Wallace Refiners has launched its 2021 Outlook, which offers the most comprehensive coverage of precious metals markets in the new year. Trillions of dollars were pumped into financial markets in 2020 and that won’t come without consequences. Economists expect that investors will be Bracing For Inflation in 2021.
(Wallace Refiners) – 2020 has been an unprecedented year for the precious metals market. In August, gold prices pushed to a record high above $2,000 an ounce.
Although the precious metal sector is attracting new investor attention, the mining sector continues to underperform. The mining sector’s value is well below what it was during the last bull market in gold and silver.
However, some market analysts think that this will change and investors won’t be able to ignore the value being generated in 2021.
With that in mind, we decided to reach out to some mining experts and ask them how they would invest $10,000 in the mining sector and what themes they see playing out in 2021.
Expert: Joe Mazumdar
Claim to Fame: Editor of Exploration Insights
What three companies do you like the most in 2021 and why?
My top picks include the following:
Trilogy Metals (TMQ.T, TMQ.NYSE) has a joint venture with a major diversified miner, South32 (S32.ASX), on the feasibility stage Arctic copper dominant polymetallic volcanogenic massive sulfide deposit and the resource-stage Bornite carbonate replacement deposit in Alaska. It underperformed in 2020 as COVID-19 concerns led its JV partner to defer its work program to 2021 to avoid putting local villages at risk. The access road to the remote project has been approved, which was a significant catalyst in 2020. The JV partners announced their 2021 budget and plans (US$21 M), which include exploration drilling of the Ambler district to add more resources.
Liberty Gold (LGD.T, LGDTF.OTC) is advancing the Black Pine gold project, which has the potential to become a significant open pit, heap leach-amenable target in a mining-friendly part of Idaho. The company continues to drill and discover new zones of pervasive oxide gold mineralization by expanding its footprint (+4.6 sq. km.) and increasing the 2021 drill program to well over 50,000 meters. Upcoming catalysts include a maiden resource (Q1/21), a scoping study or PEA (Q2-Q3/21), and a pre-feasibility study (PFS) on the Goldstrike gold project in southwest Utah, which is currently undervalued in the portfolio.
Bluestone Resources (BSR.V) operates the feasibility stage, high-grade Cerro Blanco underground gold project in Guatemala. Its underperformance in 2021 was related to delays in catalysts due to the impacts of the COVID-19 pandemic. The company re-started its drill program in October 2020 and is generating some significant high-grade infill results. The current Measured and Indicated resource contains ~1.4 million ounces at 10.3 grams per tonne gold.
Its current valuation suggests that BSR is trading at a 1.2x multiple to the NPV@5% value from its January 2019 feasibility study, which was done at a gold price of US$1,250 per ounce. The current price is well over US$1,800. At US$1,500 and US$1,700 per ounce, the company would trade at a 0.7-0.8x and 0.5-0.6x discount, respectively. The next significant catalyst is the financing package for the development of the project.
What investments would you avoid next year?
Although the desire to add more ounces to maintain or grow production profiles combined with a lack of development projects in the pipeline of many gold producers suggests that M&A will be important, the emphasis may be on projects that work under lower gold prices (<US$1500) as producers are still using much lower gold prices to book reserves. In addition, assets within countries where companies are already operating may be a priority. Therefore, I will avoid marginal greenfield assets in out of the way countries.
The number of financings in the junior market has added more companies and new management teams with a focus on promotion over substance. I will avoid those.
I will also avoid companies advancing assets in small niche commodity markets. However, if a company such as Energy Fuels (EFR.T, UUUU.NYSE), which I own shares of for their leverage to a rebound in the uranium market, makes a foray into the REE market, I don’t mind reaping the benefits.
As equity investors, we need the share price to go up to make money. Therefore, the denominator (number of shares) matters as much as the numerator (asset value). I will avoid companies with an excessive amount of potential dilution from warrants and options, or with a significant amount of shares that were acquired at a low cost that are held by weak hands.
In the end, I want to add or maintain exposure to mining companies led by quality management teams with the potential to discover or develop high margin projects in jurisdictions that have a history of permitting and developing mining projects.
What do you think are going to be the big themes next year: M&A activity, earnings, exploration, record gold prices?
Major themes that will influence my portfolio of mining equities include the following:
Precious metal producers will continue to generate free cash flow at these gold and silver prices, which will offset any minor production shortfalls due to the COVID-19 pandemic. For example, Pan American Silver Corp. (PAAS.T, PAAS.NASDAQ) generated US$292 million in operating cash flow, a 54% increase versus the same period last year despite production shortfalls (35% drop in silver) as in Q3 alone its realized gold and silver price was up +44% and +30%, respectively.
The healthy balance sheets will allow the companies to not only consider lifting their dividend yields – Pan American Silver increased its dividend yield twice in 2020 – but also to add to their project pipeline to maintain or even grow their production profiles.
Granted, growth is easier for mid-tier precious metal producers than the few major producers such as Barrick Gold (ABX.T, GOLD.NYSE) and Newmont Corp. (NEM.NYSE, NGT.T). The additions will come in the form of increased exploration budgets and/or more JVs with juniors, M&A for single asset producers, and advanced development projects. For example, recently, Equinox Gold (EQX.T, EQX.NYSE) bid on Premier Gold (PG.T, PIRGF.OTC) for its 50% stake in the multi-million ounce, permitted open-pit Hardrock gold project in northern Ontario.
In addition, the majority of M&A transactions by non-state-owned entities since Barrick Gold’s (ABX.T, GOLD.NYSE) merger of equal (MOE) acquisition of Randgold has been executed with no premium, which shareholders find more appealing than the plethora of dilutive M&A completed during the last cycle.
The four-month hold for the significant amount of equity financings will continue well into February 2021, may put some pressure on junior explorers. The funds have been used to support exploration activities and G&A, which includes investor relations as promotion seems to have eclipsed positive news flow from exploration activities as a major driver for positive share price movements. This trend may continue in 2021.
Despite the positive trend in commodity prices, a company with an asset that becomes a lightning rod for NGOs, locals, and other stakeholders will not outperform the market. For example, Northern Dynasty Minerals (NAK.NYSE, NDM.T) was up ~450% to a July 2020 peak of US$2.34 per share; however, a negative record of decision on its Pebble copper-gold project in Alaska dropped its valuation by 85%. Year-to-date, it is down over 20%. Under a Biden administration, permitting in the U.S. may take longer for projects on federal land.
Several vaccines have been developed for the COVID-19 virus, but many countries may not develop a ‘herd immunity’ and return to ‘normal’ activities before the summer of 2021. Therefore, the impacts on slow assay turnaround times (6-8 weeks vs. 3-4 weeks), reduced operational efficiency, especially in underground mines in Latin America, and travel restrictions that will slow due diligence for M&A, financings (debt) and joint ventures may continue into the summer.
The pandemic’s negative impact on many emerging, developing and advanced economies may accelerate the development of palatable development projects to generate employment and export revenue. A Biden administration may continue to seek to contract supply chains leading to more domestic production of critical minerals (REEs) and potentially to protect the uranium industry.
On the other side of the coin, miners generating significant free cash flow from assets in emerging markets may be subject to creeping nationalism in an effort to get a bigger share of the rents.
What are your final comments on what you think 2021 is going to look like for investors?
The Biden presidency will change the outlook for mining companies operating in the U.S. as permitting may take longer and those emitting significant greenhouse gases will be negatively impacted like coal companies. But I think that this administration will not be shy about spending its way out of the current economic slowdown and look at protecting local industry, which may be good for uranium.
China’s interaction with its major customers (U.S.) and sources of raw materials (Canada and Australia) are getting problematic. Recently, China’s Shandong Gold attempt to acquire TMAC Resources (TMR.T) has been shut down under the Investment Canada Act (Canada) and the parties are in discussion regarding terminating the transaction. Relations between China and Australia continues to deteriorate as 8.1 million tonnes of coal is currently stranded in 74 ships off of Chinese ports.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Wallace Precious Metals The author has made every effort to ensure accuracy of information provided; however, neither Wallace Precious Metals nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Wallace Precious Metals and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
