Gold shares have been a major disappointment due in part to the super strong US dollar. Jewelry demand also declined and it appears that the gold backed exchange traded funds (ETFs) were also sellers in the latest quarter. However, taking advantage of the weakness, central banks have added to their reserves led by Russia, Turkey and Kazakhstan. Meanwhile, total mine supply is expected to decline in part because there have been so few new mines. Noteworthy in the latest quarter, the largest producers like Goldcorp, Barrick and Newmont reported declining production. Gold exploration budgets have fallen and despite a higher gold price in 2018, few producers increased reserves.
Miners’ cost cutting has more or less reached their limits. After restructuring costs, replenishing balance sheets and selling off high cost assets, the industry is poised to focus on organic growth to replenish depleting reserves. Unfortunately, the low hanging fruit has been plucked so, management is forced to be more selective, particularly after taking some $30 billion in write-offs a few year ago.
Growth and sustainability go hand in hand. Because of improved balance sheets, the industry has focused on bite sized acquisitions like Lundin Mining’s bid for Nevsun’s Timok deposit in Serbia, or McEwen Mining’s purchase of the Black Fox mine in Ontario for $35 million. Barrick, the world’s largest gold producer is even financing junior exploration plays like Midas in Nevada or Atac in B.C. in a portfolio approach. Goldcorp and Kinross are the exceptions focusing instead on potentially larger development project like Goldcorp’s Norte Abierto (formally Cerro Casales) or Goldcorp’s Kaminak in Yukon or Nuevo Union whose Phase 1 capex is a whopping $3.4 billion. Newmont will pay $275 million to Novagold for its stake in Galore Creek, which is more of a down payment because of the hefty capex price tag.
Exploration plays are few and far between except for Australian Novo’s Pilbara play or Keith Barron’s Aurania in the Ecuadorian Lost Cities play. Nonetheless we believe the neglect will be rewarded because gold stocks are trading at their lows with their market cap per ounce per in-situ reserves averaging a paltry $350 per ounce. It’s cheaper to buy ounces on Bay Street than to explore.
Within our coverage list, our favourites are Barrick, and Agnico Eagle among the seniors. We also like B2Gold and view McEwen Mining as an up-and-comer. Performance minded portfolio managers are under pressure to perform and there is a barbell effect with successful companies like Agnico Eagle and Kirkland Lake Gold on one end and with underperforming ones like New Gold, Eldorado, and Detour on the other end.
Barrick Gold Corp.
Executive Chairman, John Thorton has created a partnership structure within Barrick so Kelvin Dushnisky’s replacement will likely come from within. Significantly, Barrick is on the road to recovery and we expect growth to come from its own in situ resource. Barrick has successfully executed a restructuring that sold assets, paid down debt and refocused management. Today, Barrick mines gold at a profit, generating free cash flow and is now poised for growth.
Barrick has the world’s largest gold reserve position at more than 65 million ounces. The drop in reserves was due to off loading higher cost ounces as part of asset sales. Barrick will nonetheless produce 5 million ounces under $900 an ounce. Barrick has slashed total debt by $10 billion and has a cash balance of $2.1 billion. Reports that Barrick was one of the players interested in Detour are misplaced. We believe that Barrick has looked at Detour Gold numerous times but would not be interested in this low grade open pit operation after off loading similarly high cost mines. Barrick’s core position is in Nevada and the company has been expanding the Deep South project as well as the existing Turquoise Hill in Nevada and Gold Rush’s four mile discovery. Regarding Pascua Lama, the Chinese Shandong Gold joint venture was upgraded and Lama might be jointly developed. We like Barrick here for its core assets, large reserve position and management expertise.
B2Gold Corp.
B2Gold had a strong quarter from Fekola in Mali and the Masbate mine in the Philippines. Fekola continues to operate above nameplate capacity and guidance. Otjikoto in Namibia produced in line with expectations. B2Gold's Nicaraguan mines, El Limon and La Libertad, however had a soft quarter in part due to a work stoppage at El Limon. Nonetheless, the company has boosted its exploration budget at Fekola because of recent good news. We like the shares here for its rising reserve and production profile.
Detour Gold Corp.
Detour is fighting hedge fund player John Paulson’s attempt to put the company into play. Ontario based Detour unveiled yet another life of mine plan and the company is of the view that they can go it alone. Management is optimistic and has focused on cost reduction. However, it is obvious that at current prices, Detour cannot make money. Detour's problem is that while the mine is well-built, grade is too low and thus cannot take advantage of efficiencies. Also, Detour’s expansion is in limbo partly due to protracted negotiations with the Moose Creek. We do not expect much to happen with respect to a sell process and believe that Paulson is “just talking his book”. We would take advantage of the strength and sell.
Iamgold Corporation
Iamgold’s crown jewel Essakane mine in Burkina Faso performed well and the company has been focusing on the Côté Lake gold joint venture with Sumitomo of Japan targeting a feasibility study next year. Iamgold also talked about Saramacca which ties in with the expansion at Rosebel in Suriname. Mid-tier Iamgold should produce about 875,000 ounces this year at an all in cost about $1000 an ounce. Westwood in Quebec is in the ramp up phase with underground development. Iamgold's expects to release a reserve at Saramacca in the second half. This likely will be followed by a production decision at the start of next year. In fact, 15 km northwest of Saramacca there is another potential discovery. Reserves are at 14.5 million ounces with Côté at almost 4 million ounces. However, we think that the start date is optimistic at this time. We prefer B2Gold here.
Kinross Gold Corporation
Kinross had a good quarter at Fort Knox in Alaska where the nearby Gilmore purchase added 2 million ounces to reserves, bringing reserves to 26 million ounces. However, pit wall instability continues to cost ounces. Meanwhile Kinross’ Tasiast operation is continuing but needed are higher prices. Kinross is still in discussions with the government of Mauritania, who rejected one of the key permits to expand Tasiast which has cast a pall over Kinross shares. Moreover, in Ghana there is a review of the mining code and tax policies which would adversely affect Kinross’ Chirano mne. While it is early days, the disappointment has hurt Kinross. Nonetheless, Kinross’ balance sheet is strong allowing it to weather potential problems. Kinross’ Nevada operations continue to perform well with Bald Mountain achieving strong results. Kinross has a portfolio of eight operating mines and while diversified, the heightened geopolitical concerns will see Kinross trade at a discount.
Yamana Gold Inc.
Yamana had a good quarter with a contribution from newly commissioned Cerro Moro in Argentina, which is milling at 900 tonnes per day or 90 percent of capacity. Cerro will produce 85,000 ounces and 3.7 million ounces of silver. Excluding cast-off Brio, Yamana operates five mine with all in costs less than $900/oz. El Penon and Chapada were strong contributiors and the Company should produce 900,000 ounces plus 120 million lbs of copper. Disappointing however was little progress in paying down a whopping $1.6 billion debt, largely incurred to buy half of Canadian Malartic. We would avoid the shares here. Sell.
