What potential for gold and gold Mines? - Interview with Charlotte Peuron, Fund Manager, CM-AM Global Gold

What is driving gold and gold related companies today?

Persistent inflationary pressures, the war in Ukraine and all its consequences (such as soaring energy and agricultural commodity prices, etc.), as well as the recovery of the Covid-19 crisis, especially in China, with severe containment, have radically changed the economic, political and financial landscape in the first half of 2022. Investors are concerned about the prospect of the global economy entering stagflation and/or recession. This environment is favorable for gold and gold equities. Indeed, demand for gold exchange traded funds (ETFs) picked up significantly during the Russian invasion of Ukraine.

In terms of short term financial indicators, inflation forecasts and geopolitical crises overshadowed real interest rates and the dollar, which are still drivers to watch.

Finally, the lack of calm in financial markets towards companies (risk of their revenues with the economic slowdown, risk of margins and earnings related to inflationary pressures) is also a supporting factor for the precious metals sector.

How do precious metal companies perform?

We met with precious metals companies representatives at a conference in early March. They remain focused on controlling production costs, which will increase by an average of 10% in 2022. Like other companies, they experience varying degrees of inflationary pressure depending on production areas and types of mines (energy cost, wage pressures, higher prices of consumables such as steel, etc.). This is what we saw during the Q1 2022 earnings season. This partly explains the correction in April and May, the second being due to the fall in equity markets.

However, with metal prices remaining elevated and production growing, we expect margins for these companies to remain at historically high levels in 2022.

We also believe that industry consolidation should continue. As this sector is cyclical, companies need to continue to diversify, either at the level of the mined metal or at the country level or both. For example, at the end of May, Goldfields has just made an offer on Yamana Gold. These factors should enable companies to perform well this year. The royalty companies segment is not spared from this move; on the contrary, Sandstorm Gold has just acquired NOMAD Royalty.

How is your fund positioned?

CM-AM Global Gold currently holds more than 87% in precious metals companies and more than 71% in gold companies. Producers of other precious metals (silver, palladium...) represent more than 6.5% and 9.5% for royalty companies positioned on precious metals. In order to take advantage of the positive long term trend in copper prices, we also have nearly 9% invested in copper producers, which also extracts gold as a ‘by product,’ both metals being often in the same field.

In the gold sector, we currently favour large producers (production above 1.5 Moz) such as Agnico Eagle and Newmont, which are often sought by general investors during bullish accelerations. They have a large number of assets, they are less risky and they are more liquid. It is then that investors seeking more growth or optionality look to smaller companies. So it's in this area that we're looking for new quality investments. For example, we recently invested in I-80 Gold. It is a Canadian producer and developer (830 CAD capitalization). The company will produce 4 assets in Nevada (particularly attractive jurisdiction despite the recent hike in royalty rates). Thus, the production of the company will increase over the next few years to reach 400 oz at the end of 2024 (2022 being the first year of production) with ‘total costs’ less than $1000 per ounce. With the current high gold price, operating leverage and production growth, the company is expected to generate the cash flow needed for its growth and create shareholder value. Today we own almost 1.9%.

As for royalty society, there are also concentration movements. In addition, we replaced NOMAD Royalty, which is the subject of a Sandstorm bid, by Osisko Royalty, which holds a royalty on the Malartic mine in Canada.

What are your main convictions?

Within Majors, we particularly like Endeavour Mining (4.4% of our portfolio). The company specialises in gold production at mines in the western Horn of Africa, including Burkina Faso, Ivory Coast and Senegal. The company has been able to make acquisitions at the right time (Semafo finalized in 2020, then Teranga finalized in February 2021), and will produce more than 1.4 Moz this year with total costs of between $880 $-930 per ounce. Management has just noted the expansion of Sabodia Massawa, which will allow production growth in the coming years. This development will require only $290M of investments and offers a robust IRR of 72% to $1700 per ounce (company data, April 2022).

We also favour copper and gold stocks such as Freeport McMoran (3.2% of our portfolio). This includes Grasberg in Indonesia, one of the largest copper and gold mines in the world, and is also the largest copper producer in the United States. In 2022, Freeport will produce 3.4 copper MLB and 1.3 gold Moz (company data, February 2022). We also recently invested in Filo Mining (1% of the portfolio): An exploration company with a very promising copper and gold asset on the Argentine and Chilean border.

What is your market outlook for the rest of 2022?

Given the economic, geopolitical and financial environment, gold and precious metal companies should perform well, while maintaining high volatility this year.