Derek Macpherson | VP, Equity Research Analyst Jacob Willoughby | VP, Equity Research Analyst [email protected]As we anticipated, the massive liquidity injections and stimulus packages being introduced have started to drive gold and gold equities higher. We believe it is now time for investor to focus on smaller producers and large developers. If you had bought an equal-weighted basket of the larger companies we recommended in our previous note (read here), it would have returned 60% (Top 3), and 68% (Wider Group - Figure 1 and 2). Based on history (Figure 3), we believe there are better returns to be made with smaller companies as this bull market matures. We are updating our “Precious Metals Hoarding List” and the junior producers that screened the best based on our criteria (Appendix A) are: Serabi Gold (TSX:SBI, not covered), Argonaut Gold (TSX:AR, not covered) and RNC Minerals (TSX:RNX, BUY, C$1.30 target, Derek Macpherson). While COVID-19 restrictions are lifting, the stimulus keeps coming. Central banks are continuing to inject prodigious amounts of liquidity (Figure 4) in new and creative ways into the global economy, which is being coupled with massive economic stimulus. Both are in an effort to lessen the economic impact of COVID-19 restrictions and although we are starting to see the early stages of reopening, we believe the stimulus and liquidity injections are likely to persist until the economy begins to recover. It is time to think smaller with your “Precious Metals Hoarding List”. With gold now in a bull market and significant gains in larger equities, we believe funds are likely to start flowing into smaller producers (Figure 5) and the developers (Figure 6 and 7) where valuations remain attractive and liquidity has started to improve. Historically, as bull markets mature, smaller companies outperform (Figure 3), particularly since M&A activity has increased. We note that smaller cap companies typically come with increased risk. Some of these equities have already begun to move and our analysis suggests that some companies with lower quality assets are beginning to screen well this time. Taking this into account in conjunction with our producer and developer screening criteria (Appendix B), we now prefer O3 Mining (TSXV:OIII, BUY, C$4.30 target, Jacob Willoughby), Nighthawk Gold (TSX:NHK, not covered), Seabridge Gold (TSX:SEA, BUY, C$67.00 target, Derek Macpherson), Lumina Gold (TSXV:LUM, not covered), GoldMining (TSX:GOLD, not covered) and First Mining Gold (TSX:FF, not covered). Silver is starting to run. After peaking at 124x (now 100x), the gold:silver ratio is starting to decline, but is still well above the historical average of 59x. Silver has outperformed gold in the last three bull market moves (Figure 8) and we expect to happen again. Taking this into account applying the same screening criteria (Figure 9 and 10), we prefer Excellon Resources (TSX:EXN, not covered), Sierra Metals (TSX:SMT, not covered), Hochschild Mining (LSE:HOC, not covered), Southern Silver Exploration (TSXV:SSV, Jacob Willoughby), NorZinc (TSX:NZC, not covered) and White Rock Minerals (ASX:WRM, not covered). Timing and COVID-19 remain as risks. We note that liquidity-based selling (i.e. the race to cash) may return, as well, the duration of the economic contraction is uncertain. Additionally, measures to mitigate COVID-19 like the temporary shutdown of mines the deferral of exploration and development plans, etc., which would impact individual companies Getting Ready for Gold to Run Updating our “Precious Metals Hoarding List” – Time to think Smaller Thematic May 25, 2020 Figure 1: Red Cloud Precious Metals Hoarding List Performance Source: S&P Capital IQ, Red Cloud Securities Inc. -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% Top 3 Index GDX Gold Wider Group Index
Transcript
Derek Macpherson | VP, Equity Research Analyst Jacob Willoughby | VP, Equity Research Analyst
As we anticipated, the massive liquidity injections and stimulus packages being introduced have started to drive gold and gold equities higher. We believe it is now time for investor to focus on smaller producers and large developers. If you had bought an equal-weighted basket of the larger companies we recommended in our previous note (read here), it would have returned 60% (Top 3), and 68% (Wider Group - Figure 1 and 2). Based on history (Figure 3), we believe there are better returns to be made with smaller companies as this bull market matures. We are updating our “Precious Metals Hoarding List” and the junior producers that screened the best based on our criteria (Appendix A) are: Serabi Gold (TSX:SBI, not covered), Argonaut Gold (TSX:AR, not covered) and RNC Minerals (TSX:RNX, BUY, C$1.30 target, Derek Macpherson).
While COVID-19 restrictions are lifting, the stimulus keeps coming. Central banks are continuing to inject prodigious amounts of liquidity (Figure 4) in new and creative ways into the global economy, which is being coupled with massive economic stimulus. Both are in an effort to lessen the economic impact of COVID-19 restrictions and although we are starting to see the early stages of reopening, we believe the stimulus and liquidity injections are likely to persist until the economy begins to recover.
It is time to think smaller with your “Precious Metals Hoarding List”. With gold now in a bull market and significant gains in larger equities, we believe funds are likely to start flowing into smaller producers (Figure 5) and the developers (Figure 6 and 7) where valuations remain attractive and liquidity has started to improve. Historically, as bull markets mature, smaller companies outperform (Figure 3), particularly since M&A activity has increased. We note that smaller cap companies typically come with increased risk. Some of these equities have already begun to move and our analysis suggests that some companies with lower quality assets are beginning to screen well this time. Taking this into account in conjunction with our producer and developer screening criteria (Appendix B), we now prefer O3 Mining (TSXV:OIII, BUY, C$4.30 target, Jacob Willoughby), Nighthawk Gold (TSX:NHK, not covered), Seabridge Gold (TSX:SEA, BUY, C$67.00 target, Derek Macpherson), Lumina Gold (TSXV:LUM, not covered), GoldMining (TSX:GOLD, not covered) and First Mining Gold (TSX:FF, not covered).
Silver is starting to run. After peaking at 124x (now 100x), the gold:silver ratio is starting to decline, but is still well above the historical average of 59x. Silver has outperformed gold in the last three bull market moves (Figure 8) and we expect to happen again. Taking this into account applying the same screening criteria (Figure 9 and 10), we prefer Excellon Resources (TSX:EXN, not covered), Sierra Metals (TSX:SMT, not covered), Hochschild Mining (LSE:HOC, not covered), Southern Silver Exploration (TSXV:SSV, Jacob Willoughby), NorZinc (TSX:NZC, not covered) and White Rock Minerals (ASX:WRM, not covered).
Timing and COVID-19 remain as risks. We note that liquidity-based selling (i.e. the race to cash) may return, as well, the duration of the economic contraction is uncertain. Additionally, measures to mitigate COVID-19 like the temporary shutdown of mines the deferral of exploration and development plans, etc., which would impact individual companies
Getting Ready for Gold to Run
Updating our “Precious Metals Hoarding List” – Time to think Smaller Thematic
May 25, 2020
Figure 1: Red Cloud Precious Metals Hoarding List Performance
• Relative Valuation: For comparison purposes we are using the 2020E EV/EBTIDA based on consensus estimates.
• Leverage to Gold: This metric uses 2019 AISC, with higher costs equating to higher leverage. • Balance Sheet: For this metric, we are looking at net cash, relative to market cap. The higher the
percentage of net cash, the lower the risk for investors. • Relative share Price Performance: For this metric we are looking at share price performance since
February 27. The further the company’s share price is from the start of the downturn, the better. • Benefit from falling local currencies: A consequence of this downturn has been the near-term
strengthening of the US dollar relative to many other currencies. For many operations (particularly underground) the weakening local currency with a steady and/or strengthening gold price leads to near-term margin expansion.
• Benefit from falling energy prices: The price of oil is off 25% since March 1 and is expected to stay low for the near-term. This should benefit remote operations that have to generate power and large open-pit operations.
Please note for royalty companies we have excluded, leverage and the benefits from falling currencies and energy prices from our methodology.
Appendix B: Developer Criteria Defined
• Relative Valuation: We are using a combination of P/NAV and EV/oz to rank developers. • Leverage to Gold: This metric uses grade as a proxy, with lower grade projects expected to have higher
leverage to the gold price. • Balance Sheet: For this metric, we are looking at net cash, relative to market cap. The higher the
percentage of net cash, the lower the risk for investors. • Funded for 2020: For this metric, we look at the company’s current cash balance, and evaluate if it 1)
needs to raise money in the near-term, 2) can survive 2020 with the cash on-hand but can do limited work or 3) has the cash on hand to deliver on its 2020 exploration plans plus have some left over at the end of the year.
• Relative share Price Performance: For this metric we are looking at share price performance since February 27. The further the company’s share price is from the start of the downturn, the better.
• Benefit from falling local currencies: A consequence of this downturn has been the near-term strengthening of the US dollar relative to many other currencies. For many projects (particularly underground) the weakening local currency with a steady and/or strengthening gold price leads to margin expansion.
• Benefit from falling energy prices: The price of oil is off 25% since March 1 and is expected to stay low for the near-term. This should benefit remote projects that have to generate power and large open-pit operations.
May 25, 2020 10 Updating our “Precious Metals Hoarding List”
Derek Macpherson | VP, Equity Research Analyst Jacob Willoughby | VP, Equity Research Analyst
Derek Macpherson | VP, Equity Research Analyst Jacob Willoughby | VP, Equity Research Analyst Taylor Combaluzier | Associate, Research Paul Kostuik | Associate, Research Red Cloud Securities Inc. 105 King Street East, 2nd Floor Toronto ON, M5C 1G6 [email protected] www.redcloudsecurities.com/research-home
Disclosure Requirement Red Cloud Securities Inc. is registered as an Investment Dealer in Ontario and is a member of the Investment Industry Organization of Canada (IIROC). Part of Red Cloud Securities Inc.'s business is to connect mining companies with suitable investors. Red Cloud Securities Inc., its affiliates and their respective officers, directors, representatives, researchers and members of their families may hold positions in the companies mentioned in this document and may buy and/or sell their securities. Additionally, Red Cloud Securities Inc. may have provided in the past, and may provide in the future, certain advisory or corporate finance services and receive financial and other incentives from issuers as consideration for the provision of such services. Red Cloud Securities Inc. has prepared this document for general information purposes only. This document should not be considered a solicitation to purchase or sell securities or a recommendation to buy or sell securities. The information provided has been derived from sources believed to be accurate but cannot be guaranteed. This document does not take into account the particular investment objectives, financial situations, or needs of individual recipients and other issues (e.g. prohibitions to investments due to law, jurisdiction issues, etc.) which may exist for certain persons. Recipients should rely on their own investigations and take their own professional advice before investment. Red Cloud Securities Inc. will not treat recipients of this document as clients by virtue of having viewed this document. Red Cloud Securities Inc. takes no responsibility for any errors or omissions contained herein, and accepts no legal responsibility for any errors or omissions contained herein, and accepts no legal responsibility from any losses resulting from investment decisions based on the content of this report. Company Specific Disclosure Details
1. The analyst has visited the head office of the issuer or has viewed its material operations. 2. The issuer paid for or reimbursed the analyst for a portion or all of the travel expense associated with a visit. 3. In the last 12 months preceding the date of issuance of the research report or recommendation, Red Cloud Securities Inc. has
performed investment banking services and has been retained under a service or advisory agreement by the issuer. 4. In the last 12 months, a partner, director or officer of Red Cloud Securities Inc., or the analyst involved in the preparation of the
research report has received compensation for investment banking services from the issuer. 5. The analyst who prepared this research report has a long position, in the issuer’s securities. 6. The analyst who prepared this research report has a short position, in the issuer’s securities. 7. Red Cloud Securities Inc. and its affiliates collectively beneficially owned 1% or more of any class of issuer’s equity securities as of
the end of the month preceding the date of issuance of the research report or the end of the second most recent month if the issue date is less than 10 calendar days after the end of the most recent month.
8. A partner, director or officer of Red Cloud Securities Inc. serves as a Director or Officer or Advisory Board Member of the issuer. 9. Has any partner, director or officer of Red Cloud Securities Inc. or any analyst involved in the preparation of a report has, during the
12 preceding months, provided services to the issuer for remuneration other than normal course investment advisory or trade execution services.
10. The analyst who prepared this research report was compensated from revenues generated solely by the Red Cloud Securities Inc.’s Investment Banking Department.
11. Red Cloud Securities Inc. is a market maker in the equity of the issuer. 12. There are material conflicts of interest with Red Cloud Securities Inc. or the analyst who prepared the report and the issuer.
Company Name Ticker Symbol Disclosures Company Name Ticker Symbol Disclosures
AbraPlata Resource Corp. TSXV:ABRA 3 Novo Resources Corp. OTCPK:NSRP.F 1,2,3,4
Aurion Resources Ltd. TSXV:AU 1,2,3,4 O3 Mining Inc. TSXV:OIII 1,2,3Doré Copper Mining Corp. TSXV:DCMC 3 Royal Nickel Corp. TSX:RNX 1,2,3,4,5,8
Dissemination Red Cloud Securities Inc. distributes its research products simultaneously, via email, to its authorized client base. All research is then available on www.redcloudsecurities.com via login and password. Analyst Certification The Red Cloud Securities Inc. Analyst named on the report hereby certifies that the recommendations and/or opinions expressed herein accurately reflect such research analyst’s personal views about the company and securities that are the subject of this report; or any companies mentioned in the report that are also covered by the named analyst. In addition, no part of the research analyst’s compensation is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.
