On a recent site visit to Ecuador, PI Financial analysts Chris Thompson and Gary Sidhu saw the importance of being a first mover in an emerging district ripe for discovery. The four mining companies visited were INV Metals Inc., Lundin Gold Inc., Lumina Gold Corp. and SolGold PLC. All have amassed large and strategically important land packages.
The price of gold has fallen, prompted by fading geopolitical risks and a rallying US dollar. The precious metals sector is in a funk. Now is a good time to sharpen the pencil as we review our precious metals producer coverage universe following the latest set of quarterly production and financial results (the first quarter of 2018) in preparation for the second half of 2018 re-awakening.
We have left our base case metal price assumptions (Gold: $1,350 per ounce, approximately four per cent above Spot, and Silver: $18.50 per ounce, approximately 13 per cent above Spot) unchanged. We note that while the silver price has held up better than the gold price (April to present), silver has rarely been this undervalued relative to gold (Gold: Silver=78:1) and, as with gold, we continue to have a constructive near to medium term outlook for the metal.
Our thesis amongst gold and silver stocks remains unchanged and we continue to recommend investors maintain exposure with core positions in quality names, taking advantage of short-term opportunities created by valuation dislocations, potential upcoming catalysts and market re-ratings.
Gold and silver stocks we like
After considering the overview of the mining sector, we noted a few names we liked. For example, whilst we like B2Gold Corp. (TSX—BTO) for production growth (worthy of a premium valuation against peers), we highlight SSR Mining Inc. (NASDAQ—SSRM), Superior Gold Inc. (TSXV—SVI), Jaguar Mining Inc. (TSX—JAG) and Wesdome Gold Mines Ltd. (TSX—WDO) for attractive valuations at current levels. Similarly, we highlight Pan American Silver Corp. (NASDAQ—PAAS) at current levels for larger cap exposure to silver production and Excellon Resources Inc. (TSX—EXN) as an attractively-valued, small-cap silver-focused pick. Of these companies, we note that SSRM, WDO, JAG and PAAS started the year off well by beating consensus first quarter 2018 cash flow per share estimates.
We have left our forecasts unchanged at $3 per pound copper, $1.45 per pound zinc, and $1 per pound lead. We have incorporated the first quarter 2018 production financial results for all producers. The only material adjustment made to our estimates concerns B2Gold where we adjusted our forward looking estimates to better account for taxation of the Fekola mine in Mali.
We tweaked our target prices slightly lower for Endeavour Mining Corp. (TSX—EDV) and SSRM, a reflection mostly of a re-alignment of valuation multiples. We note that the market is still applying premium multiples to BTO and EDV (i.e. 1.4 and 1.5 times net asset value), a reflection of their potential for significant near-term low-cost production growth and resource growth through discovery. We also note that silver mining stocks trade at premium valuation.
Ecuador is an attractive investment destination
A recent site visit to Ecuador (April 29 to May 4) highlighted the importance of being a first mover in an emerging and highly prospective district ripe for discovery. The four companies visited were INV Metals Inc. (TSX—INV), Lundin Gold Inc. (TSX—LUG), Lumina Gold Corp. (TSXV—LUM) and SolGold PLC (TSX—SOLG). All have amassed large and strategically important land packages in relatively under-explored parts of Ecuador.
Of the four, INV Metals is the only explorer and Lundin’s Fruta del Norte mine the only project in construction. Lumina Gold and SolGold are advancing projects at the pre-development stage.
We are fast finding favour in Ecuador as an attractive mining investment destination, offering untapped exploration upside. Major companies such as Newcrest Mining Ltd. (ASX—NCM), Anglo American plc (LSE—AAL), Fortescue Metals Group Ltd. (ASX—FMG), First Quantum Minerals Ltd. (TSX—FM), and BHP Billiton plc (LSE—BLT) are actively seeking investment opportunities in juniors with significant land packages along mineralized trends. There are US$4 billion in mining investments expected by 2021. Ecuador is also known to have good infrastructure, cheap power and a willing workforce.
Pioneers to watch
INV Metals: Permitting (anticipated in the third quarter of 2018) 1.3 kilometres of development to provide access to mineralization.
Lundin Gold: Construction on track (first gold pour anticipated in the fourth quarter of 2019).
Lumina Gold: Finalizing significant earn-in agreements with First Quantum and Anglo American on exploration concessions. The Cangrejos project preliminary economic assessment (PEA) is anticipated in the second quarter of 2018.
SolGold: Systematically exploring copper-porphyry opportunities (e.g. Alpala, Aguinaga) and other priority and highly prospective targets. A PEA is expected in the second half of 2018.
Chris Thompson and Gary Sidhu are precious and base metals analysts for mining research at PI Financial. Mr. Thompson acts as head of mining research. Mr. Sidhu has more than 10 years experience as a field geologist, managing metal exploration and mining projects in Western Canada.
This is an edited version of an article that was originally published for subscribers in the June 22, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •7/9/18 •