How to Play The Next Big Rally in Gold
FN Media Group Presents Oilprice.com Market Commentary
LONDON, May 14, 2020 /PRNewswire/ -- The pandemic lockdown is killing the global economy, and while stocks are rebounding on the slim hope that everything will eventually go back to normal, Wall Street knows a fear bargain when it sees one, and this could be gold's time to shine, while some other commodities get crushed. Mentioned in today's commentary includes: Yamana Gold Inc. (NYSE: AUY), Eldorado Gold Corporation (NYSE: EGO), First Majestic Silver Corp. (NYSE: AG), Wheaton Precious Metals Corp. (NYSE: WPM), Rio Tinto Group (NYSE: RIO).
Gold is trading at over $1,688 an ounce right now. And it's going to hit $3,000 an ounce in about 18 months, according to the Bank of America. So, imagine buying it in the ground for $3-$4 an ounce instead. When Wall Street goes bargain hunting, it's looking for discount gold.
One way it does so is by targeting junior miners with in the ground gold assets, setting short-term price targets that make these global gold assets a cheap base price for investors who are fleeing the next potential economic meltdown.
Among the well-known Wall Street bargain shoppers are Cantor Fitzgerald and GMP Research, two authorities on the street that closely follow the world's breakthrough gold developments.
In the past, both have spotted an obvious gold target: Euro Sun Mining (ESM, CPMFF) - owner of the biggest in-development gold mine development project in Europe. Cantor Fitzgerald's short-term price target of $2.10. GMP Research has given it a $3.00 price target.
That's because when this gold gets out of the ground in a world that has undergone an epic change due to a global pandemic that no one predicted, gold won't only be one of the most valuable safe haven assets in the world--it may be the only thing still holding on.
The Fear Opportunity
Fear has overtaken greed, and investors are running for safe havens. A year ago, greed ruled the day. Now, the market's running on fumes and an economic meltdown is already being written in the history books. We've gone from a trade war that knew no bounds and a geopolitical disruption pitting the U.S. and its allies against Iran to a global pandemic far worse than anything a single political leader could have concocted.
- The IMF says the "world economy will experience the worst recession since the Great Depression," with global economic growth this year projected to fall to negative 3%.
- America's economy contracted in Q1 and the pain is expected to be even worse in Q2. The damage already done by COVID-19 is just starting to catch up.
- The labor market is dying a painful death. COVID-19 has stripped the American labor market of 30 million jobs. A new report Wednesday morning showed US private sector companies alone cut a record 20.2 million jobs in April.
In a matter of weeks, Bank of America has changed its 18-month $2,000 price target for gold to a whopping $3,000. That's more than 50% above the existing price record.
Why? Because there's too much paper money floating through the system and the Fed just keeps printing tons of fiscal and monetary stimulus to beat back COVID-19--but "the Fed can't print gold".
How Do You Buy Gold At A Discount?
Gold is and always has been the ultimate safe haven. After decades of experimentation with gold alternatives, gold's hegemony as the go-to store of value remains unchallenged.
Central governments the world over knew gold would soar even before the pandemic. Right before COVID-19 hit, central banks were stockpiling the yellow metal at the fastest rate in six years.
That stockpiling alone prompted billionaire investor Paul Tudor to tell Bloomberg that gold has everything going for it right now and could zoom to $1,700 per ounce in a matter of months.
He was right, and he didn't even have the foresight to predict the global pandemic, which now has predictions of gold reaching for $3,000 sooner rather than later. But the real money isn't in buying the bullion itself…
It's in getting exposure to gold at a discount. A technique for buying ounces of gold in the ground at cents to the dollar.
Gold mining is a tough business and getting progressively harder with the easy-hanging fruit in open pit mines now mostly gone. For every ounce a Barrick pulls out of the ground - they typically have 11-12 ounces in undeveloped projects. A large operator might have 60-80 million ounces of gold in proven reserves.
Instead of paying $1,688 (or even $3,000) per ounce from a gold broker, investors can pay $100… $50, $25…even $4 per ounce for resources that haven't yet been mined. When gold likely skyrockets – they'll benefit from extraordinary leverage.
Take Euro Sun Mining (ESM, CPMFF) for example, a company with over $17 billion gross worth of measured and indicated gold equivalent on its books. This company's current market cap is $40 million – valuing each indicated ounce of gold at just $4.
During the last gold boom, investors had plenty of success with this strategy as small miners enjoyed outstanding returns – Back in 2016, when gold prices soared 26% in 6 months, Mid cap miners such as Endeavour Mining Corp and its Ontario based competitor IAMGold gained significantly.
…but some of the real winners were the shareholders of small cap miners.
Great Panther Mining saw its share price jump in no more than 4 months after it reported a 19% increase in gold production.
Admittedly, a strong dollar can annihilate junior mining stocks. That's what's happened over the past five years, and now some of these little explorers are trading at a tiny fraction of their gross value estimates based on their existing gold reserves.
Based at the company's mine development project in Rovina, Romania, Euro Sun Mining has 400 million tons of ore, with billions of dollars in gold equivalent and copper locked inside the rock.
Gold had lots going for it before COVID-19. Now, it's an upward trend that is being solidified, and if the pre-pandemic environment was rife with the geopolitical strife that gold loves, the present and post-pandemic atmosphere will be even more amenable to the precious metal.
2020 is shaping up to be a banner year for gold, and the following companies have all locked in their bets:
Yamana Gold (AUY) has recently completed its Cerro Moro project in Argentina, giving its investors something major to look out for. The company plans to ramp up its gold production by 20% through the year and its silver production by a whopping 200%. Investors can expect a serious increase in free cash flow if precious metal prices remain stable.
Recently, Yamana signed an agreement with Glencore and Goldcorp to develop and operate another Argentinian project, the Agua Rica. Initial analysis suggests the potential for a mine life in excess of 25 years at average annual production of approximately 236,000 tonnes (520 million pounds) of copper-equivalent metal, including the contributions of gold, molybdenum, and silver, for the first 10 years of operation.
Eldorado Gold Corp. (EGO) is a mid-cap miner with assets in Europe and Brazil. It has managed to cut cost per ounce significantly in recent years. Though its share price isn't as high as it once was, Eldorado is well positioned to make significant advancements in the near-term.
In 2018, Eldorado produced over 349,000 ounces of gold, well above its previous expectations, and is set to boost production even further in 2020. Additionally, Eldorado is planning increased cash flow and revenue growth this year.
Eldorado's President and CEO, George Burns, stated: "As a result of the team's hard work in 2018, we are well positioned to grow annual gold production to over 500,000 ounces in 2020. We expect this will allow us to generate significant free cash flow and provide us with the opportunity to consider debt retirement later this year. "
First Majestic Silver (AG): There's a lot of bullishness around this stock, with earnings growth expected to be high over the next 3-5 years. The optimism is absolutely justified as this Canadian mining company has been operating in Mexico for nearly a decade and has over $770 million in assets including 5 of the most promising locations in the country.
Apart from its strong resource base in a proven jurisdiction, First Majestic Silver could see its share price go up significantly in the next 2 years, as a majority of world-renowned economists are now expecting a recession before the end of 2020.
In the short term, investors can look forward to a share repurchasing program. The company board has already approved an extension of the current share buyback, which allows the company to buy back up to 5,000,000 of its own shares.
Wheaton Precious Metals Corp. (WPM)
is a company with its hands in operations all around the world. As one of the largest 'streaming' companies on the planet, Recently, Wheaton sealed a deal with Hudbay Minerals Inc. relating to its Rosemont project. For an initial payment of $230 million, Wheaton is entitled to 100 percent of payable gold and silver at a price of $450 per ounce and $3.90 per ounce respectively.
Randy Smallwood, Wheaton's President and Chief Executive Officer explained, "With their most recent successful construction of the Constancia mine in Peru, the Hudbay team has proven themselves to be strong and responsible mine developers, and we are excited about the same team moving this project into production. Rosemont is an ideal fit for Wheaton's portfolio of high-quality assets, and when it is in production, should add well over fifty thousand gold equivalent ounces to our already growing production profile."
Rio Tinto (RIO), one of the world's biggest miners is also in the gold business…though you might not know it. Rio Tinto, the mining giant, made a huge discovery in February, uncovering what could be its next big copper-gold mine in Western Australia. The mine is part of Rio's $250 million exploration program. Analysts predict the company will be able to scale up its operation quickly, thanks to the company's ample resources.
Rio recently delayed production on a mine in Mongolia, pushing back the planned expansion from early 2020 to third quarter 2021, so the Western Australia discovery comes at a good time. Like other gold stocks, Rio Tinto has been ticking up this year, buoyed by concerns over market volatility and helped along by the new COVID-19-fueled good rush.
By Charles Kennedy
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This news release contains forward-looking information which is subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ from those projected in the forward-looking statements. Forward looking statements in this release include that prices for gold will retain value in future as currently expected; that Euro Sun can fulfill all its obligations to exercise its Romania property; that Euro Sun's Romania property can achieve drilling and mining success for copper and gold, and successfully mine the measured and indicated resources of gold; that a construction permit will be obtained; that currently expected geological information and estimations will prove to be accurate; that high-grade targets exist in sufficient quantities to justify building a mine; that it should be a relatively cheap mine to operate; and that Euro Sun will be able to carry out its business plans. These forward-looking statements are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking information. Risks that could change or prevent these statements from coming to fruition include that the Company may not be able to finance its acquisition of the Taylor mine project or its intended drilling program, aspects or all of the property's development may not be successful, mining of the copper and gold may not be cost effective, Euro Sun may not raise sufficient funds to carry out its plans, changing costs for mining and processing; increased capital costs; the timing and content of upcoming work programs; geological interpretations and technological results based on current data that may change with more detailed information or testing; potential process methods and mineral recoveries assumptions based on limited test work with further test work may not be viable; the availability of labour, equipment and markets for the products produced; and despite the current expected viability of its projects, that the minerals cannot be economically mined on its properties, or that the required permits to build and operate the envisaged mines cannot be obtained. The forward-looking information contained herein is given as of the date hereof and the Company assumes no responsibility to update or revise such information to reflect new events or circumstances, except as required by law.
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