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Seeking Free Cash Flow? Gold and Precious Metal Miners Have Got You Covered

Summary:
Physical gold continued to catch a bid this week, trading above ,760 an ounce, on a host of head-spinning economic news, from millions more Americans filing jobless claims to record money-printing to negative oil prices. The national average price for a gallon of gasoline fell further to .78 on Friday, down more than a gallon from a year ago. But the lowest price in the country may belong to a Shell station in Francis Creek, Wisconsin, which is reportedly selling (giving away?) gas for %excerpt%.75 per gallon, according to GasBuddy’s Patrick De Haan. The seriousness of the coronavirus-fueled recession is reflected in April’s preliminary health reading of America’s manufacturing and service sector industries. The composite purchasing manager’s index (PMI) plunged to 27.4, a new series low,

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Physical gold continued to catch a bid this week, trading above $1,760 an ounce, on a host of head-spinning economic news, from millions more Americans filing jobless claims to record money-printing to negative oil prices.

The national average price for a gallon of gasoline fell further to $1.78 on Friday, down more than $1 a gallon from a year ago. But the lowest price in the country may belong to a Shell station in Francis Creek, Wisconsin, which is reportedly selling (giving away?) gas for $0.75 per gallon, according to GasBuddy’s Patrick De Haan.

The seriousness of the coronavirus-fueled recession is reflected in April’s preliminary health reading of America’s manufacturing and service sector industries. The composite purchasing manager’s index (PMI) plunged to 27.4, a new series low, as companies were shuttered and millions of non-essential workers were furloughed or laid off. A staggering 26.4 million people, or about 15 percent of the U.S. workforce, have now lost their jobs since mid-March due to the Great Lockdown.

Seeking Free Cash Flow? Gold and Precious Metal Miners Have Got You Covered

“The scale of the fall in the PMI adds to signs that the second quarter will see an historically dramatic contraction of the economy, and will add to worries about the ultimate cost of the fight against the pandemic,” writes Chris Williamson, chief business economist at IHS Markit, which produces the monthly business survey.

Some U.S. states are slowly starting to reopen their economies, and I’m eager to see what effect this might have on May’s PMI. If it turns up, it could indicate the bottom is behind us. The most aggressive of any state right now appears to be Georgia, whose governor, Brian Kemp, has come under fire by even President Donald Trump for allowing high-risk businesses such as gyms and hair salons to open their doors to customers. The southern state processed more unemployment claims in the last week of March than it did in all of 2019, according to CityLab.

Fire Up the Money Printers…

Bloomberg reports that in the month of March, central banks in Group of Seven countries purchased some $1.4 trillion in financial assets in an effort to soften the blow of the pandemic. That’s nearly five times the previous monthly record set in April 2009, when the world was dealing with what was then the worst crisis since the Great Depression.

Meanwhile, world governments have unleashed a combined $8 trillion in fiscal stimulus, with more on the way. This week alone, the U.S. House of Representatives approved, and the president signed, an additional $464 billion in relief for small businesses that have been impacted by the economic downturn, as well as funding for hospitals and testing.

For fiscal year 2020, the federal budget deficit could hit an incredible $3.7 trillion, the Congressional Budget Office (CBO) said on Friday. That would be its largest size as a share of the U.S. economy since World War II.

Right now the U.S. is printing money on a scale we’ve never seen. The amount of M2 money supply—which includes cash and “near money” such as savings deposits, money market securities and mutual funds—has raced up 16 percent compared to the same time a year ago. That may not seem like much, until you put it in an historical context and see just how significant the ramp-up really is.

Seeking Free Cash Flow? Gold and Precious Metal Miners Have Got You Covered

Physical Gold Is Glittering, but Don’t Overlook Gold Mining Stocks

All of this is constructive for the price of gold, which I believe is on a path to exceed its previous record of $1,900 an ounce. Analysts at Bank of America now see the precious metal touching $3,000 within the next 18 months.

And if that happens, just wait and see what gold mining companies do.

Shares of senior producers, as measured by the FTSE Gold Mines Index, are up close to 20 percent for the year, but for the 10-year period they still trail the metal’s spot price performance. I believe this makes the group an attractive investment opportunity, especially now that gold mining is one of the few industries generating strong revenues and free cash flow on higher metal prices.

Seeking Free Cash Flow? Gold and Precious Metal Miners Have Got You Covered

Think about it: With more than 26 million people applying for unemployment benefits in the past month and a half, many S&P 500 stocks’ revenue will dry up. Gold stocks should shine, by comparison, and I predict we’ll see new buyers who focus on companies with free cash flow, one of the best metrics of profitability.

Take a look below. What you see are the most profitable precious metal mining stocks with a market cap of $1 billion or more, based on free cash flow yield (FCFY). This is a metric that basically tells you how much cash the business is generating after taxes relative to how much it costs to operate. The lower the number, the less cash it’s making. The higher the number, the more cash it’s making.

Included in this list are highly liquid, mega-cap producers like Barrick (3.9 percent FCFY) and Newmont (also 3.9 percent), smaller firms such as the Russian Highland Gold Mining (5.4 percent) and everything in between. One royalty company, Wheaton Precious Metals (3.8 percent), is also represented.

Topping the list is intermediate miner Alacer Gold, which released positive initial drill results this week at its Copper Hill project in Turkey. The Denver-based producer reported “impressive grades” at the site, with the copper close to the surface and “very low” in contaminates.

Seeking Free Cash Flow? Gold and Precious Metal Miners Have Got You Covered

Something I ought to point out is that the data above is as of December 31, as companies have not yet reported for the first quarter of 2020. For comparison’s sake, the S&P 500’s average FCFY for the same period was 5.6 percent. Even before the market tanked and gold began to surge, a few of the metal producers were already outperforming S&P 500 stocks in cash generation.

Keep your eyes on mining stock earnings in the coming days and weeks. Time will tell, but I expect to see that many generated healthy levels of free cash flow in the March quarter, which should help attract investors who up until this point may have been sitting on the sidelines.

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Gold Market

This week spot gold closed at $1,729.60, up $46.78 per ounce, or 2.78 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 12.10 percent. The S&P/TSX Venture Index came in up just 3.99 percent. The U.S. Trade-Weighted Dollar rose 0.45 percent.

Date Event Survey Actual Prior
Apr-21 Germany ZEW Survey Expectations -42.0 28.2 -49.5
Apr-21 Germany ZEW Current Situation -77.5 -91.5 -43.1
Apr-23 Initial Jobless Claims 4500k 4427k 5237k
Apr-23 New Home Sales 642k 627k 741k
Apr-24 Durable Goods Orders -12.0% -14.4 1.1%
Apr-27 Hong Kong Exports YoY -14.6% 4.3%
Apr-28 Conf. Board Consumer Confidence 87.8 120.0
Apr-29 Germany CPI YoY 0.7% 1.4%
Apr-29 GDP Annualized QoQ -3.7% 2.1%
Apr-29 FOMC Rate Decision (Upper Bound) 0.25%
Apr-30 Eurozone CPI Core YoY 0.7% 1.0%
Apr-30 ECB Main Refinancing Rate 0.000% 0.000%
Apr-30 Initial Jobless Claims 3500k 4427k
May-1 ISM Manufacturing 37.0 49.1

Strengths

  • The best performing metal this week was gold, up 2.78 percent. ETFs added 36,334 troy ounces of gold to their holdings on Thursday, bringing this year’s net purchases to 12.2 million ounces, according to Bloomberg data. That marks the 24th straight day of increases for ETFs backed by the yellow metal. Newmont, the world’s largest gold company, increased its quarterly dividend by 79 percent to signal how gold’s status as a haven is helping producers weather the coronavirus, reports Bloomberg. The U.K. Mint said sales of gold bullion coins and bars jumped 736 percent in March compared with a year earlier. The mint added that a fifth of new customers were under 35. Gold exports from Switzerland to the U.S. rose to 43.2 tons in March – the most since data going back to 2012, according to data from the Swiss Federal Customs Administration. The U.S. Mint reopened its West Point facility in New York this week after temporarily closing the plant last week.
  • Bank of America made two very bold precious metal price predictions this week. The bank said silver could rally to $20 an ounce due to a rebound of economic growth later in the year. Spot silver last traded at $20 in 2016 and is down 14 percent so far in 2020. Secondly, the bank says gold could nearly double to $3,000 an ounce over the next 18 months as central bank stimulus and economic turmoil drives record interest in the metal. The bank released this forecast in a report titled “The Fed can’t print gold.”

Seeking Free Cash Flow? Gold and Precious Metal Miners Have Got You Covered

  • The silver market surplus is set to shrink by more than half in 2020 due to shuttered mines. Total silver supply is expected to top consumption by 14.7 million ounces this year, down significantly from 31.3 million last year, according to estimates by Metals Focus for the Silver Institute. Silver coin and bar demand is set to rise 16 percent – the most since 2013.

Weaknesses

  • The worst performing metal this week was palladium, down 6.11 percent on the large drop in automobile buying, which could push the market to surplus this year. Precious metals fell early in the week as the broader market weakened along with oil prices. Gold futures for June delivery fell 1.4 percent to $1,687 an ounce by Monday afternoon, but then rose back above $1,700 later in the week.
  • Capital Economics said in a report that a decline in gold prices is looming in the month ahead as economies will come back online and demand for haven assets will fade. The firm predicts gold will fall back to $1,600 an ounce by year-end.
  • The coronavirus pandemic continues, and mine shutdowns have plagued metal prices and miners. China, the world’s top commodities buyer, recorded its first contraction in decades, reports Bloomberg. Miners globally are struggling to relocate workers amid mine shutdowns while facing the challenges of disrupted supply chains.

Opportunities

  • Although gold jewelry buying In India has been down for months, a new love for gold has emerged. The World Gold Council (WGC) wrote in a report this week that nearly 29 percent of retail investors who had never bought gold, now look forward to buying gold in the future. The report adds that gold is now a preferred investment option in the country.
  • K92 Mining share price got hit on Friday as Barrick Gold announced it was challenging the Papua New Guinea’s (PNG) government decision to not renew their special mining permit for their Poregera Mine. This initially weighed heavy on K92 Mining as its gold mine is also located in PNG and investors worried “was PNG changing their mining policy?” Apparently, the PNG government has specific issues with Barrick Gold that remains unresolved. St. Barbara Ltd. renewed its mining license recently and K92’s does not come up for renewal till 2024. The pullback in K92’s share price could be an attractive entry point. GFG Resources announced a non-brokered private placement to raise gross proceeds of up to C$5 million with Alamos Gold has committing to purchasing those securities to obtain a 9.9 percent interest in GFG. Roxgold Inc. released strong drilling results from its gold project in Cte d’Ivoire. Highlights include 12 meters at 13.8 grams per ton of gold and five meters at 28 grams per ton of gold.
  • A senior fund manager at Alternative Investments, Quantum AMC wrote their five reasons why gold can help investors get through a recession. 1) Counterparty risks in paper assets like bonds tend to increase during a recession, while gold cannot default. 2) Gold’s value is not dependent on revenues and profits, as equities are. 3) As central banks cut rates, fixed-income instruments will yield less. 4) Central banks are injecting massive amounts of liquidity, increasing the probability of higher inflation, which is historically good for gold. 5) Lastly, gold benefits from economic distress as people flock to perceived safe-haven assets.

Threats

  • Palladium could be looking at a small surplus in 2020 after years of a deficit that led to skyrocketing prices. Kitco News reports that palladium fell from an all-time high of $2,700 at the end of February to nearly $1,400 in mid-March on demand concerns surrounding coronavirus. The world’s top palladium producer, Norilsk Nickel, said that it expects a small surplus of around 0.1 million ounces. The surplus is projected to be temporary and that a deficit will resume once the world fully reforms after the pandemic subsides.
  • The seriousness of the coronavirus-fueled recession is reflected in April’s preliminary PMI readings. The composite PMI plummeted to 27.4, a new series low, as companies were shuttered and millions of non-essential workers were furloughed or laid off. A staggering 26.4 million people, or about 15 percent of the U.S. workforce, have now lost their jobs since mid-March.
  • Adding to the global stress of the coronavirus spread and efforts to treat infected patients, President Trump said on Thursday that scientists might investigate inserting cleaning agents into the body to cure COVID-19. White House Press Secretary Kayleigh McEnany said in a statement the next day: “President Trump has repeatedly said that Americans should consult with medical doctors regarding coronavirus treatment.” There has been contrasting information coming from the President and some of his top advisors surrounding the pandemic.

 

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average lost 1.93 percent. The S&P 500 Stock Index fell 1.32 percent, while the Nasdaq Composite fell 0.18 percent. The Russell 2000 small capitalization index gained 0.32 percent this week.
  • The Hang Seng Composite fell 1.93 percent this week; while Taiwan was down 2.36 and the KOSPI fell 1.33 percent.
  • The 10-year Treasury bond yield fell 4 basis points to 0.60 percent.

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April 24, 2020

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

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