Happy Family Day (Alberta, Saskatchewan, Ontario), Presidents Day (US), Louis Riel Day (Manitoba), Islanders Day (PEI), and Valentines Day (date-challenged romantics). It is not a holiday in BC but feels a bit like one because the markets are closed – and not a bad day for it for gold bugs, as gold slipped 2% since its Friday close.
Why? A pause in safe haven sentiment, I would say. World markets that were open rose sharply today after China’s central bank fixed the yuan higher and oil cemented recent gains. European and Asian stocks rose notably, as did US futures.
The signs were not all positive: Chinese exports and imports for January were down 11.2% and 18.8% year-over-year and Japan contracted 1.4% in Q4, year-over-year, a worse result than expected.
All together, a confusing day. Some negative data contrasted with tightening from China – and we have come to know, over the last eight years, just how much the market loves tightening. China’s move to fix the yuan higher and to spent US$96 billion of its foreign reserves in January alone supporting the yuan are tightening, whether the People’s Bank wants to acknowledge it or not.
We will see tomorrow how this actually plays out in North American markets. I expect US markets to rise and gold to give up some more ground, though not a lot precisely because the picture is not clear and (more importantly) the reasons that drove safe haven buying last week still exist.
There is more on that in the fourth and final bit of this week’s snippet from the Maven Weekly, titled Safe Haven Happenings. Also comment on the Lake Shore deal, on the significance of Franco-Nevada’s move, and on a very healthy premium in a financing from Golden Arrow Resources.
Tahoe Bids for Lake Shore
No question what to rank as the biggest mining deal of the week: that goes to Tahoe Resources’ all-stock bid for Lake Shore Gold. The Reno-based miner, with mines in Guatemala and Peru, has been looking to boost its jurisdictional appeal and the Lake Shore takeover will do just that by adding two mines in Ontario, while also lifting Tahoe’s growth profile.
Tahoe’s flagship asset is the Escobal mine in Guatemala, which performs very well as a mine but has struggled with political and local opposition. Lake Shore’s two mines and shared mill near Timmins face none of that.
Under the deal, Lake Shore shareholders will get 0.1467 of a Tahoe share for each LSG share held, which implies $1.71 per share. That’s a 15% premium based on closing prices the previous day…but it’s 34% premium versus the day before, which is when rumors of a bid started swirling.
Is it the right price? Hard to say. As a 2016 gold optimist, if I were a LSG shareholder I would be frustrated that management did a deal today rather than waiting for stronger gold prices.
I would also be frustrated at the deal price from the point of view that Lake Shore has more resource upside and lower production costs than Tahoe, critical factors that do not seem sufficiently represented. (This post on Stockhouse does a very nice job of going through the numbers.)
That being said, Lake Shore had been looking to a future where it needed additional money to turn its resources into mineable reserves, what with $103 million of debentures coming due in 2017.
With this deal Tahoe is cementing a reputation as a bear market mover. A year ago the company bought Rio Alto Mining in a mostly-shares deal worth $1.3 billion, which added the La Arena mine in Peru to its portfolio.
Tahoe was spun out of Goldcorp in 2010 and has done well since, though its challenges in Guatemala have hurt its share price in the last 18 months. Now there is talk that the Goldcorp connection might arise again: Tahoe executive chairman Kevin McArthur has been hinting that Tahoe is interested in Goldcorp’s Porcupine operation. Porcupine is also in Timmins, Ontario, but Goldcorp announced last month that it is closing one part of the mine for cost savings. Perhaps Tahoe thinks it can render profitable what Goldcorp cannot.
Taking a step back, the Tahoe-Lake Shore deal is big for the sector and should help build confidence that mining is slowly making a real comeback.
One specific aspect worth noting is that the cheap Canadian dollar definitely played a role. The loonie lost 11% against the greenback in 2015, which effectively lowered costs at Canadian gold mines. Seen from another angle: the cheap dollar means gold is currently worth C$1,660 per oz., a nice price that leaves lots of room for profit.
There are a number of other Lake Shore-like companies with standalone gold operations in Canada. The bid for Lake Shore only adds to speculation about which will be the next Canadian gold miner to attract a suitor. Companies on the list include Claude Resources, Detour Gold, and Richmont Mines.
Franco-Nevada Buys Gold-Silver Stream From Glencore for US$500 million
No one spends half a billion dollars without being pretty sure they’re getting a good price. That basic logic means today’s deal to buy a gold-silver stream on the Antapaccay mine in Peru from Glencore shows that Franco-Nevada is pretty darn sure mining is at a bottom.
The deal also showcases FNV’s enviable investment appeal. The golden boy of royalties and streaming simultaneously announced a US$550-million bought deal financing, priced at a slight discount to market.
Investors front the cash and FNV gets the stream, which will add some 70,000 gold equivalent ounces to Franco’s annual sales. FNV will pay 20% of the spot price for the first while, rising to 30% after 750,000 oz. gold and 12.8 million oz. silver have been delivered. Share structure gets diluted by about 7%.
For its part, Glencore gets cash in hand representing about a third of the investment it made to build and commission Antapaccay, which started producing in 2012. It’s an impressive mine, churning out 202,000 tonnes of copper in 2015 and with reserves to support operations until 2030.
Franco-Nevada is an important player in our sector. There is a feeling that royalty and streaming companies represent brain trusts in mining, each a collection of geologists, engineers, and financial analysts who twist and turn possible deals in every direction before making a move. And given that royalty and streaming companies have, on average, outperformed miners in the last ten years through bull and bear markets, they clearly do represent a smart way to gain metals exposure.
As I mentioned a few weeks ago, these companies have been laying out cash over the last year. The top three royalty co’s spent $3.8 billion in the second half of 2015.
They clearly see a sector at a bottom and want to build up their asset bases before things start to get expensive.
What matters to us is the first part: that these brain trusts see this as the bottom.
I have been assessing opportunities in royalty and streaming companies. It’s the most expensive space in the mining sector, but I am hopeful I can find us an entry point that makes sense. Stay tuned.
That’s A Healthy Premium
A noteworthy raise last week: Golden Arrow Resources announced a $1.2-million financing that will see the company sell 2.9 million units at $0.40 apiece. Each unit comprises a share and a warrant exercisable at $0.30 for a year.
Seems a touch odd, on first glance, that the warrant exercise price is less than the financing price. But it’s because the financing is being done at a 100% premium. Golden Arrow shares are currently trading at $0.20.
The news release included a line I haven’t seen in an announcement before that is intended to explain the pricing: “Management appreciates that the subscribers, being seasoned mining professionals, recognize the value in Golden Arrow.”
A conversation with Golden Arrow’s Shawn Perger, manger of investor relations, added these notes.
“The group that did the financing wanted a meaningful position – we were not looking to do an offering,” he said. “There are the negotiated terms. I think the market is getting people excited and they want to be positioned in case this is the turn around.”
Positioning in Golden Arrow means exposure to the Chinchillas silver project, in Argentina. Golden Arrow has been advancing Chinchillas since late 2011 but a deal with Silver Standard Resources in October 2015 changed the game. Chinchillas is adjacent to Silver Standard’s Pirquitas mine and the deal will see SSO invest up to US$12.6 million to assess the feasibility of developing Chinchillas into part of the operating mine. If that happens, the joint mine will be owned 75% Silver Standard and 25% Golden Arrow.
It’s a unique and impressive deal. Of course, it all hinges on Chinchillas proving itself worthy of development. Results of late look good, with infill drilling returning mineralization where and as expected.
On the share price front, the market did not give GRG any credit for the SSO deal back in October. Investors are likely waiting because the deal includes 18 months of work – drilling, studies, and the like – before SSO has to decide what it wants to do. But if they decide they want to expand Pirquitas to include Chinchillas, GRG will suddenly get cash flow from 25% ownership of a mine – including backdated payments covering the 18-month assessment period.
If it doesn’t happen, GRG will get Chinchillas back with millions of dollars having been spent to advance it. Granted the asset would be tarnished if Silver Standard dives that deep and then says no, but still.
A 100% premium to market and warrants only exercisable for a year? The seasoned mining professionals who agreed to this deal definitely think Silver Standard is going to jump in with both feet.
Safe Haven Happenings
I am not optimistic about the US economy, but goodness knows whether we’re heading towards real recession or just several quarters of such slow growth that it feels like a recession, even if officially it ain’t.
Thankfully, I have also stopped worrying about it.
Whether there’s a recession ahead or not, cracks in the economic and markets have become abundantly evident. Despite firing every stimulus cannon in the armory, world growth is anemic and markets are turning over.
It took only a few addition events – the Yuan devaluing 6%, Japan moving to negative interest rates, poor US manufacturing numbers, and of course the tanking price of oil and all the fallout that entails – to shift mass mentality from It’s All Good to Danger Ahead.
That shift means investors are moving to safe havens. And because of that, gold kissed US$1,200 per oz. on Monday, marking an 11% rise in just over a month.
It has helped that the US dollar lost almost 4% in the last few weeks – but a declining dollar is certainly not the only reason.
The dollar is declining for a raft of reasons that can be lumped into one: ebbing confidence. When confidence ebbs, in the economy or in the markets, investors move to safe havens. Utilities are one such safe haven, because households use power whether they are buying cars or appliances or not. The fact that utility stocks are up 7.7% this year, positioning them as the top performing sector on the S&P 500, shows that safe haven moves are undoubtedly in action.
Gold, of course, is another.
There are multiple factors at play, but the overarching one – ebbing economic confidence – will not resolve anytime soon. That’s good. Because confidence will remain in question, it looks like gold is setting up for a serious run, one that will outlast its usual seasonal uptick. Even technical analysts agree – many have acknowledged gold’s success in busting through resistance levels they thought would impede its ascent.
As of today, even Janet Yellen agrees – maybe not about gold, but about persistent economic weakness. In her testimony to Congress the Federal Reserve chair acknowledged that global financial market turbulence could set back US growth. She said the US economy continues to make progress but noted that higher risks from China and more challenging market conditions (lower share prices, higher credit costs, and a stronger dollar) could derail progress.
Everyone is watching everything right now. Some data points return comfort, like Friday’s jobs report showing unemployment down to 4.9% and real wage increases. Others are volatile – the price of oil, for one. And yet others are downright nerve-wracking.
For example, it’s well known that outperformance from a small group of big stocks held up the S&P 500 last year, which is weighted by market capitalization. The group became known as FANG, which stands for Facebook, Amazon, Netflix, and Google – and all four are down this year. Amazon is down 28%, Netflix is down 22%, and Google is off 10%. Facebook is the outperformer, only down 5%.
It is never good when the leaders of the bull market start to stumble. More broadly, earnings are rolling in and appear in line with expectations, which predict a 5% year-over-year decline in earnings. Such an outcome would represent the third quarter in a row with lower earnings versus the same quarter the previous year.
On the economic front, the biggest question of all is the dollar. It has declined almost 4% in recent weeks, a slide that US multinationals welcome. Dollar strength alone is estimated to have cost the average US multinational corporation almost 7% in revenue growth in 2015. One way to look at that: the weak 2% growth we saw in the S&P 500 in the third quarter would have been closer to a respectable 5% without currency appreciation.
It is hard to know what the dollar will do from here. Looking only at the US economy, it is easy to become bearish and thus assume a dollar decline. But currency valuations are always relative – and what currency should perform instead?
There is no answer to that question, which is why the dollar is not about to tumble. Weaken some, yes, but not tumble. Continued dollar strength is gold’s greatest challenge, but there are enough fundamental forces at play to outrun the greenback.
Moreover, we are at a point where momentum could start to build – in miners. Momentum gets going when investors make money and that is starting to happen.
After lagging gold’s initial gains, miners are now outperforming the metal. As of today’s close the Market Vector’s Gold Miners EFT (GDX) is up 37% since January 19. Even small and mid-tier miners are providing leverage to gold: the Junior Gold Miner’s ETF (GDXJ) is up 29%.
In the Maven portfolio, we did well to average down on B2 Gold on January 29, as BTO is up 16% since then. Newmont has shot up 49% in the last three weeks, bringing us back to almost even on this holding. Newmarket Gold is up 15% since mid-January.
More broadly, four of the five largest miners in the GDX are now trading above their 400-day moving averages and are at multi-month highs. The best of the mining bunch are right on technical breakout points.
Stories of investors making money on miners are exactly what the sector needs. Such stories encourage others to put down cash. So if you have been waiting for some sign before positioning in gold stocks, considered yourself signed.
At some point, rising share prices could encourage producers to use their stock to make takeover bids for smaller producers. Tahoe just did that with its bid for LSG. Other bids may be in the barrel.
At this point, though, I don’t really expect bids for development stage assets, let alone exploration plays. The rationale is straightforward: mid-tiers are still very cheap and, since they’re already in production, they don’t carry the capex requirements that development stage assets demand. Later, once the rally is better established, development and exploration stage assets will get their turn – but not for a bit.