Rosenberg on Gold

Gold is inversely correlated with either near zero rates, zero rates, or negative rates which makes it an ideal investment. Mark Twain coined the phrase “Lies, damned lies, and statistics”. But the thing about charts is that they don’t lie. Gold went through a long-term, multi-year basing period. Now, it has broken out and the chart looks fantastic. Also, gold is no country’s liability. For example, in the United States M2 growth is running at double digits. So when you compare the new supply of gold against the supply of money coming into the system from Central Banks, to me it’s a very clear cut case that you want to have very high exposure to bullion.

David Rosenberg, “Gold is an Ideal Investment”

GOLD:SPX Racing Form, 1975-2020

The Gold:SPX has successfully retraced 78.6% of its 2000-2011 move, and appears to be moments away from completing its post parade…

Bettors, it’s almost post time!

I’ve got Equinox and Victoria down for an Exacta in the first race and thoroughbred banker First Majestic to Win and quarter horse Fortuna to Place in the second, though we like to keep tabs on Endeavour, which tends to find its legs in the backstretch. I’m a sucker for long-shots so I plan to stick around late for the third race and place a big bet on colt Aurcana to Win in its maiden race with bug boy Brian Briggs in the saddle.

Incorrigible mudlark Bear Creek is another favorite. We think his post parade shenanigans with lead ponies, tendency to bolt in the homestretch and graceful nodding across the finish line are classy traits.

$TSRMF : Treasury Metals — Independent Economic Analysis

Updated, 14 January 2020

Long-Term Price Case$1,700/oz. Au & $24/oz. Ag
Flagship ProjectGoliath
Mineral Resources (Measured & Indicated)1,174,668 AuEq ozs.
Shares Outstanding159,570,255
Market Cap$33,749,109
Average Annual Production90,100 AuEq ozs.
Payable Product1,171,294 AuEq ozs.
LoM13 years
True All-in Cost (TAIC) $1,001/oz.
Gross Revenue$1,991,199,800
Smelting & Refining($5,376,239)
Total Operating Costs($622,637,915)
Total Capital Costs ($203,581,223)
Net Income$818,808,011
Net Profit Margin41%
Absolute Cost Structure (ACS)59%
MTQ Score0.7
True Value $5.13/sh.
True Value Discount96%
Cash Flow Multiple10x
Average Net Annual Cash Flow62,679,900
Future Market Cap629,799,000
Future Market Cap Growth1,766%

Notes: All Values in U.S. Dollars

Were Goliath in production at $1,400/oz. Au, it would earn roughly 34 cents on every dollar it collects. From there, Net Profit Margins improve incrementally as the fundamental gold picture improves. An Absolute Cost Structure (ACS) of 59%* makes this possible. What is more, the ACS declines by ~11% as gold prices move from $1,400 to $1,700. It is this factor which underpins the improvement in Net Profit Margins.

We have learned to shy away from enterprises (catastrophes?) that cannot manage to rein in their ACS, but Treasury Metals is an example of a future gold producer that makes the cut.

*You’ll see plenty of ballyhooed Before-Tax Cost Structures below 50%, but they aren’t an accurate representation of reality. If you can find a gold producer with an ACS under 70%, you may have stumbled upon a real gem, though abiding by non-GAAP in your analysis won’t help you find gems. Which is to say, one must find new methodologies that enable one to push beyond AISC & All-in Costs in pursuit of extended valuation factors such as True All-in Cost and Absolute Cost Structure.

$ALO : Alio Gold – Independent Economic Analysis

Updated, 8 January 2020

Long-Term Price Case$1,700/oz.
ProjectFlorida Canyon
Mineral Reserves1 Mozs.
Shares Outstanding84,700,000
Market Cap$65,219,000
Average Annual Production85,000 ozs.*
LoM9.8 Years
Payable Product734,200 ozs.
True All-in Cost (TAIC) $1,283/oz.
Gross Revenue$1,248,140,000
Refining Charges($3,369,978)
Gross Income$1,187,355,582
Total Operating Costs($662,900,000)
Operating Profit$524,455,582
Income Taxes($136,358,451)
Total Capital Costs($81,900,000)
Net Income$306,197,131
Net Profit Margin25%
Absolute Cost Structure (ACS)75%
Total True Value$3.62/sh.
Cash Flow Multiple5x
Average Net Annual Cash Flow$35,445,000
Future Market Cap$177,225,000
Future Market Cap Growth172%

Notes: All Values in U.S. Dollars

Alio Gold, with Mark Backens at the helm, has done more soul-searching than is common for a small producer. As a result, it has rapidly been transformed into an enterprise with few illusions and a no-nonsense mission.

At Fahy Capital Management, we typically invest in the deposit first and management second, but the reverse is true with Alio Gold. With this particular investment, we are primarily investors in Mark Backens, as he has made the hard choices required to bolster shareholder confidence.

From the bold sale of non-core assets and the negotiation of a smart financing package with Sprott to the recent lease agreement with Caterpillar and the swift development of a critical Phase II leach pad, Backens has attacked Florida Canyon with a laudable all-or-nothing attitude. He has spearheaded a right-sized capital spending program that is effecting material results for shareholders. He has transitioned San Francisco to residual leach, while pursuing a potential monetization of the mine. Meanwhile, spending at Ana Paula has been reduced to holding costs until the asset is monetized or a JV** is in place.

In closing, as we are confident that Alio Gold will boost production by up to 50% at Florida Canyon in 2020 and grow mineral inventory through brown field exploration, we have boosted our stake for the 3rd time in 24 months.

*For the time-being, we have included an approximately 12,500 ozs. of residual leach output from San Francisco in our valuation model. This will taper down over time.

**We think a JV is the ideal path forward for Ana Paula, an asset on which we have spent a lot of research hours, as well as one that we believe will prove of value to shareholders in the latter half of the decade.

$THM : Tower Hill Mines — Independent Economic Analysis

Long-Term Price Cases$1,700 oz. Au
Shares Outstanding187,111,857
Market Cap99,169,284
ProjectLivengood Gold Project
Reserves9M ozs. Au
Average Annual Production294,100 ozs.
Payable Gold6,763,900 ozs.
LoM23 Years
True All-in Costs (TAIC)$1,412/oz.
Gross Revenue$11,498,630,000
Total Operating Costs ($4,586,129,395)
Operating Profit (EBITDA)$6,567,541,705
Income Taxes($1,773,236,260)
Total Capital Costs($2,847,000,000)
Net Income$1,947,305,445
Net Profit Margin17%
Absolute Cost Structure (ACS)83%
MTQ Score (Higher is Better)0.2
True Value$10.41/sh.
Cash Flow Multiple5x
Average Net Annual Cash Flow$84,700,000
Future Market Cap$423,504,000
Future Market Cap Growth327%

Notes: All Values in U.S. Dollars

Net Profit Margin is slim and Absolute Cost Structure is bad but scale works nonetheless for Tower Hill Mines, a fact that hasn’t gone unnoticed by the likes of John Paulson and Electrum. We became shareholders on 31 December 2019.

Expectations for Gold Remain Low While Key Gold Indicator Wallows in the Dumps

The Grasberg-Saville Gold Rating remains firmly ensconced in bear territory this week. This is the Rating’s 13th such week signalling persistent bearish fundamentals for gold.

Although TIPS continue to consolidate above support, the KBW Bank Index Inverse Change Ratio continues to plummet, with the underlying Index rocketing northward for the second month above the key 104.43 breakout level. The 30s/Dollar Ratio and the 30s/5s Yield Curve Change Ratio also are under pressure.

We are paying particular attention to the KBW Bank Index ($BKX). It is set to open 2020 with a bullish bias in price-neutral territory. If it continues to rise, we expect selling at 117.36, which should afford gold a bit of relief. Selling could also hit the Index well-ahead of 2020 initial resistance, which also would bode well for gold.

$TGB : Taseko Mines — New Prosperity… What if?

Long-Term Price Cases$3/lb. Cu, $1,700/oz. Au, $24/oz. Ag
ProjectNew Prosperity
M&I Resources12,836,666,667 CuEq lbs.
Average Annual Production247,911,111 lbs. CuEq
CuEq Recovery64%
Payable Copper3,648,000,000 lbs.
Payable Gold7,720,000 ozs.
Payable Silver19,800,000 ozs.
LoM33 Years
True All-in Costs (TAIC)$1.55/lb. CuEq
Gross Revenue$24,543,200,001
Total Operating Costs ($6,664,337,195)
Operating Profit (EBITDA)$17,878,862,806
Income Taxes($4,827,292,957)
Total Capital Costs($1,149,157,800)
Net Income$11,902,412,049
Net Profit Margin48%
Absolute Cost Structure (ACS)52%
MTQ Score (Higher is Better)0.9
Estimated Average Net Annual Cash Flow Contribution at the Long-term Price Cases$359,471,111

Notes: All Values in U.S. Dollars

An encouraging development at Taseko this week:

The Tŝilhqot’in Nation and Taseko have agreed to an outstanding litigation freeze, while the parties engage in what we hope proves a fruitful dialog aimed at the resolution of a decade-long conflict.

Were a resolution to be reached and development of the New Prosperity Project green-lighted, Taseko would be catapulted into the top ranks of North American mid-tiers.

New Prosperity is one of our favorite development-stage Projects and our economic analysis demonstrates why.

It’s time to pray!

$OGLDF : Otis Gold — Independent Economic Analysis

Long-Term Price Case$1,700/oz. Au
Flagship ProjectKilgore
Ownership100% (Royalty-Free)
Indicated Resource825K ozs.
Shares Outstanding175M
Market Cap$12,057,500
Average Annual Production111,700 ozs.
RecoveryCrush: 82%/ROM: 50%
Payable Product558,700 ozs.
LoM5 Years
True All-in Costs (TAIC)$1,239/oz.
Gross Revenue$949,790,000
Total Operating Costs ($435,570,000)
Operating Cash Flow (EBITDA)$514,220,000
Income Taxes($159,408,200)
Total Capital Costs($97,460,000)
Net Income$257,351,800
Net Profit Margin27%
Absolute Cost Structure (ACS)73%
MTQ Score (Higher is Better)0.4
True Value$1.47/sh.
True Value Discount (TVD)95%
Cash Flow Multiple5x
Average Net Annual Cash Flow$51,493,700
Future Market Cap$257,468,500
Future Market Cap Growth2,035%

Notes: All Values in U.S. Dollars

The kind of arrangements about which we daydream don’t happen too often, but there’s no practical reason why some of them couldn’t. For instance, we’d like to see an Otis/Bullfrog business combination.

I try to avoid as much modernist lingo as possible, including the catchword, ‘synergy.’ Which is to say, I don’t necessarily think an Otis/Bullfrog business combination would necessarily prove ‘synergistic.’ Rather, a single entity could better benefit from an economy of scale, enabling it to quickly fund additional inorganic growth.

I have also imagined an interesting three-way merger: Otis + Bullfrog + Paramount.