Gold Miners React and Ready For More

Gold Shifts on Yields, Miners Follow

Gold’s response to changes in U.S. Treasury yields persisted through April, as prices trended to a monthly high of $1,798 per ounce on the 22^nd while, at the same time, 10-Year yields fell to a monthly low of 1.53%. To end the month, yields reversed course from their lows and gold eased to $1,770.55—eventually ending April with a gain of $63.55 (3.6%).

Gold stocks trended higher than gold as the NYSE Arca Gold Miners Index (GDMNTR)¹ and MVIS Global Junior Gold Miners Index (MVGDXJTR)² gained 7.1% and 7.4%, respectively, to end the month. Senior/Major gold miners have been outperforming gold since mid-March and on 15 April GDMNTR broke out of its correctional downtrend. Outflows in the VanEck Gold Miners UCITS ETF (GDX) since January have also reversed course. While further evidence is needed to confirm the break-out – i.e., more persistent, positive performance – we believe gold stocks might just be reflecting an end to the recent, ongoing correction in gold.

Dollar Weakness Finally Settling In?

The U.S. dollar index (DXY)³ failed to advance during the month, despite the late move in yields and positive reads on economic indicators in manufacturing, jobs, retail sales, and consumer confidence. DXY’s April decline marks a pause in the dollar’s strength which has, otherwise, been mostly resilient for a majority of 2021 thus far.

In its first 100 days, President Biden’s Administration has unveiled a $1.9 trillion pandemic relief plan, a $2.25 trillion infrastructure plan, and a $1.8 trillion American families plan [while we’re at it, why not add some needed fun to the government’s largess with a $1.3 trillion vacation plan at $10,000 a household?...kidding, of course]. The U.S. dollar’s weakness might be in response to this unprecedented deficit spending and plans for higher taxes. Over the past year, the gold market has been driven by yields, while the U.S. dollar has been a secondary driver. However, if the U.S. dollar goes into a persistent decline, it might again become the primary driver for gold.

Recovering Central Bank Demand

The World Gold Council reported net central bank purchases of gold in excess of 95 tonnes during the first quarter. This was surprising to us, given China and Russia’s lack of involvement in the buyer’s market and central bank demand stumbling after the pandemic had set in. Most of the buying came from India, Kazakhstan, Uzbekistan, and Hungary. The Hungarian National Bank stated in an 7 April press release: “Managing new risks arising from the coronavirus pandemic also played a key role in the decision. The appearance of global spikes in government debts or inflation concerns further increase the importance of gold in national strategy as a safe-haven asset and as a store of value.” We believe the lack of consistent buying by China and Russia likely underlies the World Gold Council’s characterization of central bank demand as “large, sporadic purchases and sales”. Nonetheless, many countries still see a need to increase reserves and general central bank demand looks to be trending back to pre-pandemic levels.

Gold Pennant

The price chart below depicts gold’s correction from its peak of $2,075 per ounce in August 2020. We believe price trends have formed a “pennant pattern” (in technical analysis, a term used to describe a security’s continuous pattern of consolidation then breakout) which will last, at most, into the summer when gold either breaks above the pennant with strength, or else falls below with weakness. If we knew which way gold might go, we’d likely be writing this commentary from a yacht in Saint Tropez…again, kidding.

Instead, here is our best guess (from an office somewhere in midtown Manhattan): Gold successfully tested the base of the bull market trend in March with a double-bottom and is now positioned in the middle of the pennant where the base is around $1,700 with a top at $1,870, in our view. If the advance in U.S. bond yields has run its course—and if the U.S. dollar has resumed its general downtrend—then two major headwinds to gold will have been removed. Gold stocks are reacting as expected and the systemic financial risks we often talk about have not gone away. Thus, our guess is that, by mid-year, gold may successfully test the top of the pennant to confirm the bull market trend.

Show Me the Way to Saint Tropez!

Source: VanEck, Bloomberg

Margins Still Intact For Miners

The drop in gold prices below $1,700 in March warranted no concerns on the part of the miners, who continued to report strong cash flow. Cost guidance and forecasts for 2021 have been registered across the Senior/Major and mid-tier producers*. While most analysts see low, single-digit cost inflation in 2021, longer-term forecasts see all-in sustaining costs (AISC)** remaining around the $1,000 per ounce level. We estimate average 2021 AISC 4% higher than 2020 at $1,047 per ounce for our coverage universe. We expect the companies in our portfolio to have an average AISC of $1,023 in 2021; Scotiabank estimates AISC up 2% at $1,030 per its April gold industry report, while Bank of America estimates costs up 5% at $1,024 per its April special gold report as highlighted by Bloomberg.

The main drivers of higher 2021 costs:

• Royalties, some of which escalate with gold prices
• Sustaining capital, some of which was deferred from 2020 due to COVID
• Fuel – Scotia reckons that a $10 per barrel move in oil increases costs by approximately $6 per ounce
• Incremental COVID costs range between $10 and $20 per ounce

Other cost drivers that may surprise in 2021 are steel prices and currency strength in Canada and Australia. Also, during its latest quarterly earnings report, Caterpillar has warned of chip shortages that may impact equipment production in the second half.

Keeping Costs in Check

Companies are doing a better job of controlling costs in this cycle than we have ever seen. The AISC chart below shows how costs have risen and fallen with the gold price historically. Notice how costs have remained around $1,000 as the gold price rose to over $2,000 in 2020. Scotia estimates a small decline in costs through 2023.

Cost Containment Remains High Priority

Source: Scotia, VanEck

Costs have been contained because companies are more focused on operational efficiency and less obsessed with growth. Building mines is fraught with risks, so companies no longer attempt to build multiple mines at once. In this cycle, we are seeing companies sequence developments in order to achieve a manageable pace and avoid costly mistakes. More capital is also being used to fund lower risk brownfield projects that typically carry higher returns than new developments.

Technology: Laying the Groundwork for Future Growth Opportunity

Another major contributor to containing costs is the adoption of new technologies. For example, on 29 April, Newmont (6.9% of Fund net assets as of end-April) announced first production from an autonomous haulage system at its Boddington gold and copper open pit mine in Western Australia. Autonomous haul trucks have lower maintenance, fuel, and labor costs than traditional haul trucks. Once the system is established at Boddington, Newmont will look to implement autonomous haulage at other mines globally.

It’s not just Seniors/Majors who can benefit from technology either. Junior developer Osisko Development Corp. (not held by the Fund) is testing an ore sorter at its Cariboo Gold Project in British Columbia. Ore sorting can only work in deposits that have the right mineralogy. It uses optical or x-ray transmission sensors to remove unmineralized material from the mill feed. This increases the grade and lowers the tonnage that must be processed. Results have been very encouraging. Compared to traditional processing, Osisko’s tests show 50% less material passing through the plant, processing and capital costs reduced by 25% to 30%, 50% less process water used, 50% less power to the concentrator, and 50% less tailings capacity needed.