Gold SWOT: A Quarter of Central Banks Anticipate Increasing Gold Reserves

Strengths

• The most robust performing precious metal for the week was silver, gaining 2.6%. G Mining Ventures has signed a binding agreement with CEMIG to supply the Tocantinzinho Project with cost-effective renewable energy. The fixed energy pricing, applicable between 2024 and 2026, will cover the commissioning, ramp-up, and initial production years at Tocantinzinho. Commercial production is expected to begin in H2/2024, resulting in a 25% reduction in electricity costs.
• After a modest 2022, the junior and intermediate producers we cover have started the year strongly. Year-to-date, junior producers have risen 8% while intermediates have surged 15%, outperforming the senior producers who are flat for the year, and spot gold, which has risen 7%. On a P/NAV basis, intermediates now trade at a premium to the seniors (0.72x NAV vs. 0.65x for seniors), whereas junior producers trail at 0.52x NAV. Notably, junior producers are projected to generate a 23% sustaining free cash flow (FCF) yield in 2024.
• At Evolution Mining, Ernest Henry capital expenditure is expected to be between $450-500 million, in line with consensus. The mine life extends to 2040, surpassing consensus expectations. The resource update in September is likely to reveal additional potential to be incorporated into the September 2025 feasibility study. The life extension of the Mungari mine also exceeded expectations, with construction set to be completed by March 2026.

Weaknesses

• The weakest performing precious metal for the week was palladium, falling 6.2%. Argonaut announced a delay in first production at Magino, which has been postponed to mid-June (previously expected in late May). Despite the delay, wet commissioning activities are well underway.
• Zijin Mining's Colombia gold mine, a significant producer in the Andean country, has halted 60% of operations due to recent attacks against workers, allegedly by illegal miners associated with a major crime gang. Following two attacks within two weeks, the company has prioritized worker safety.
• Ecuadorian President Guillermo Lasso invoked the "Muerte Cruzada," dissolving the national assembly and allowing him to rule by decree under the supervision of Ecuador's Constitutional Court. National elections will now be held in August, followed by a second round in October, with the new authorities serving until May 2025. Notably, neither President Lasso nor his party will seek re-election.

Opportunities

• Petra, currently holding 75% of Williamson with the remaining 25% owned by the Government of Tanzania (GoT), will now share equal ownership with Taifa, each holding 37.5%. Post-ratification of two existing agreements, Petra will retain a 31.5% stake in Williamson, with Taifa holding an equivalent 31.5% and GoT owning the remaining 37%.
• Eldorado announced a C$81.5 million strategic equity investment from the European Bank for Reconstruction and Development (EBRD) along with a concurrent C$135 million bought deal financing. With this funding and a €680M project debt facility, the company gains added balance sheet flexibility.
• The World Gold Council's sixth annual central bank gold reserves survey reveals that among the 57 central bank respondents, 24% anticipate increasing gold reserves over the next 12 months, demonstrating a robust outlook for gold.

Threats

• Strong end-market demand has resulted in high prevailing prices, some diamond producers were (briefly) realizing >50% like-for-like price increases in 2022. Diamond demand is driven by the US at it is 50% of global consumer demand (China is only 14% of demand). As the Fed pivots following a series of rate hikes, there is the risk that diamond fundamentals weaken as U.S. consumer confidence weakens and discretionary spending falls.
• Bank of America downgraded Royal Gold, a precious metals royalty and streaming company, from Neutral to Underperform and lowered their target to $130 per share (down from $149). The price objective is based on a 2.25x net asset value (NAV) multiple, which is lower due to heightened operational and execution concerns around significant assets in Royal Gold's portfolio. This concern was especially directed towards Mount Milligan, which constitutes 21% of NAV and is owned by Centerra Gold, where 2023 gold production guidance was recently tempered.
• According to a Financial Times report, the Mexican mining industry is threatened by sweeping new regulations. The modifications in the mining code make it difficult for companies to secure mineral concessions and could instigate a wave of lawsuits by Canadian miners with investments in Mexico. The new legislation mandates all mining exploration activities to be conducted by the Mexican Geological Service, a state-run agency with insufficient funding. This could severely hamper exploration efforts.

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