Gold: Build The Wall

August 5, 2020

Get Together

(The Youngbloods, 1967)

Come on people now
Smile on your brother
Everybody get together
Try to love one another
Right now

Today, social media platforms like, Facebook, Instagram, Twitter and TikTok are reinforcing our individualistic narcissistic society. No wonder that despite more than 4.5 million coronavirus cases in the United States and rising, the population and their leaders are in a state of denial, in the belief that they won’t be infected. Of course, if they wore a mask and stayed 6 feet away from each other, they would minimize their chances of being infected by the worst pandemic since the Spanish Flu. Wearing a mask has become a political statement not a health issue. And the beaches and bars remain crowded, schools are reopening and everyone is celebrating as if the war was won! And, there is that other war.

“Trade wars are good and easy to win” tweeted President Trump. Despite China’s plans to buy a record 1.762 million tonnes of corn beginning in September, the trade war is fraying at the edges, as the United States escalates tensions in a tit-for-tat diplomatic war, that risks morphing into a financial war. Already America has lost billions.

Domestically, this self-described “War Time” President is at war with his own citizens, playing the “law and order” card by sending federal troops into Portland, in response to protests sparked by the police killing of George Floyd. And going all in, he also wants to send federal troops into Detroit, Chicago and Oakland, coincidently Democratic led cities. America is at war with themselves.

What is Normal?

The world will change post Covid-19, in the biggest economic upheaval since the 1930’s Depression but this time with global implications. Despite central banks marshalling trillions to fend off the worst effects of the global pandemic, millions remain out of work. Bilateral relations between the two largest superpowers are at the lowest ever. While the trillions in liquidity have offset economic risk, it only postpones the day of reckoning. And worse, as the tenacious pandemic kills, particularly in the United States, it also stalls the economic rebound.

Although pandemics have occurred with regularity, we were not prepared and thus the after effects are more serious. A return to the old normal is unlikely. The world’s largest economy is mired in a once in a generation pandemic promising a long and difficult recovery. It will be a new and very different world. We are only now witnessing the first wave of economic damage, after the largest government bailouts and support in history, and the virus threatens to outlast the rescue packages. The new economy will be different from the old. Education will change. Business will change. Travel and tourism will change. A UN study expects global tourism to fall $3 trillion. Large swaths of airlines, cruise lines, restaurants, and sports have already become victims of the coronavirus pandemic. There were too many, too leveraged and there will be fewer.

Geopolitics will change. On a broader scale, emerging and developing nations, representing three quarters of the world’s population, face sovereign defaults and the need for debt moratoriums and/or bailouts. In the post virus world, the pandemic will shape our economies and investments. The “never normal” will be all about change. Sadly, politics won’t change. Already some leaders are exploiting the spreading virus as a political tool. Masks have become a political statement, not a life saving health aid.

Globalisation that allowed the world to prosper in the past half century is now set to be disrupted by the drive towards self-sufficiency for everything from PPE to solar cells, to vaccines, to semi-conductor chips. The open question is how the technological giants like Facebook, Alibaba or Huawei will fare under a new environment of isolationism and politicization. And with only 4 percent of the global population, America has become the epicentre of Covid-19 with 25 percent of confirmed cases globally. Consequently, the world has quarantined the largest economy in the world, as the virus lays bare America’s failings with its external power and social framework in decline.

After The Disease, Comes Debt Reckoning

Central banks have been forced to take a growing role in our financial markets, loading their balance sheets with open ended bonds and equity purchases but the cost of replacing and supporting the lost economic input keeps increasing. Central banks have “nationalised” our economies with trillion dollar stimulus programmes, and slashed rates to support, at least temporarily their citizens, but at a cost of 15 percent or more of GDP. According to the US Treasury, America’s debt stands at $27 trillion or 126 percent of GDP. Once thrifty, Canada’s deficit is pegged at $348 billion or 17 percent of GDP, resulting in the first country to face a downgrade by Fitch, a credit rating agency. The US Treasury again in favouring the few, gave a $700 million Federal Relief loan to YRC Worldwide, a $70 million market capitalization trucking company, employing some 24,000 members of the politically influential Teamsters Union. And even the Catholic Church received $1.4 billion in taxpayer aid. It helps to have friends in high places.

But who is to ultimately pay for the necessary spending costs while the virus still rages? In an election year, increased taxes would be an historic blunder. Debt moratoriums have been tried. Who is to pay the piper? In America’s case, it is unrestrained money printing. However, while there is no rush to close these soaring deficits, they cannot continue indefinitely as the cost of the debt burden keeps mounting. To pay for this, the Fed must print more dollars and in using the full force of its balance sheet, further blurrs the lines between fiscal and monetary policy and, unwittingly becomes one of America’s largest bond managers. The addiction to debt has developed over decades with the US economy becoming the drug addict and the Fed, its dealer satisfying the addiction with yet another shot of liquidity to keep the economy from sinking. Debt on debt is not good. The result is that the Fed and the market have become one, in a world of “state” support that converted one of the most capitalistic of economies into a massive welfare economy.

During the Great Depression, “beggar thy neighbour” policies gave birth to competitive devaluations, tariff wars and protectionist barriers, which exacerbated the downturn. Eerily similar, today the pandemic has accelerated protectionist “America First” sentiment started by Mr. Trump. Most ominous, the president’s anti-China stance will likely last whether Trump sits in the White House or retires to Mar-a-Lago in January (assuming there in an election). While much of Mr. Trump’s measures and motives are tweetable, with the November election less than 100 days away, the long term damage has already been done, undercutting confidence in the United States. The pandemic also reinforced barriers between countries as the pandemic forced some countries to introduce testing at borders, different quarantine policies and even treatments depending on the respective country’s success or lack of success in dealing with the virus. Ironically, Mr Trump has his promised wall, erected by others to keep Americans out.

US Disorder and Decline

Not only has the US government injected $3 trillion plus of bailout stimulus but the Fed subsidised the debt markets in the hopes that the edifice of debt would be validated by future growth. Coronavirus spending tripled in June pushing the budget deficit to $864 billion and since the beginning of the year, the Fed expanded its balance sheet by more than 70 percent to $7.3 trillion, the highest ever, or a whopping 33 percent of gross domestic product. Worse, at the current rate of asset purchases, the Fed’s balance sheet could top $10 trillion or almost half of America’s GDP by the end of the year. And, unlike after the 2008 crisis, the control of money has quietly passed from central banks to governments to the banking system which has pushed funds directly into households and businesses. In only a month and half to June 8, broad money supply (M2) increased by a trillion dollars or 23 percent, more than the money growth for all of 2019, and only the tenth time this has happened in the Fed’s 190 year history. Money supply is the feedstock for inflation. We believe that this time, this historic expansion in money supply will push inflation higher.

Unlike 2008 when the bailouts benefited the one percent and recapitalised Wall Street, this time the government turned on the spending taps, doling out $600 per week to households. And still jobs are disappearing with fresh outbreaks triggering new lockdowns. Legislators are locked in a showdown over another jobless bill despite temporary stimuli having temporary benefits, yet both sides want the economy to survive until the November election. And, despite a $3 trillion bond buying spree by the Fed and $2 trillion of congressional spending, the economy still sank as second quarter GDP plunged almost 33 percent, worst than the Great Depression. The situation is grim. Debt to GDP is just too high and having exhausted the temporary measures designed to bridge the economy, the pandemic outlook is darkening and it will be hard for American authorities to repeat the exceptional measures to preserve the economy and jobs again, particularly with rates near zero. Ergo, the welcome allure of inflation whose embers are glowing brightly.

The Never Normal

All in all, we believe that the legacy of a heavily indebted system will weigh on the global economy. Instead of traditional investment from savings, we are running the global economy on debt. This is highly problematic and unsustainable as the burden of near zero rates keeps transferring wealth from savers to debtors.

Looking ahead there was widespread hope of a vaccine before year end, allowing a return to the “never normal”. However a vaccine or even medication to moderate Covid-19 symptoms is unlikely to be found until next year and despite the lockdowns, the pandemic spreads. Of concern while the economy was on the rebound, the pandemic’s curve exponentially spiked. A second wave or double dip is likely in the fall but with the epicentre in the United States continuing to climb, the virus might just be in the first wave. China is experiencing its third wave. As well as the human toll, the concern is that America’s slumping economy will have economic consequences for the rest of the world.

In this new narrative, the world will have to live with Covid-19. Masks, social distancing and tracking have become the new norm. Self-sufficiency in PPE is the watchword. Needed however, is a coordinated economic approach. The World Health Organisation (WHO) warned that the lack of solidarity in fighting the virus is more dangerous than the virus itself. Lacking is global leadership, particularly when Trumpism turned out to be a blind alley. Not needed is the hogging of much of the vaccine stocks of Remdesivir by the United States, leaving the EU and others scrambling. We live in an interdependent world. The US needs investment and allies. China needs markets. Yet as the lockdowns thaw, borders are being erected, new quarantines imposed and when the pandemic worsens this fall, the spread will be exacerbated by certain leaders’ stupidity – worrisome because we all can’t move to New Zealand.

Casino Royale

Our capital markets have often been described as a casino. Working from home, millions of Americans have become day traders. Many see the economy and stock market as rigged, particularly given this disconnect between the markets and the economy, as Wall Street booms while Main Street suffers. With the economy in the dumps, why is the stock market near record highs? Is it really different this time? Do fundamentals not matter? We believe that the white hot market run is a beneficiary of the trillions created to prop up the economy. And the millions of day traders have joined the black boxes as the markets become increasingly fragmented and complex. While the Fed’s ultralow interest rate policy and credit support lessened the cost of debt, it also distorted capital markets by pushing yield hungry investors into the stock market, chasing other asset classes like gold, real estate, and classic cars.

That liquidity is akin to the water in the bathtub sloshing around and the ebb and flow is attributable to the momentum, with the Fed the prime source of liquidity, filling the tub. And yes, eventually the tub overflows. Today, retail investors have returned to the stock market in droves lured by user-friendly platforms, such as Robinhood Financial which offers commission-free trading fees. No longer a venue for big funds, these zero commission platforms have allowed retail investors to participate in the booming stock market, in particular the tech sector driving stock prices even higher. Platforms like Robinhood, Charles Schwab or E*TRADE that offer zero commissions also make vast sums from the safekeeping and borrowing function, by loaning client securities to the even bigger Wall Street derivative players, for a handsome fee. Today the retail trading frenzy is estimated to represent about a quarter of stock market transactions.

Wall Street’s largest bank and brokerages are also among the major winners of the increase in trading. The booming stock market boosted the business of the derivative players who use the borrowed underlying shares to create and financial engineer ever newer and improved structural products like swaps on the popular ETF index products. Others borrow these securities to actively slice and dice, creating structured products that even hedges risk. But, one of the biggest money makers and beneficiary of the booming retail activity are the big automated algorithmic trading platforms’ routing practices who pay the hedge funds and big players for their retail order flow, generating even bigger profits. Computer trading makes up more than 50 percent of the daily volume and the high frequency players (HFTs) like Citadel LLC, or Virtu Financial are among the winners as their super-computers developed processes, revolving around data, speed and machine-driven, which can transact a large number of trades from the market ecosystem in flow in milliseconds, taking advantage of speed, picking off slower market participants, unless there are “speed bumps”, such as Aequitas’ Neo Exchange.

In other words, the “old” business of making money on retail trading commission on a per share basis has morphed into a much bigger business with multiple players behind the scenes, hiding in the financial plumbing of the market, making big money in parasitic fashion off the retail trade activity. Noteworthy, if a human trader purchased this order flow, they would have been called out for “front running”, which is an illegal practice. However, because an algorithm-designed black box instead fulfills that role, it is legal in the eyes of the regulators.

And of course, there are the other big Wall Street insiders who are among the biggest winners. When the market hit a peak last spring, Corporate America spent billions in huge share buybacks, which further boosted share value, sending the stock market indices higher. Buybacks surged to a record $1 trillion in 2018 as household names like Apple, Wal-Mart and Johnson & Johnson bought back billions, ironically funded by the Mr. Trump’s onetime tax break.

Greed Is Good

And there is another and important dimension for the surprising market rebound, which is the fear of missing out on a stock market that seems to go up every day. Greed is good it seems, but what about risk? Risk was conveniently taken care of by a government that replaced the economy with unprecedented state-supported multi-trillion dollar packages, that eliminated “moral hazard”, (where an entity or an individual risk is borne by others – a form of insurance.) As such, investors have taken on greater risk hoping to make big profits in the belief that the deep pocketed government’s willingness to bailout everyone and everything, leaves them with the upside while the government assumes the downside. Sitting on the sidelines has its cost, it seems. Climb aboard before it’s too late. In fact, in the quest for even bigger profits, some investors have piled on more debt and leverage on dubious terms, becoming in time the ultimate bag holder. Trees don’t grow to the sky and one day, a crisis will come along that’s too big even for Washington to handle.

Above all, risk remains. Risk did not disappear since the governments’ lockdown measures simply froze businesses and the economy. But months later, the swamp has drained. Wirecard, the big German payments processor recently went bankrupt in a massive multibillion dollar fraud. The oil patch too is facing solvency questions with Chesapeake Energy, the biggest US shale company, filing for bankruptcy. Retailers must cope with 18 million unemployed Americans and big names like Brooks Brothers and JC Penny are no longer around. The biggest factor though is that the Fed has become one of the largest market and bond players as it buys securities like now bankrupt Hertz bonds, or popular ETFs driving up prices further.

And while the financial gravity of defaults and bankruptcies in the future will test the Fed’s “whatever it takes” promise, that shoe has yet to drop. It is far too soon to declare the pandemic over, whatever equity investors might think. Investors should be reminded that the booming stock market is not a reflection of the health or future health of the US economy, but a symptom of an almost decade long near zero interest rate environment, which is symptomatic of a weak underlying economy. And, while asset prices keep booming due to the explosion in liquidity, the rich get richer widening the wealth gap creating a more unequal world.

Summer of Protests

From Seattle to Paris, Hong Kong, Bolivia to Chile, mass protests have rocked governments as citizens revolt against their governments in a period of social instability. The root cause ranges from social injustices, racial inequality and a widening wealth gap stemming from stagnant economies, ballooning asset prices and deteriorating democracies. City centres have become war zones. The class, race and power turmoil has engulfed democracies, pitting young versus old, rich versus poor, left versus right, family versus family and black versus white.

While, the massive stimulus programmes appear to have worked, the consequential boom in asset prices also laid bare major vulnerabilities such as the widening wealth gap. In the United States, racial unrest has worsened. Climate change too has become an issue. Brexit stoked fires in England with a disunited Europe. Populism rocked South America. The common denominator?

We believe there is a lack of leadership, which is a major cause for this global dissatisfaction and backlash, with revolutionaries battling reformers. The extreme polarization of politics makes it difficult to achieve “middle ground”. Of concern is that the rule of law, trust and even capitalism itself is being undermined. Another perspective is that many view the economy as rigged. Economic polarization was created along the fault lines of the wealth gap and exacerbated by the coronavirus. That widening inequality gap has polarized societies, politically and culturally and unfortunately our leaders are tone deaf. Ironically, it may be that Covid-19’s legacy is that these problems will no longer be ignored.

And yet, a century and half later, after the North defeated the South, America is still dealing with its history. The racial injustice of the past persists in haunting the present, with nationwide protests stretching into months. While time is supposed to heal, America continues to relive the injustices from Martin Luther King’s assassination in 1968, to the present day George Floyd brutal murder, which touched off global protests. As, Toni Morrison wrote, “The very serious function of racism.... is distraction.” Radical solutions lie ahead.

In the upcoming election, America’s “culture war” will center on race, equality, leadership and the economy. The good news is that the protests, pandemic and polarization has brought forward a natural debate about housing, policing and education. More people are educating themselves on matters of systemic racism and the deep underlying inequality built into our social and economic system. No longer can we blame naivety. Omission is just as bad as commission. Of concern though, amid this heated climate, the November election will likely spark a raft of lawsuits and protests (remember the chad dispute). In this polarised world we worry that the electoral chaos from a wave of lawsuits and challenges will undermine the legitimacy of the results and crush the stock market. We can recall that it took more than a month for the winner to be declared between George W. Bush and Al Gore in the 2000 election. Gold would be a good thing to have ahead of this election.

Dollar Supremacy is Not Forever

With only 4 percent of the world’s population, America’s geo-political dominance is underpinned by the US dollar being the world’s global currency, despite providing only 15 percent of global output. That unique “exorbitant privilege” has given it extraordinary influence over other countries economic destinies. It also allowed America to borrow money cheaply, and sustain its lifestyle through cheap imports. Mr Trump’s bullying of allies and hogging of vaccines and attacking organizations like WHO is unhelpful when the world should be unified in fighting the virus. We believe that the escalating political and health risks together with America’s steady rise in infections and lack of a plans to halt the spread has made the dollar’s inadequacies more apparent. To no surprise the greenback is in a freefall of almost 6 percent from the highs of the year as investors sour on the dollar because of worries about America’s economy and its virus response.

True, there have been successes as Washington’s blunt measures and sanctions enacted enormous damage on North Korea and Iran. However, the Cold War with China, sanctions and trade wars with America’s allies broke tradition in several ways. Although the trade war with China ended in a truce, America’s escalation of tensions and demonization of anything Chinese threatens to draw a reprisal from Beijing, hurting Americans when they can least afford it. Both sides are openly flexing their economic and military muscles. China exports almost 15 percent of its GDP and is home to the world’s largest and most innovative technology companies. However, it is more than about faster download speeds. China has a range of brands and sectors that could hurt the United States as well as a market that is four times larger. America’s allies have even worked around America’s dollar hegemony with treaties like the TransPacific Partnership. Or then there is the creation of an alternative to the US dollar denominated SWIFT international payment system, which allows Chinese and European companies to continue to trade with Iran. Today, Middle East players now swap oil for Chinese renminbi, following Russia’s move of eliminating the usage of the dollar. And at a time when the US in reeling from a recession and fighting the spreading coronavirus amid increasing isolationism, Beijing and others are capitalizing on US weakness.

Events lately have eroded America’s fiscal stability, faith in its policies and institutions. The liquidity that the Fed has pumped into the financial system has created enormous bubbles. Former Fed Chairman Paul Volcker who saved the United States and the dollar from the “brink of hyperinflation” in 1987 said, “Nihilistic forces are dismantling policies that protect our planet and our democracy....and the concept of truth itself. Instead confidence in the US is under siege.”

Until recently, trust in the US and its institutions was the reason that despite a growing government debt load and economic uncertainty, the dollar remained strong. However, the mounting US debt and ensuing bubbles have debased the dollar’s reserve currency role, shaking trust in the dollar’s standing as a reliable store of value.

Dethroning the Dollar

America bears a close resemblance to early 20th century Britain when sterling used to be the world’s reserve currency, but soon lost that role to a rising America. A dominant reserve currency has only declined twice in the 20th century. Britain’s sterling was devalued between 1914 and 1931 losing its reserve status under the weight of Britain’s crushing First World War debt, marking the collapse of the international world order. Then, America was the world’s largest creditor, and Britain, its largest debtor. The US dollar subsequently replaced sterling as the world’s reserve currency but the dollar devalued when Bretton Woods collapsed and President Nixon took the dollar off the gold standard in 1971. And today, the world’s largest creditor nation is China, and its largest debtor, the US.

The present system depends on the dollar as the keystone of the global financial system. As America weaponizes its currency and financial system, debases this global reserve currency and undermines faith in its institutions and laws, other countries have sought alternatives. In the context of economic interdependence with the West and faced with growing hostilities, with a third of its $3 trillion reserves in dollars and growing, China has balked at purchasing more US Treasuries. China has the financial power today, becoming the world’s financier underlining the shift of financial power from west to east.

The problem for America, is that they spend more than they produce and therefore depends on external financing to pay their bills. However until recently, foreign investors financed that gap, but lately have been absent, forcing America to depend more on the Fed to finance its deficits and spending. We believe that the pandemic has reframed the role of the dollar and importantly puts a premium on trust. Without confidence in the dollar, the world has no reserve currency.

Our view is that there is a growing realisation among America’s creditors that the best they can hope for is to be repaid in much depreciated US dollars. This currency debasement and the growing disenchantment with the United States, together with an anemic pandemic response has caused foreign investors to lose confidence in the dollar’s standing. America’s financial supremacy days are numbered. Not much seems evident in luring them back, so an avalanche of dollars will force Americans to pay more and the attendant rising inflation will wreak havoc on their financial markets. That will be good for gold, bad for the dollar because gold is an alternative to the dollar. To date gold has rallied 32 percent as buyers sought a crisis haven outperforming every other asset class.

Recommendations

Central banks are the largest holders of gold and in 2019 they bought 650 tonnes, the highest in 50 years. Gold is historically a store of value in times of stress and an important part of the central banks’ reserves. Russia, China and Turkey were big purchasers and continue to add to their reserves ditching the US dollar. The United States is the largest holder (8,133 tonnes), followed by Germany (3,363 tonnes), Italy (2,459 tonnes), France (2,436 tonnes), Russia (2,229 tonnes) and China (1,948 tonnes). Canada has no gold. Today 10 countries control over 50 percent of global reserves. But, it is not only the central banks that like gold. The World Gold Council reported that gold-backed Exchange Traded Funds (ETFs) hold a whopping 3,624 tonnes of gold, more than second ranked Germany. In June alone, ETF buying topped 100 tonnes on the fiscal stimulus moves with investors placing a record $40 billion of cash into ETFs in the first half of this year.

So much for demand, what about supply?

Reserve replacement is the central problem for gold producers. Demand has increased whilst supplies peaked in 2019 falling by 1 percent. Gold production fell 4 percent in the first quarter and will be lower in the second quarter due to Covid-19 lockdowns. Gold producers expect flat production as they harvest their output with capex falling due to few discoveries. The problem is not geology, nor even demand, but lack of investment. While reserves are depleted continuously, producers have been harvesting production. When gold reached $1,921 an ounce in 2011, there was a rush in development to capitalize on higher prices but those mines are now in production. Producers also resorted to expensive M&A activity, but when gold collapsed, producers took almost a decade to repair their balance sheets that involved cutting costs and exploration programmes. Mega-capital projects were postponed as the industry went back to basics to boost margins. Today, dividends and shareholder value are the new mantra.

With gold topping $2,000 an ounce, higher prices have lifted profits for gold producers who are generating huge free cash flow and with the dearth in discoveries, M&A activity has been confined to buying ounces on Bay Street, rather than the drill bit. Simply it is cheaper to buy reserves in the ground than explore. We expect the world’s appetite for gold to increase, with investment dollars, likely to go to the senior producers with multiple mines, robust cash flow and acreage needed to be explored. Of interest is that gold shares are cheap, with many trading at less than net asset value. We like Agnico Eagle, B2Gold and Barrick among the majors. We also like Lundin Gold and believe Centamin and Eldorado are likely takeover candidates in the quest for reserves in the ground. Developer McEwen Gold is favoured.

Above all, we believe that investors can look forward to the “sweet part of the cycle” and the industry’s huge cash flow generation will allow needed spending on exploration. With precious few discoveries, the “hockey stick” of exploration lies ahead, particularly since the world’s mine output lags demand.

Gold has surged to all time historic highs, breaching $1,921 an ounce reached in September 2011. Gold had earlier reached record highs in most other currencies and now gold priced in dollars to record highs on fears about the global pandemic’s impact on the world economy. While we have long forecasted a target of $2,200 an ounce, we expect gold to trade higher than $3,000 an ounce due to a lower greenback and solvency concerns. And with the expected inflationary impact of the unprecedented massive dose of monetary and fiscal stimuli, gold’s “never normal” bull run has only just begun.

In summary, America’s global primacy is being tested. The George Floyd killing has laid bare racial inequities, kicking off global protests in every continent. America’s failure to contain the coronavirus has resulted in the quarantining of America – Mr. Trump has his de facto wall, as the world quarantines itself against America. But America’s financial hegemony is also being tested as its central bank floods the world with cheap dollars to pay for its profligacy and rising debt load. America is waging wars on two fronts, domestically, a cultural war centering on race and inequalities, and an ill-fated Cold War with China centering on technology, trade and power rivalry. All told, the US has a serious credibility and financial problem with its debts which undermines an overvalued dollar. We believe that gold is telling us that a perilous adjustment lies ahead. The cure will be painful. Gold will be a good thing to have.

Companies

Agnico-Eagle Mines Ltd.

Agnico has become the “go to” gold miner with mines in Canada, Finland and Mexico. Agnico’s hiccups at Meliadine and Meadowbank have been resolved. Agnico is a cash flow machine with $300 - $400 million plus free cash flow for the balance of the year. Although most of Agnico’s mines were temporarily shutdown because of Covid-19, production is expected to pick up into the balance of the year and guidance remains unchanged. Flagship LaRonde deep exploration on satellite Zone 6 and 20N Zone has been promising. Phase 2 Amaruq and Meliadine expansion are on track. We like Agnico for its growth profile, expecting production to increase by 18 percent to 2022. Buy.

B2Gold Corporation

B2Gold’s flagship’s Fekola expansion should be completed in the last quarter of this year, allowing B2Gold to meet guidance. With no major capex on the horizon, B2Gold should be a cash flow machine for the balance of the year and thus debt free. Second quarter results will show an improvement due to Fekola’s expansion. Otjikoto will have a solid quarter. B2Gold has reserves of 7 million ounces. With the off loading of Nicaraguan assets to Calibre, B2Gold costs will decline, improving cash flow and low cost profile. Buy.

Barrick Gold Corporation

Barrick is the world’s second largest gold mining operator with 16 mines on four continents. Barrick’s second quarter production was flat because of Covid-19 related production issues and mine sequencing. Nonetheless, Barrick produced 1.15 million ounces and 120 million pounds of copper. Barrick’s Nevada Gold Mines joint venture with Newmont remains a cash machine. Tanzania is up and running. Barrick shares have outperformed the market due to the management moves of Mark Bristow, building on the blocks of Chairman John Thornton and management execution capability. With a stellar balance sheet, 60 million ounces plus of reserves and the largest array of Tier 1 assets at six mines, the shares are a buy.

IAMGold Corporation

Mid-tier player, IAMGold has given the go-ahead to Côte in northern Ontario, which is a low grade bulk open pit mining joint venture (70/30) with Sumitomo Metal Mining. IAMGold’s project’s cost is a whopping $1billion plus with current production pegged at 361,000 ounces at a 30,000 tpd mill rate. However grade is low and continuity has made the project iffy. IAMGold’s decision is a big bet and they appear to be going all in after buying the project for $600 million in 2012. We think they are throwing good money after bad. IAMGold has three producers with Saramacca in Suriname coming on stream which should improve high cost Rosebel and flagship Essakane. IAMGold’s costs remain high and we believe the Côte is a big question mark. Sell.

Kinross Gold Corporation

The company had a strong quarter with its Russian mines boosting output. Although operating in Russia successfully for 25 years. Kinross’ exposure in Russia has resulted in a discount. Similarly, Tasiast in Mauritania has underperformed and while the company’s dispute with the Mauritanian government over royalties has been resolved, Kinross will be paying an escalating royalty in exchange for the 30 year lease. Nonetheless the expensive deal allows Kinross to go ahead with plans to expand Tasiast production to 24,000 tpd up from 15,000 tpd. Kinross will produce a steady 2.4 million ounces but is now in the harvest stage given a flat production profile until mid 2023, when Tasiast Phase II should be completed. We prefer B2Gold in the interim.

Lundin Gold Inc.

We like Lundin Gold, here as they ramp up production from Fruta del Norte (FDN) in Ecuador. FDN is the richest deposit in the world and next year will produce 350,000 ounces at an AISC of $773 an ounce. At current gold prices, FDN will be a cash machine, easily paying down debt. Of interest is that the company has an excellent land position with the potential to discover more ounces. Buy.

Newmont Corporation

Newmont continues the turnaround of last year’s Goldcorp acquisition producing 1.26 million ounces in the quarter. Better grades at Cerro Negro and Penasquito helped. Newmont has an excellent balance sheet and will spend $1.4 billion this year. Newmont has 12 operating mines and two joint ventures. Still in the turnaround stage are Éléonore in Quebec and Porcupine complex. Newmont has a stellar balance sheet with $3.8 billion of cash and a solid core of assets but still needs to digest the Goldcorp acquisition. In the interim, we prefer Barrick.

Yamana Gold Inc.

Yamana has paid down debt and Jacobina remains a strong flagship with a solid contribution from 50 percent owned Canadian Malartic. Yamana, however remains a high cost operator and grandiose plans to list in London, will only add to its high AISC. Debt remains near $800million and Jacobina expansion will take most of free cash flow. Yamana’s production profile is flat and thus the shares should be used as a source of funds. Sell.

John R. Ing

jing@maisonplacements.com

********

The volume of all the gold ever mined can occupy a cube 63 feet on each side.

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