March 11, 2022
Gold rose 3.4% to US$1,986/oz this week, its strongest weekly gain since November 2021, as US inflation again surprised to the upside, and global prices have also continued to rise, but there has been no strong reaction to offset this by central banks.
With the Q4/21 results season for Big Gold completed, this week we take a look at the relative valuation levels of these companies, and how reflective they are of their expected production and cost levels, EBITDA growth and returns.
The producing and junior miners both rose, with the GDX up 6.7% and GDXJ up 5.3% on the rise in the gold price because of continued concerns that inflation may prove difficult to control, while the Canadian juniors remained mixed.
Gold jumped 3.4% this week to US$1,986/oz, its largest percentage gain since
November 2021, and reached as high as US$2,076/oz. This was driven by another
jump in US inflation above expectations, to 7.53% for January 2021, while inflation
continues to rise globally, with Europe reaching 4.96% in December 2021 and even
Japan, with has tended toward deflation for nearly three decades, seeing inflation of
0.6% (Figure 4). While the Fed is planning a series of interest rate hikes starting this
year to begin to combat this inflation, they seem to be viewed by the market as
somewhat behind the curve, and unlikely to able to make the very aggressive rate
hikes that could be required to curb inflation in the short-term. We view this as the
main fundamental factor that will continue to drive gold, although it is also clearly
getting support from surging geopolitical risk from Russia's invasion of Ukraine,
which has in turn driven up oil prices, which will further exacerbate already high prices.
Also, while money supply growth, which tends to be an indicator of future inflation, with a lag time of between six months to two years or more, is starting to come down, it still remains very high in historical terms globally, suggesting that this strong flow of liquidity could still be driving up consumer price indices through 2022 and well into 2023 (Figure 5). While US M3 money supply growth at 12.6% yoy in December 2021 does look far more reasonable compared to the 27.1% yoy growth peak in early 2021, this needs to be taken in the context that this was the highest ever growth for the money supply in the country by far since the gold standard was adopted in 1830s. The Fed is in a difficult position where if it aggressively hikes rates it could crash an economy that is already seeing some signs of slowing from its post-global-healthcrisis rebound or a stock market that is already looking shaky because of fears of rate hikes as well as still historically very high valuation levels.
With the Q4/21 results complete, with all of the major gold producers having reported, including their guidance for 2022E on production and costs, this week we compare these estimates to their relative valuations, to ascertain a picture of how the market is looking at the relative prospects of the companies. Figure 6 shows expected production growth for 2022E versus the all-in sustaining cost with the bubble size indicating their market caps, with the 'ideal' company being to the right bottom corner, with high production growth and low costs. We see that Agnico-Eagle best fits this, but this is not because of strong organic growth, but rather its recently completed merger with Kirkland, which has boosted its expected production in 2022E by 58.2%.
While Iamgold and Equinox have strong expected production growth of 8.7% and 10.9%, they are also relatively high-cost players. The rest of the group have production growth in a tighter range from -1.7% for Yamana to 3.9% for Newmont, and an AISC from US$952/oz for B2Gold to US$1,097/oz for Eldorado. As in Figure 6 we only use 2022E production and average of 2021-2022E AISC, it also useful to consider the longer-term performance of the companies with regard to these metrics. Excluding Equinox, for which production growth has been exceptionally high and only available for the past few years, the big organic gainers have been Agnico-Eagle and Newmont, while the rest of the group has seen production growth decline over the past decade (Figure 7). On the cost side, Equinox and Iamgold are also the higher costs players longer-term, with Barrick, Eldorado and especially B2Gold standing out for low-cost production (Figure 8). Combining production growth and costs for a net income number and comparing that to equity, or return on equity (ROE), we can see that over the past decade Newmont and B2Gold standout for strong return versus the sector, while Iamgold, Barrick and Yamana had low returns. We note also, however, that these low returns can be driven by large exceptional items.
We can now take the operating performance of these companies and see how the market is valuing them in relative terms, using two metrics. The first is EV/EBITDA, which takes the Enterprise Value of the firm, or the total cost to buy its equity and debt, over Earnings Before Interest, Tax, Depreciation and Amortization, a proxy for its cash flow, compared to its EBITDA growth (Figure 10). The second compares its Price to Book, or Price to Equity, to its Return on Equity, which looks at net income, after Interest, Tax, Depreciation and Amortization, to consider how the firms fares when all of its costs are incorporated, not just its cash generation, showing the total return that shareholders are expecting. (Figure 11). Based on EV/EBITDA, the market is paying more for companies like Eldorado, with its low costs, or Newmont, with its relatively high long-term ROE, and less for higher cost firms like Iamgold or lower long-term ROE firms like Yamana.
Looking at Price to Book versus ROE, we again see the market paying a premium for relatively high ROE firms like Newmont, but also for Agnico-Eagle, which is expected to see a considerable increase in its returns driven by its merger with Kirkland, which has had a much higher ROE than Agnico-Eagle in recent years. The market is again paying less on a Price to Book basis for high-cost Iamgold and lower return Yamana. Overall, given the operating metrics, there does not appear to be any severe relative under or overvaluation within the sector based on EV/EBITDA or Price/Book. However, looking at the sector overall, and considering that the gold price could potentially spike much further this year the whole sector may be substantially undervalued currently. We could therefore see a substantial upward re-rating in these multiples even if the relative valuations within the sector are maintained.
The producing gold miners surged this week on the spike in the gold price, with the majority up over 5.0% (Figure 12). Newmont reported its gold reserves for 2021 at 92.8mn oz for 2021, down from 94.2 mn oz in 2020, copper reserves of 15 bn tonnes and silver reserves of 568 mn oz. Pretium announced the completion of its merger with Newcrest, Alamos reported a quarterly dividend of US$0.025share, continuing thirteen years of dividend payouts, and Centerra reported a quarterly dividend of C$0.07/share or C$20.8mn, and announced that it had completed its previously announced acquisition of Gemfield Resources, the owner of the Goldfield District Project, from Waterton Nevada Splitter (Figure 14).
The Canadian juniors were mixed even as gold saw strong gains (Figure 13). For the Canadian juniors operating mainly domestically, New Found Gold reported drill results from a new discovery on the JBP Fault Zone, about 10 km Northeast of the Keats/Golden Joint/Lotto zones. Osisko Development closed the first tranche of its previously announced non-brokered private placement for US$48.8mn, Tudor Gold reported a termination agreement with Richard Mill for Purchase Agreements for mineral claims in the Skeena Mining District and two 2.5% Net Smelter Royalties, and Probe Metals announced the closing of its previously announced bought deal private placement for $20.77mn (Figure 15). For the Canadian juniors operating mainly internationally, Prime Mining reported drill results from the Los Reyes' project Guadalupe East zone and Mako Mining reported a US$17.2mn exploration program at San Albino to be funded through internal cash flow and drill results 100 metres outside the current resource (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.