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Mr. Trump is Good for Gold

Gold recently traded at 6 1/2 year highs as investors sunk almost $4 billion in September in global ETFs to 2,808 tonnes, the highest ever, amid fears of a recession, exacerbated by President Trump’s protracted tariff war as well as the onset of negative interest rates leaving investors nowhere to hide.

Gold is a beneficiary of the central banks’ driven policies of negative yields. Further underpinning gold is America’s profligacy and record debt level which is not only unsustainable but undermines confidence in the US economy and its currency. One can detect the decline in confidence in every part of the world. What damages trust in the US, damages the world. Investors today are left with whom or what can they trust.

Last year 22 central banks bought the most gold in half a century ending four decades of demonetisation. So far this year 14 central banks bolstered their gold reserves with total gold holdings back to early 1950 levels, with gold distribution shifting from the west to the east. Investors suspect that the American people will elect an inflationary president next year. No candidate, including Mr. Trump stands for sound money. Meantime, there are supply problems as miners deal with declining reserves, grade and increased costs. China is the largest gold producer in the world and like other major central bankers is buying gold such that China is currently the sixth largest holder, after Russia.

There is not enough gold to meet demand. In June, gold broke out from a five-year trading range beginning its new bull market. Gold is up 15 percent year to date. With so much fear stalking the world, we believe gold will post new cyclical highs, exceeding the last peak of $1,921, reached in 2011.

Mr. Trump is good for gold. In the Godfather, Don Vito Corleone said, “Lawyers can steal more money with a briefcase than a thousand men with guns and masks”. Today, this” Goldfather” might have substituted politicians for lawyers. Gold is a good thing to have.

Mining Company Recommendations

Mining companies will have a mixed quarter as some producers managed to lower debt, others reduced production costs in an attempt to boost margins but few replaced ounces. Most gold producers however continue to rein in costs and focus on spending in order to protect their balance sheets. Cash flow is king as most of the gold miners have lowered “all in costs” (AISC) below $1,000 an ounce, which potentially allow dividend policies that would give shareholders a return and enhance shareholder value. Still, reserve replacement is a problem for the industry, which will end the year with a declining reserve picture, as the miners find it increasingly expensive to replace production.

Nonetheless, growth-oriented Agnico Eagle Mines and B2 Gold bucked the trend with growing production profiles next year. While market fundamentals have improved, exploration players continue to find projects difficult to finance resulting in a dearth of discoveries.

We continue to recommend Barrick Gold and Agnico Eagle among the senior producers. We also like B2 Gold and would avoid debt heavy Yamana and New Gold. IAMGOLD is still pursuing asset optimization but we did not think the Chinese players would spend $2 billion to buy a producer that loses money. We would also look at the junior developers that have completed feasibility studies and need only capital to finance their developments.

Agnico Eagle Mines Ltd. (AEM) – had a good quarter and expects record production this year due to the ramp up of Meliadine in Nunavut, which achieved commercial production ahead of schedule and Amaruq in the current quarter. Most of the heavy lifting and expenditures have been done and Agnico will harvest its new production from the Meadowbank complex where total expenditure costs will come in at $830 million, below $900 million forecasted. At Kittila in Finland, good grades at the Rimpi zone will extend the high-grade mineralisation. Agnico successfully replaced reserves last year with 22 million ounces at an average grade of 2.70 g/t. As of June, Agnico had strong liquidity of $126 million and a $1.2 billion undrawn line. We like Agnico Eagle for its growing production profile, low costs, and pipeline of projects.

Barrick Gold Corporation (ABX) – Barrick results continue to show improvement, allowing the company to pay down debt. Barrick produced a five-year plan for mammoth Nevada Gold Mines with an emphasis on production, synergies and reserve replacement. The joint venture has 10 underground mines, a dozen open pit mines with 48 million ounces of reserves and 10 processing facilities. Barrick recently released drill results extending the Four Mile discovery as part of the three tier one assets it owns. Gold Rush is included in the Nevada joint venture, which produced 4.1 million ounces last year. Barrick also acquired the remaining Acacia Mining minority position, which should accelerate an agreement with the Tanzanian government to end the two-year standoff. Nonetheless, we like Barrick here for its array of tier one assets, experienced management and large reserve position.

Detour Gold Corporation (DGC) continues its cost-cutting optimization with an emphasis on expanding margins. The miner is mining less but increased mill rates to optimize output, needed for a low-grade operation. Detour has improved operations but will unveil a new mine plan. The company refinanced its debt, extended term and reduced interest payments. Detour should produce 585,000 ounces this year at AISC of $1,200 an ounce, stressing the need for grade control and reducing cost. Nonetheless we prefer B2 Gold here for lower costs and rising production profile.

IAMGOLD Corporation (IMG) is a mid-tier player that has been stymied by worker problems at flagship Rosebel Gold Mine in Suriname, which resulted in the stoppage of mining operations. Operations have been on and off following the death of a unauthorized miner. Rosebel is key since the interruptions at Rosebel mill affects processing of nearby Saramacca ore. Meantime Westwood in Quebec is still underperforming and a disappointment. We believe that the takeover talks with the Chinese failed because any suitor would not pay $2 billion plus for a company that can’t make money. Sell.

Kinross Gold Corporation (K) – Kinross surprised the street by expanding their footprint in Russia. Kinross acquired 100% of Chulbatkan development in Russia’s Far East for $283 million over two years comprising 40 percent cash and 60 percent Kinross’ shares. Kinross’ due diligence suggests that there is a large resource of 4 million ounces and good grades for an open pit heap leaching operation. The Russian mine has a six-year mine life and could produce 1.8 million ounces. While the Kupol-Dvoinoye operation continues to perform well, Kinross’ Russian exposure has been a price depressant. Also, the Tasiast 24K expansion project continues with Kinross starting the first phase but a deal with the government is needed. Kinross has a good pipeline of projects but should focus more on its Nevada assets such as Phase W or the Vantage Project at Bald Mountain than La Coipa and the Lobo Marte projects which are too big and capital intensive. We prefer Agnico Eagle or B2 Gold.

Kirkland Lake Gold Ltd. (KL) – Kirkland Lake, an intermediate player with five underground mines and three mills in Canada and Australia, reported record production at 248,400 ounces. Kirkland had a strong quarter with low cash costs and huge margins due to high-grade Fosterville in Australia. Macassa Mine made a strong contribution at almost 63,000 ounces as it mines higher-grade stopes but the Holt Complex’s higher costs hurt margins. Macassa has four drill rigs turning with high grade results to the northeast. Nonetheless, Kirkland has a strong balance sheet with $615 million and an all in cost less than $700 an ounce. We believe Kirkland should use its richly valued paper to acquire a mid- sized player to remedy Kirkland’s relatively short mine life.

Newmont Goldcorp Corporation (NGT) – Newly minted President and Chief Executive Officer, Tom Palmer has his hands full and has given a more realistic guidance outlook due to the need to integrate, reduce costs and optimize the Goldcorp acquisition. Costs were hit by an illegal labour dispute at Penasquito and while the blockade was lifted, results will be adversely impacted. We believe that digesting Goldcorp will take a couple years and there is a likelihood of further asset sales. Newmont has 14 operating mines and 2 non-operating JVs with 90 percent of output in the Americas and Australia. Newmont reported that its Ahafo mill expansion in Ghana processed first ore, which will extend mine life to 2029. We prefer Barrick here because it will take a couple years to digest Goldcorp.

Editor’s Note: This is an edited version of Gold: The GoldFather by John Ing, President & CEO of Maison Placements Canada Inc. Mr. Ing has over 45 years of experience as a portfolio manager, mining analyst and investment banker. The full article can be viewed at www.TheBullandBear.com.

Maison Placements Canada Inc. is an institutional investment boutique that provides financial services to corporate, government, institutional, and individual investors. The firm offers securities underwriting, distribution, and execution services. Additionally, it provides investment banking services including mergers, acquisitions, and divestures; equity financing; financial and corporate restructuring; valuations; fairness and regulatory opinions; and management advisory. For more information on Maison Placements Canada, visit www.maisonplacements.com.

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