I started Thanksgiving shopping a little early this past week.
New COVID cases are starting to climb here in Maryland, and I wanted to get out in front of any potential retail hoarders this holiday season.
Judging from the paper products aisle at my local Target, that instinct was mostly correct.
Source: Target, Selfish People
But the moment I walked into Whole Foods, however, I heard something that stopped me dead in my tracks.
The moon is right…
The spirits up…
We’re here tonight…
And that’s enough…
Christmas music. A full week before Thanksgiving… are you kidding me, Whole Foods?
In any normal year, that would drive me up a wall. But with 2020 being probably the worst year on record for a whole lot of folks, I do kind of get it… people just want something to look forward to. So I just put it out of my mind and went about my business.
It did get me thinking, however.
Although most people I know think it’s almost sacrilegious to make any reference to Christmas before Thanksgiving – much less start in on the carols – there was always one exception when we were kids.
Unbridled Avarice Versus Bargain Shopping
When I was growing up in the 1980’s, the centerpiece of any solid list for Santa was always sourced from one of a handful of holiday retail catalogs.
And despite the complaining we hear today about Christmas marketing creeping further up into November, these suckers showed up in our mailboxes by late August.
For me, it offset the humdrum of back-to-school season by offering a glimpse of something to which I could look forward.
The Sears Wish Book, JCPenney Christmas Catalog, Montgomery Ward’s – many of which have been scanned and compiled on this website – any one of them could provide an endless stream of dreams and schemes, all fueled by hopes of a successful sales pitch to Mom and Dad.
Much like Ralphie and his brother in the movie A Christmas Story, my brother and I would dive into the catalog filled with “desire and the ecstasy of unbridled avarice” only to put together a list resembling a small novel.
And although time marches on, some things don’t really change… my 6-year old daughter is doing the same thing to me with the newest American Girl catalog.
If any of you have young daughters, then you know I’m in trouble… because that stuff is expensive.
So much so that my wife has been scrolling through their website, looking for anything on the Christmas list that has a coupon, or otherwise is being discontinued, as those are generally sold as less expensive closeouts.
And that reminded me of a presentation I gave a long time ago with legendary resource speculator Rick Rule. In it, as per our usual arrangement, I talked mostly about markets and he talked mostly about investing philosophy.
And one comment he made – which always gets a big laugh – is that men always need to ask their wives for investing advice. Why, you ask?
Because they know that the best time to buy things… is when they’re on sale.
So let’s clip some coupons.
Gold Correction Puts Mining Companies on the Sale Rack
As investors have flocked to risk assets in the wake of vaccine pump after vaccine pump, they have mostly rotated out of one of the best performing asset classes of 2020 – gold.
Today, it finally broke through the $1,830/oz support level I suggested would fall back in October, and is knocking on the door of its next support point at $1,800.
I wrote in that same issue that in the event gold falls through any support points, I want to pick up another ¼ stake of Proshares Ultra Gold (NYSEArca: UGL) and Proshares Ultra Silver (NYSEArca: AGQ) there… well, here we are.
It’s looking like there are a lot of bids at this level – which is good to see – but ultimately, I think we’re headed down to the midpoint of this year’s massive run.
That level, highlighted in blue here, is around the $1,750 mark, and represents the top end of gold’s range for much of the spring. To get there, prices will have to pass through both $1,800 and the 200-day moving average at $1,794 per troy ounce.
Once below the 200-day, it will require a catalyst to dig it back out – something I have suggested will ultimately come in the form of infrastructure.
But given President-Elect Joe Biden’s recent nomination of former Federal Reserve Chairman Janet Yellen to head up the Treasury Department, I suppose it could also come in the form of good, old-fashioned money printing.
Either way, gold is set to benefit, and I’m comfortable holding through any near-term weakness. If the bottom begins to fall out, I can simply close the position to short the last leg down.
But unlike the yellow metal, that last leg is starting to affect gold miners, as they have almost universally moved through their 200-day moving averages already.
This trend provides us an opportunity to look through the sector… to see what’s going on sale.
And just like I used to do when I was a kid, I’m going to make a Christmas list.
Making a List, Checking it Twice
One way to approach the market would simply be to look at the largest producers first. The data from the list below – although not exhaustive – I quickly pulled from Bloomberg.
You might find it interesting that when I pull a few of those top producers into a single chart, they’re all pretty much shaped the same.
In short, the larger companies tend to move alongside gold prices, usually making slightly larger movements on a percentage basis than those of gold itself. That volatility in relation to the underlying commodity means that major miners have a larger beta than that of a gold ETF, for example.
Honestly, any of these stocks would serve just fine, as they’re all set to make fantastic margins even if gold pulls back as discussed. But a quick look at their costs can tell us who’s making the biggest margins.
Now the first two are data aggregation errors of some sort, as I know for a fact that DRDGOLD and Harmony’s costs exceed $1,000/oz, but the others look correct at a glance.
But the rest of these companies down through Golden Star Resources are making money hand over fist, even in the event of a gold price correction down to $1,700.
So the risk that remains in these operations mostly comes down to where the operations are. In an uncertain economic environment, I want to stick mostly to size, and to reasonably predictable jurisdictions like the Americas and Australia.
For example, although Alacer’s mine is the lowest cost on this list, it is located in Turkey. If I have a choice, I’d prefer not to have much exposure there simply because of the country’s financial instability.
Similarly, Centerra’s operations are located in Kyrgyzstan and Mongolia, which are a little too close to China for my liking.
Source: Bloomberg, Seawolf Research
In other words, these mining companies should be going way up… not down.
Even better, other than Barrick Gold’s Porgera mine in Papua New Guinea and Newmont’s assets in Ghana, almost all of their operations are in countries with little jurisdictional risk.
As such, they’re a good couple of names to start our Christmas list with.
I’m interested in both, right around the halfway points of their most recent runs. That means Barrick below $22.50 and Newmont below $55.
In the next tier of cash flow machines, Kinross has some jurisdictional risk, as a significant part of its production comes from two mines Russia – Kupol and Dvoinoye.
Similar to Barrick and Newmont, I like each of them below the halfway point of this year’s run. For Agnico Eagle, that means below US$60 per share, and for Kirkland Lake, below the US$38 mark.
And finally, for those interested in taking on a little bit of jurisdictional risk, there’s Mali-based B2Gold (NYSE: BTG). Their Fekola mine is a fantastic operation, and even better they’ve recently expanded capacity by 25%.
Cash flow has been increasing from that mine for years, and with 2020 production now expected to come in at 600,000 ounces at an all-in cost of $800, it’s hard to pass up should it get down below the US $5 per share mark.
That would bring it back to around pre-virus highs, which is still a solid value considering most analyst price targets are in the $9-12 per share range.
There are others on the list worthy of consideration too.
I thought Yamana Gold was under-loved during this year’s rally.
Endeavor Mining just announced a merger with Teranga Gold, creating a new senior producer.
And Equinox Gold – chaired by no less a legend than the great Ross Beaty – acquired Leagold last year and doubled its production profile. Ross himself picked up shares at around the US$6 mark (on the US exchanges), which I still think was an absolute steal.
But I’ll leave adding to this list for another day.
In the meantime, I have to check and see if my daughter is behaving… if she’s not, I’m not adding to her list either!
All the best,