Haywood Securities mining analysts expect a positive backdrop for precious metals and related equities to remain. They name their six favourite gold stocks.
Since the all-time high of US$1,921 per ounce in September 2011, gold has had three meaningful rallies before the current price wave, none of which was able to break out above US$1,375 per ounce, which was the rough level needed to start a new technical bull market in gold:
■ A seven-month rally from a low of about US$1,050 an ounce in 2016;
■ A 16-month rally from a low of roughly US$1,120 per ounce in 2017; and
■ A six-month rally from a low of around US$1,160 an ounce in 2018.
The primary elements of support continue to revolve around softer macro-economic fundamentals, which consist of tempered global growth (indicated by declining purchasing managers indexes data), increasingly dovish language from the US Federal Reserve on forward interest rates, and the magnitude of negative yielding debt.
Monetary policies positive for precious metals
Given the adoption of a more accommodative monetary policy in the US through reductions in the target interest rate, together with the continuation of comparable practices elsewhere (European Central Bank’s implementation of quantitative easing), we expect the positive backdrop for precious metals and related equities to remain.
Further, the prospect of lower interest rates bodes well for gold investment demand, with the World Gold Council (WGC) reporting 2018 central bank gold buying at the highest since 1971, and a recent survey of central banks conducted by the WGC showing that most participants expect global holdings of gold to climb within the next 12 months. The increased appetite for investment demand in gold appears pronounced of late, with total gold ETF holdings showing a marked increase year-to-date.
This contextual picture supports the fundamental case for a stronger gold price, in addition to the improved technical picture, which saw gold break out above US$1,375 per ounce in the latest rally that started in May 2019 from a low of about US$1,270 an ounce. (As of Aug. 22, the price for an ounce of gold stood at around US$1,500.) The last four rallies have built from progressively higher lows and point to a stronger gold price potential as we move ahead.
Rallies building from higher lows
The NYSE Arca Gold Bugs Index (NYSEARCA—MAGBNAV), which traded at about the 211 level in late July, stood at about 217 as of Aug. 22, versus the high in 2011 of 638. Meanwhile, the VanEck Vectors Gold Miners Equity ETF (NYSEARCA—GDX) has traded in the US$28-per-share territory since mid-July versus the all-time high of about US$67 a share.
Even more indicative of weak sentiment in the equities is a relative snapshot of the VanEck Vectors Junior Gold Miners ETF (NYSEARCA—GDXJ), at a paltry US$40 a share or so compared to the all-time high of US$179.44 in 2010.
Notwithstanding low sentiment, cost pressures for production have ebbed over the same period as evidenced by the concurrent drop in oil prices (for example, in 2011 West Texas Intermediate or WTI oil averaged US$95 per barrel compared to about US$58 a barrel as of late July), which supports the potential for operating margin maintenance and/or expansion from leverage to higher gold prices.
Precious metals price forecasts
For the second quarter of 2019, we had forecast a gold price of US$1,300 an ounce and a silver price of US$15 per ounce. We have revised our models to reflect actual 2019 second-quarter average prices of US$1,309 and US$14.90 per ounce, respectively.
Furthermore, we have also adjusted our forecast 2019 second-quarter foreign exchange rate assumptions to reflect actual quarter averages.
Our full-year 2019 forecasts have been modified to reflect average prices from the first half of the year, and in addition, have been modified to reflect our revised second-half pricing assumptions.
With these considerations in mind, our full-year price forecasts have been revised to US$1,360 an ounce for gold and US$15.75 per ounce of silver, from US$1,300 for gold and US$17 per ounce of silver previously.
We have also modified our price deck for 2020 and beyond to US$1,425 per ounce of gold and US$17 per ounce of silver, from US$1,400 and US$20, respectively.
‘Top pick’ precious metals companies
Our focus on organic value growth in the sector leads us to highlight the following preferred focus companies:
■ For mid-cap gold producers, we like Alamos Gold Inc. (TSX—AGI), B2Gold Corp. (TSX—BTO) and SEMAFO Inc. (TSX—SMF);
■ Among junior gold producers, we’re fans of Roxgold Inc. (TSX—ROXG);
■ For exploration and development-stage gold companies, our favourites are Marathon Gold Corp. (TSX—MOZ) and Lumina Gold Corp. (TSXV—LUM).
Alamos Gold has room to grow
Diving into some of our selections, Alamos Gold is a ‘top pick’ due to its potential for longer-term organic production growth, its strong balance sheet (no debt and US$180 million in cash), a strong Canadian presence (with 65 per cent of its production coming from Canada), and free cash flow generation (US$113 million in 2020 according to our model), assuming a gold price of US$1,425 an ounce.
With the addition of Kirazli, production can grow to roughly 650,000 ounces by 2021, or 29 per cent, and with the addition of Agi-Dagi, Camyurt, and Lynn Lake, production has the potential to grow to more than 900,000 ounces by 2024, a 75 per cent rise.
We set a target price of $11 a share for Alamos.
B2Gold focuses on higher margins and cash flow
We continue to highlight B2Gold as a preferred name within our coverage universe given its track record of operational execution and outlook pertaining to growth-related catalysts that are underpinned by a low-cost production profile, particularly at and around the flagship Fekola gold mine.
Furthermore, we are encouraged by B2Gold’s recent decision to sell its Nicaraguan non-core assets (for total consideration of US$100 million, reflecting a 28 per cent gross premium to our estimates) to facilitate maximum operational focus towards mines generating higher margins and magnitudes of operating cash flow given their inherent size and lower-cost asset base (such as at Fekola).
For 2019, we are forecasting production of 968,000 ounces of gold at cash operating costs of US$533 an ounce and all-in sustaining costs (AISC) of US$870 per ounce across all operations. We are projecting operating cash flow of US$0.55 per share with earnings before interest, taxes, depreciation and amortization (EBITDA) of US$681 million and revenue of US$1.316 billion.
We have increased our target price for B2Gold most recently to $6.50 a share based on a multiple of eight on enterprise value divided by cash flow per share, using our 2020 cash flow per share estimate of $0.86.
Roxgold positioned for high-margin production
We continue to highlight Roxgold as our junior producer ‘top pick’ given its ongoing ability to deliver on multiple operational facets, which include: consistent delivery of robust low-cost gold production driven by elevated mill performance at Yaramoko; concurrent growth through the recent integration and continuing ramp-up of the Bagassi South mine; and possible resource growth and development of the recently acquired Seguela asset over the short- to mid-term.
Collectively, these facets position Roxgold for high-margin gold production, and resource growth that could venture into further corporate production expansion.
We anticipate Roxgold will enjoy additional lift in its production profile with the integration of stopped ore material from the Bagassi South underground mine. Current Bagassi South ramp-up activities are expected to segue into commercial production early in the third quarter of 2019, and in our view symbolizes a key free-cash-flow-generating catalyst for Roxgold.
The company anticipates this expansion project will result in a 40 per cent increase in production for 2019 and is expecting gold production of 145,000 ounces to 155,000 ounces of gold. Our own forecasts outline full-year production of 154,000 ounces of gold at a cash cost of US$509 per ounce and AISC of US$761 per ounce. We set a target share price of $1.90 for Roxgold.
Lumina finds high-grade ore at shallow depths
As for our explorers and developers, we believe that Lumina Gold offers exposure to organic growth through the Cangrejos gold and copper project in Ecuador, which continues to yield positive results from drilling on both the Gran Bestia gold-copper satellite deposit, as well as the main body of Cangrejos.
Growth is afforded through natural providence of these Miocene-aged porphyry systems, whereby we consider that value is continuing to be added through discovery of not only additional gold and copper mineralization, but also of mineralization that is shallow and higher-grade than the average deposit to warrant functional changes in the value of any future production centre.
This thesis for value accretion is particularly evidenced by the unearthing of higher-grade, shallow gold and copper mineralization at Gran Bestia. Drilling there is ongoing and is anticipated to deliver a maiden resource estimate in the fourth quarter of 2019 along with drilling result updates in between.
The Cangrejos deposit holds an inferred resource comprised of 408 million tonnes of ore grating at 0.65 grams of gold per tonne of ore and 0.11 copper content, translating to 8.5 million ounces of gold and 1 billion pounds of copper.
We assign a target price of $1.50 per share to Lumina.
This article is a condensed version of a report on precious metals prepared by mining equity analysts at Haywood Securities.
This is an edited version of an article that was originally published for subscribers in the September 6, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846