especially with wider industrial uses, like tin, up 25%, iron ore, up 21%, and zinc, up 14% (Figure 4), have seen strong gains, as the recovery in economic growth continues. However, considering the gold and silver pullback in the context of the past two years, since April 2019, it could be viewed as a reasonable consolidation with gold up 38% and silver up 75% (Figure 5). From April 2019 to mid-2020, gold significantly outpaced these other metals, on a combination of a flight to safety, and hedging against the major monetary expansion, and this benefited silver by Q3/20, as it is a monetary metal, and had become quite undervalued versus gold in historical terms. Silver was further boosted by the economic rebound story given its wider industrial use than gold, and thus was able to bridge the transition from a flight to safety to a more risk-on economic recovery phase and continue to gain in H2/20 even as gold started to lag over the period.
However, eventually the continued economic rebound saw industrial metals that had
lagged since 2019 start to catch up and surpass both gold and silver, with iron ore
now up 105% since April 2019, far ahead of silver, and tin, up 50%, significantly
outpacing of gold. We believe that the period of consolidation may be a good thing
for gold and silver, allowing for the testing of resistance to the downside, and for the
industry overall, as it seems that gold will reliably hold up well above US$1,700/oz,
providing a good level of profitability for the majority of producing mines.
Meanwhile the effect of the continued monetary mania especially in US is only hinting so far at boosting CPI inflation, and if consumer prices were to really take off, we are likely to see gold's role as inflation hedge come into play. Also, the huge rebound in the global economy will likely eventually slow, as US consumption is nearly back to pre-crisis levels, and the high growth rate is likely to subside, and with it, the jump in industrial metals will also slow down. This could mean that gold and silver could see another period of outperformance versus the other metals later this year.
This week we shift a bit from our regular stomping ground of the TSXV and have a
look at gold producers and developers on the TSX, which are specifically focused on
Latin America (Figure 6). Three are above a $1,000mn market cap, with Torex Gold
operating the producing El Limon Guajes Mine in Mexico with a $1,316mn market
cap, Orla Mining, at the FS stage for Camino Rojo in Mexico and the PFS stage for
Cerro Quema in Panama with a market cap of $1,081mn, and Aura Minerals,
operating four producing mines, EPP in Brazil, Aranzazu in Mexico, San Andres in
Honduras and Gold Road in the US, with a market cap of $1,037mn.
Two are mid-cap producers, Calibre Mining in Nicaragua, operating the Libertad and Limon mines, with a market cap of $676mn and Jaguar mining, operating both the Turmulina and Pilar mines in Brazil, with a market cap of $500mn. There are three smaller companies, Belo Sun, at the Feasibility Stage at its Volta Grande project, with a $382mn market cap, Gran Columbia, operating the producing Segovia mine in Columbia with a market cap of $320mn and Condor Gold, the smallest of the group, at the PFS stage for the Nicaragua project La India, has a market cap of $135mn.
The companies all have considerable total gold Reserves and Resources, with Orla and Torex having the largest, in-line with their large market caps versus the group, with 14,000k oz AuEq and 11,931k oz AuEq, respectively (Figure 7). Torex is by far the largest producer of the group, at 131k oz Au over the most recently reported Q4/20, and 430k oz Au over 2020, with Orla having yet to enter production (Figure 8). Torex trades at an EV/Resource of $103 on versus the group average of $105 (Figure 9), and trades at 2.69x on an EV/EBITDA basis, below the group average of 2.69x (Figure 10). Orla trades below the group average at an EV/Resource of $79, in part because it has still yet to enter production. Even with Torex's large resources and production its share price declined -25% over the past year, as possibly its strengths were largely already baked into the share price, while Orla is up 40% (Figure 11).
The next largest in terms of Resources is Belo Sun, with 10,626k oz AuEq, although its market cap is less than a third the level of Orla and Torex, leading to the lowest EV/Resource of the group, suggesting that considerable de-risking of its large Resources still needs to come through to warrant a rerating upward, and its share price is up just 11% over the past year. Calibre Mining has 6,252k oz Au in resources and the second lowest level of production of the group, at 43k oz Au for Q4/20 and 136k for 2020. While its EV/Resource of $98/oz is moderately below the group average, its EV/EBITDA is moderately above the group at 5.98x, and its price performance has been reasonably strong, up 103%. Aura Minerals has 5,007k oz Au in resources, and the second highest production, at 65k oz Au over Q4/20 and 195k oz over 2020. It has by far the highest EV/Resource of the group, at $200/oz, and EV/EBITDA, at 8.39x, heading for double the group average for both, given the highest share price gain of the peers, up 276%.
Gran Columbia has 3,267k oz Au in Resources, and trades at an EV/Resource of $108/oz, very near the group average and an EV/EBITDA of 1.96x, the lowest of the group, with its share price is down a moderate -11% over the past year. Jaguar Mining has 2,989k oz Au in Resources, with production the lowest of the group at 23k oz Au for Q4/20 and 91k oz Au for 2020. It trades above the peer group average on an EV/Resource of $160/oz, and inline with the peer average on an EV/EBITDA of 4.69x, and has seen a strong 97% share price gain over the past year. Condor Gold has resources of 2,362k oz Au, and trades at an EV/Resource of $55/oz, well below the average of the peer group, as it is still at the PFS stage and has yet to enter production, although it has also made strong share price gains over the past year, up 170%, the second highest of the group.
All of the major gold producers were down this week on the dip in gold (Figure 12). Q1/21 results started to come through, with industry major Newmont reporting, as well as Yamana and Alamos (Figure 14). Barrick reported that the third underground mine at the Loulo-Gounkoto gold complex in Mali has reached its first mining level, and Equinox completed the previously announced sale of 10mn shares of Solaris Resources for C$82.5mn, with the buyers granted warrants for an additional 5mn Solaris shares at C$10.0/share for an additional potential C$50.0mn in proceeds.
The Canadian juniors were mixed this week, as some companies saw specific drivers offset the decline in gold (Figure 13). For the Canadian juniors operating mainly domestically, New Found Gold reported assay results from step out and infill drilling at the Keats zone at Queensway, Great Bear reported drill results from Dixie with continuity extended substantially YTD, Tudor filed an NI 43-10 for its previously announced initial mineral resource for Treaty Creek, and Amex Exploration announced drill results from the High Grade Zone and Denise Zone of the Eastern Gold Zone of the Perron project (Figure 15). For the main Canadian juniors operating internationally there were no major press releases this week.
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.