Is Gold’s Rally Vulnerable, as Fed Readies To Meet?

January 24, 2023

Source: Adrian Day  (1/23/23)

Adrian Day of Adrian Day Asset Management reviews recent results from several resource companies, mostly positive, though cost increases are an issue everywhere. 

Gold has moved ahead on expectations that the Federal Reserve will start to slow and then pause its tightening program. There have been several indications of this since the last Fed policy meeting, including chairman Jerome Powell’s comment at his December press conference that the Fed would not start to cut interest rates “until we are convinced that inflation is moving down towards 2%”, a quite different matter than inflation actually being at 2%. Then in the last week, several Fed officials said “not so fast,” but some of those, such as James Bullard, who called for a half-point increase later this month and another full percentage point this year, are no longer voting members of the rate-setting committee.

But we know the Fed, and particularly Mr. Powell, are concerned at markets discounting the Fed’s message. They are less concerned about the gold market than they are about stocks, bonds, and other assets, but certainly, gold is vulnerable to a pullback after the 18% move since early November. A quarter-point rate increase is now seen as almost certain; it is very unlikely to be less than that, so any surprise is likely to be on the upside, that is, negative for markets and gold.

We remain very positive for the balance of the year, but some trimming of gold stocks and certainly caution in new buys, would not be out of place.

Pending Acquisition of Yamana Overshares Pan American’s Solid Quarter

Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ) reported strong production in the last quarter of the year and probably the last full quarter before the acquisition of Yamana, ending a string of disappointing quarterly results. In its preliminary production report, Pan Am said it met its previously reduced guidance, with gold production up 28% on the prior quarter, while silver output rose 5%; zinc and lead, the two primary non-precious metals, also were up meaningfully.

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Though the results were positive, they were overshadowed by the pending acquisition of Yamana, which is expected to close sometime this quarter. The deal is accretive for Pan Am and arguably improves the aggregate quality of its mines. We expect to see the company sell some higher-cost or shorter-life assets, thus reducing its purchase cost. Pan Am said it expects to discuss 2023 guidance after the transaction is complete.

Pan American is trading at a discount to both major miners and to other silver-focused companies. Although we are very positive about the stock longer term, especially with the possibility of Escobal in Guatemala coming back online at some point, we are cautious in the near term. We may see some selling from shareholders who own too much of the combined company or Yamana shareholders unhappy with the transaction, and given that Yamana shareholders will hold nearly half of the combined company, this could be meaningful. Hold.

An Osisko Asset Moves Forward

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) received more good news, with the first resource estimate on Osisko Development’s Tintic project in Utah. The Trixie Zone has 456,000 ounces of gold at an average grade of 23.5 g/t., the resource covering only about 10% of the footprint on limited drilling (50 drill holes). The resource should get to one million ounces, at similar grades, for a high-grade mine expected to commence production in early 2024. Osisko Gold holds a 2.5% metals stream on the project, payable at 25% of the spot prices at delivery; it paid $20 million for the stream.

This is a good example of the benefits that Osisko derives from its offspring. And it is only one of more than a dozen projects advancing this year. Given the strong rally, both since early November (up 34%) and the last few days (traded under $13 on Tuesday), we will wait for a pullback to add. Hold.

Fortuna Delivers Another Solid Quarter

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) also reported a solid fourth quarter, with gold and silver production both in line with full-year guidance, while lead and zinc exceeded guidance somewhat. Gold production was above many analyst expectations, although costs were up, at most mines around 15%, driven by sustaining capital spending. This quarter represents another consecutive quarter where Fortuna’s operations have met or exceeded expectations after a frustrating series of issues in 2021 and early 2022. Construction at Séguéla remains on track, with the first gold expected in the second quarter after mining begins this quarter.

The company is initiating action in Mexico, on both the judicial and political front, over the last reversal of its permit for San Jose. The company is looking for an increase in gold-equivalent ounces this year of between 3% and 15% over last year, driven by a 25% increase in gold as Séguéla comes on stream. Gold production is expected at between 282Kk and 320K, as much as a 23% increase, while silver output is expected to decline by up to 9% to 6.3 million to 6.9 million ounces.

Strong management, a solid balance sheet, a diversified asset base, and growth ahead: Fortuna can be accumulated here and bought aggressively on any dips.

Barrick Disappoints on Production and Costs

Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) had a disappointing quarter, even though it was the strongest for gold production of any this past year. Gold output was up 13% over the prior quarter, but that was not sufficient to save full-year production, which at 4.14 million ounces, was below the low end of the company’s guidance. The company’s assertion last quarter that it would still meet guidance was treated somewhat skeptically by many analysts. Though copper production was down 5% from the prior quarter and below some estimates, it still came in within the full-year guidance range.

Costs were also disappointing; although down slightly from the third quarter, largely due to higher volumes, costs were higher than management was indicating. Given the results, it is likely that the variable quarterly dividend will decline to the base of 10 cents a share. Separately, Barrick announced a time frame for its new Reko Diq copper project in Pakistan, with a feasibility update expected to be completed by the end of next year, with 2028 targeted for the first production, as indicated previously. Barrick is the 50% owner and the operator.

Barrick remains inexpensive, both fundamentally and in relation to his historical average valuations. However, we would like to see a pullback before buying, given the strong rally in recent months (the stock was at $13.10 in early November).

Midland Has Another Busy Year Ahead

Midland Exploration Inc. (MD:TSX.V) released an overview of its exploration plans for the coming year, expecting a budget of over $11 million with 20,000 meters of diamond drilling. Its plans for 2023 are aimed at following up on new discoveries made throughout 2022. Midland is working on several projects in partnership with others, including BHP, Rio Tino, SOQUEM, Probe, and Wallbridge. The company will also advance several of its wholly-owned properties. Given the activity, the strong management, and the balance sheet, Midland is a strong buy at the current level.

TOP BUYS THIS WEEK, in addition to the above, include Orogen Royalties Inc. (OGN:TSX.V). As we have said for the last couple of weeks, we are generally cautious on buying right now, given valuations in the broad market and following the strong gold-stock move in the last couple of months. Patience will pay off!

Adrian Day Disclosures:

Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor’s opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2022. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.


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