Repositioning our gold exposure
During early March 2020 Eiger Capital repositioned its exposure to small cap gold miners by a factor of over 3x. We are now overweight gold vs the XSO small ordinaries index weight of around 10%.
We increased our investment in St Barbara (SBM) and added significant new positions in Gold Road (GOR) and Alacer Gold (AQG). St Barbara has at times seemed to struggle to complete the significant upgrades at its Gwalia mine in Western Australia but we are confident that this project is almost complete. We also believe that the acquisition of Atlantic Gold in Canada will pay dividends in the years ahead. The new Managing Director, Craig Jetson, has a very successful history is fixing initial problems with the sulphide project at the Lihir mine for Newcrest. We believe he will be able to do the same for St Barbara at Simberi in Papua New Guinea. Simberi is likely to add a sulphide project using similar technology to Lihir (also in Papua New Guinea) during 2021.
We have owned Alacer in the past but in recent times we felt this excellent company was until recently overvalued. Our opportunity came in early March as small cap gold miners were likely aggressively sold down by passive ETFs.
Canaccorde Genuity noted the following on April 8:
“Gold equities have certainly not been immune to liquidation selling on COVID-19 fears (and realities). We highlight an average share price fall of ~40% of our covered gold stocks (vs ASX200 -37%) from the 21 Feb peak to the recent 23 Mar trough, vs the gold price at only -5% (A$ gold up 8%). While we have seen a rebound rally in gold equities (avg. +31%, albeit from a lower base), we continue to see equities lagging the gold price with an average implied gold price of our covered gold stocks of US$1,228/ oz, 26% lower vs spot (at time of writing).”
We totally agree with these sentiments and believe that liquidity issues rather the operational issues provided a very good entry point for an investment in Alacer.
Gold Road is a new investment for our team and strategy. The company owns a 50% stake in the new Gruyere mine in Western Australia (with Goldfields GV-USA, who are the mine operator) and some highly prospective tenements in its own name. production is ramping up now and seems to be going very well. We are optimistic that the Gruyere mine will achieve its 300oz/pa run rate by mid 2020 with cash cost of around A$1100/oz. Gold Road also announced some highly prospective drilling results at its 100% owned Gilmour project.
However our decision to significantly increase our gold exposure during early March 2020 was more than just driven by a mismatch between equities performance at the underlying gold price (particularly in A$).
We also believe that advent of never-seen-before monetary and fiscal stimulus in response to the COVID-19 crisis will be supportive for gold. The world economies will likely emerge from this crisis heavily indebted, uncertain, unable to raise interest rates from virtually zero and immediately facing a highly charged US Presidential election. This is an election that could see US-China relations go in very different directions depending on the result. The emerging world, that relies heavily on gold as a store of wealth, are also likely to emerge from the COVID-19 crisis in terrible financial shape compared to the developed world, that itself is likely to be struggling.
On April 3 Goldman Sachs noted the following:
“Our commodity team has revised their gold price forecast, now expected to average US$1,638/oz for CY20 and US$1,800/oz for CY21. The team cites risks to global growth surrounding COVID-19 together with a continued savings glut, depressed real rates and increased focus on the US election as the drivers for risk aversion and a higher gold price by year-end.”
In this environment companies that can maintain earnings, let alone increase them, are likely to be in a small group. We believe that the three gold names we have selected have a chance of reporting increased earnings and possibly significantly so. Margins in A$ (Turkish lira in the case of Alacer) are now at record levels and may go higher. We do not believe that production will be disrupted beyond the bounds of normal quarterly variability. We have also chosen, in selecting these three companies, to avoid the lower cost West African gold producers. In a time of record prices, we believe selecting more certainty of production ranks ahead of lower costs. Attempting to assess the ability of some African States to cope with COVID-19 is also incredibly difficult.
We have however maintained our smaller investment in Perenti (PRN) which is a world leader in open cut and underground gold mining including in the more stable African States. We believe that this is a better way to gain some additional exposure to a sector that is likely to see higher margins during the course of the rest of 2020 and into 2021.
Finally, we cannot end an update on gold without a comment from Lord Edmund Blackadder (aka Rowan Atkinson) on the value of gold (or is that green?).
Author: Stephen Wood, Principal and Portfolio Manager
The information in this article is current as at the date of publication and is provided by Eiger Capital ABN 72 631 838 607 AFSL 516 751. It is intended to be general information only and not financial product advice and has been prepared without taking into account your objectives, financial situation or needs. Past performance is not a reliable indicator of future performance.