October 10, 2022
Gold rose 2.3% this week to US$1,701/oz, marking a two-week rebound off two-year lows of US$1,627/oz, with rate hike concerns offset by a fade in the US$, rising geopolitical fears and a money supply to gold ratio still in the metal's favour.
This week Mexico-focussed gold miner Minera Alamos is In Focus, with the release of its PEA for its Cerro de Oro project, with the company also operating two other projects, Santana, already in production, and PEA-stage La Fortuna.
Gold was up 2.3% to US$1,701/oz, the second consecutive week up from over twoyear lows of US$1,627/oz, which was only the second dip well below US$1,700/oz since the global health crisis, with the last being in March 2021, when gold hit a trough of US$1,678/oz. It appears that continued pressure on gold from rate hike concerns was offset by decline in the US$, rising geopolitical fears and a gold to money supply ratio still in the metal's favour. Of the two main short-term drivers, US real bond yields and the US$, the former continues to move against gold while the latter has been more supportive over the past week. For the medium to longer-term drivers, it seems that geopolitical risk, which tends to be bullish for gold, is only going to rise through the rest of 2022 and into 2023. Also, the ratio of the gold price to the US money supply has dipped below its average for the last three decades. This suggests that gold may need to rise to bring it back inline with its tendency to track the money supply long-term, or that the money supply will need to come down substantially, which we view as somewhat unlikely with a US recession already underway.
US 10-year real bond yields continue to become substantially less negative, up from a trough of -6.4% in March 2022, and while hardly attractive in an absolute sense, the losses on holding these bonds have been reduced, making them relatively more appealing to other options like gold (Figure 4). We note that the September 2022 real yield of -4.6%, while based on the actual 10-year nominal yield of 3.5%, also incorporates an estimate, the 8.1% consensus for US CPI inflation, with the actual figure to be reported this week, which could come in higher or lower. Nonetheless, with US inflation appearing to at least be stabilizing and at best trending down, and interest rates in the country very likely to rise through the rest of 2022, we would expect to see the real yield driver continue to move against the gold price.
The US$ driver has been more bullish, as it eased off this week, with the dollar index pulling back to just below 113.0 after peaking over 114.0 last week, offering some support for gold, as the prices of the two assets tend to move inversely (Figure 5). This was partly because of rising concerns on weakening economic data in the US, with the lower expected growth potentially leading to a pullback by the Fed on its interest rate hikes. This was coupled by a sudden surge in interest rates in the United Kingdom to above US levels, and a general move of most large countries to hike interest rates, especially since mid-2022. This has lowered the interest rate differential between the US and other countries, which had been quite wide especially in early 2022, and driven large inflow of funds into the US$, chasing the higher yields. It seems that this could start to reverse as the rest of the world, which is also facing high inflation, hike rates more aggressively to curb this problem, and eventually catches up with the US, bringing fund flows back towards their countries.
Another much longer-term driver is money supply growth, with the gold price tending to roughly trend up with the US M2 money supply, although this is not as tight a relationship like that of gold and US$, with the gold price diverging away from the money supply for very long periods (Figure 6). The past two years is an example, with the money supply rising very rapidly, but gold only tracking it for about half the gain, and then flattening. This suggests that gold could eventually rise to match the money expansion as we do not expect that the US Fed will actually be able to decrease the money supply substantially given the economic fallout already from its rate hikes. The ratio of the gold price to the US M2 Money Supply seems to indicate a relatively low gold price, having declined to 0.08, below the average since 1990 of 0.10 (Figure 7).
The producing gold miners were mixed even as the gold price rose and equity markets edged up (Figure 8). Eldorado released exploration highlights from Efemcukuru, Lamaque and Kassandra, NovaGold reported Q3/22 results and Lundin Gold Q3/22 production. SSR Mining provided drill results from the Cakmaktepe Extension of the Copler project, Equinox announced that commercial production had been reached at the Santa Luz Gold Mine in Brazil, Centerra reported a new LOM plan for Mount Mulligan with an increase in gold and copper reserves, and Iamgold reported that recent political developments in Burkina Faso had not affected operations at the Essakane mine in the country (Figure 10).
Most of the larger TSXV gold juniors were up as gold increased (Figure 9). For the Canadian juniors operating mainly domestically, Artemis Gold announced a US$175mn equity financing, Eskay Mining reported the completion of its 2022 exploration program, Tudor Gold released results from step out and infill drilling at Goldstorm and Laurion Mineral Exploration appointed Tyler Dilney as its CFO (Figure 11). For the Canadian juniors operating mainly internationally, Arizona Metals received conditional approval to graduate to a listing on the TSX, Minera Alamos released a PEA for the Cerro de Oro project, Chesapeake Gold issued stock options to officers of the company, Mako Mining reported an increase in metals recovery, and Lion One reported drilling results from metallurgical testwork at Tuvatu (Figure 12).
Mexico-focussed gold miner Minera Alamos released a PEA for its Cerro de Oro
project this week, which is planned to be its second gold mine, operating by 2024,
with it just recently entering commercial production for the open pit heap leach mine
Santana. The process for starting up the Santana mine was somewhat
unconventional, as there had been no resource estimate, PEA or Feasibility Study
released by the company on the project, leaving the market unclear as to its longterm prospects. It has been reported that Santana's initial capex was less than
US$10mn and that 21,000 oz Au had been stacked on the heap leach pads as of July
2022, with 10,000 oz Au recovered and 5,687 sold as of Q2/22.
Minera Alamos financial results show the company generating an operating profit over H1/22, with production of 3,390 oz Au over Q1/22 and 3,129 oz Au over Q2/22 (Figure 14). The company continues exploration drilling at Santana and plans to use the cash flow from this mine to fund Cerro de Oro, and eventually La Fortuna, its third project, which has had a PEA since 2018. Some analysts have forecast a mine life of up to 10 years for Santana, and even assuming production continues only at the H1/22 rate would indicate over 12,000/oz Au per year in output, although without clear guidance or data from management, the outlook for Santana remains opaque.
There is much more clarity, however, on Minera Alamos' other two projects, with both Cerro de Oro and La Fortuna having PEAs (Figure 15). The Cerro de Oro project is expected to have 477k oz AuEq in output, about twice the size of the 250k oz for La Fortuna. Cerro de Oro has a much higher tonnes per day (tpd) throughput of 20,000, and mine life, at 8.2 years, than La Fortuna, at 1,100 tpd with a 5.0 year mine life. However, Cerro de Oro's grade and recovery are much lower, at just 0.73 g/t Au and 68%, versus 3.68 g/t Au and 90% for La Fortuna. While initial capex levels for both projects are similar, at US$28.1mn for Cerro de Oro and US$26.9mn for La Fortuna, the all-in-sustaining-cost per ounce for Cerro de Oro is much higher, at US$873/oz Au, compared to just $440/oz Au for La Fortuna. The discount rate and gold price for the PEAs of the two projects are not the same, with 5.0% and US$1,600/oz used for Cerro de Oro, reflecting the more recent upbeat outlook for the industry and higher gold prices, compared to the more conservative 7.5% and US$1,250/oz for La Fortuna's PEA from 2018, at the tail end of the gold bear market from 2013-2018.
To make these PEAs comparable, we have used the assumptions as presented in the
original reports, but adjusted them by applying a common discount rate of 7.5% and
gold price of US$1,250/oz, both of which we see as conservative (Figure 16). We also
assume that production begins for Cerro de Oro in 2023 and for La Fortuna in 2028,
leading to a CAD$208mn valuation for Cerro de Oro and US$75mn valuation for La
Fortuna, or a combined CAD$283mn, before including any value for Santana,
compared to the current market cap of US$222mn.
The current consensus target price for Minera Alamos is CAD$1.01/share, or 104% upside from its current price of CAD$0.50/share, which implies a market cap of CAD$471mn. We compare this to a more aggressive valuation which assumes a US$1,500/oz gold price for both projects and maintains the 7.5% discount rate. This leads to a valuation for Cerro de Oro of CAD$368mn and for La Fortuna of CAD$105mn, which combined are around the level of market cap implied by the consensus target price, again, before adding value from Santana.
Looking at Minera Alamos versus the other major TSXV gold developers, the company is the fourth largest in terms of market cap (Figure 17), and has had the best relative share price performance of this group over the past twelve months, down just -11%, likely supported by Santana moving into production and the continued progress on the development of Cerro de Oro (Figure 18). The company is valued around the middle of the group with an EV/Resource basis at CAD$83/oz with Rupert and Prime above CAD$200/oz and Artemis, Osisko and Probe all below CAD$50/oz (Figure 19). Minera Alamos' upside to its target price of 104% is the second lowest of the group, only ahead of Rupert Resources (Figure 20).
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.