Gold: The Chickens Come Home to Roost

Why does the world seem falling apart? Wars, pandemics, anti-semitism, polarization, and it goes on. What happened to civility? How did it come to this? To revive the world economy following the 2008 crisis, governments embarked on a tremendous spending binge during the past 16 years, with debt and spending rising faster than GDP. In the US, lacking in savings, they added to an already heavy debt burden because when it came to fund those widening budgetary deficits, the Federal Reserve bought tens of billions of bonds and mortgages with newly printed money (quantitative easing), so that money was essentially free. Under this fiscal free lunch, interest rates went down to the lowest in history. The supply of Treasuries exploded over $25 trillion or five times since the beginning of the financial crisis of 2008. A rising tide lifts all boats. Inflation and several asset bubbles, including those in real estate and bonds, were driven by this liquidity. And if you go back further, both Presidents Obama and then Trump too pursued spending freely, because there was no penalty, lulling investors into complacency.

As a consequence, amid entrenched inflation, financial reality has intervened. As part of a quantitative tightening campaign, the Fed is attempting to decrease the money supply (M2) after four rounds of bond purchases that increased the size of the Fed's balance sheet from $1 trillion in 2007 to over $8 trillion. As a result, interest rates are at 22-year highs. Yet Mr. Biden keeps spending. His big climate law, the misnamed Inflation Reduction Act feeds inflation demanding even more debt issuances. Simply inflation remains high because structural forces threaten to keep it there. Not surprisingly the economy remains resilient. Unemployment is under 4% and workers are getting big pay raises complicating the inflation fight. The Fed now warns us that rates will stay “higher for longer.” Amid this fiscal profligacy, America faces a debt reckoning. Those chickens are coming to roost.

Then there are the tectonic-scale geopolitical changes that are putting America to the test. The hegemon for much of this century, facing wars overseas and cultural wars at home, America seems oblivious, since Biden’s foreign policy initiatives were secondary to the limitless domestic spending such as the greening of America or plying the populace with free money during Covid. Since the early 1900s isolation succeeded in helping America’s national security and prosperity and then in a reversal, Harry Truman’s network of global alliances enabled America to lead the world in a unipolar globalization role. That worked. But today after the humiliating retreat from Afghanistan, a term of Donald Trump and a dysfunctional Capitol Hill, Mr. Biden’s turn away from globalization started by his predecessor resulted in the loss of leverage on the world stage. Today, with Russia threatening Europe, China as a peer competitor has filled the vacuum. We now live in a fragmenting multi-polar world with geopolitical risks the highest in half a century. That said, Ukraine and now Hamas may force the US to end its isolation. It may be too late.

A Day of Reckoning Looms

US-China relations are the worst in four decades. Economic relations are in a perilous state with the wielding of embargos, tariffs and financial sanctions as a foreign policy tool. Nancy Pelosi’s visit to Taiwan, Trump’s tariffs and newly introduced restrictions on real estate and technology have made re-engagement difficult as realpolitiks obstructs almost a half century commercial relationship. And despite supporting the decades-old “One China” policy, American politicians continue to ratchet up tensions over the future of Taiwan, jeopardizing this relationship. The rise of China as the world’s second largest economy, global trade hub and superpower has led to a confrontation with the United States where everything Chinese is being demonized. Although both view each other as polar opposites, they are very much alike. Admittedly much is made for political gain, but at a time when political rhetoric is so heated, it is a slippery slope which could spiral into wider xenophobic uncertainties, threatening both global growth and war.

On the other hand, US allies from Australia to Europe want to manage a better relationship as well as American businesses who are pushing back because realpolitiks puts them at a disadvantage. If the business climate is not resolved, it will be more difficult to reverse, particularly in an election year. With supply chains becoming risky and costly to replicate, many companies rely on inputs from China that are hard to find elsewhere such as the critical minerals for making batteries. Furthermore, China’s leadership position in resources and a key player in energy puts America at a disadvantage. Although America retains harsh sanctions against Russia, Russian oil revenues have doubled helped by the world’s largest oil importer. With over half of their needs coming from the Persian Gulf, China’s new sway among Arab states, Russia and Iran isolates America’s once prime position, challenging political alliances around the world. Chickens have a habit to roost.

Meanwhile for the past two decades, China has been buying up valuable resources around the world to supply its manufacturing industry. China has a monopoly and is many steps ahead of the West holding a leadership position in the processing of raw materials into usable metals in the production of EV batteries and cars. The West went along with this because many countries did not want the toxic materials left over from processing. The conflict in Ukraine, however, only served to highlight the West's vulnerabilities and strain its supply lines. As a result, despite the current rush for vital resources, there is insufficient processing capacity due to stringent government regulations, high capital requirements, and a dearth of downstream processing activities. Canada has lost much of its mining industry while America only has one lithium mine. Canada is even planning to ship its government-subsidized batteries to other countries for assembly into electric cars. As a result, both countries are now dependent on China's technology and processing capabilities. Crucially, battery plants are receiving more funding and subsidies than the processing or even recycling of the essential minerals required for electricity networks, EVs or wind turbines.

Another critical problem is who or whom will buy America’s debt? China has become the biggest creditor in the world, the US the biggest debtor. Demand has shrunk. What about bringing back Asian money? However, in the face of increased Treasury supplies, demand from traditional offshore funding sources like China and Japan have dried up as ties deteriorate. Once America’s largest creditor, China’s holdings are down $300 billion since 2021. Wall Street banks, forced to beef up their capital were also big buyers but have been absent, creating a financing problem. In the past 600 years, we have seen the rise and fall of the Portuguese Empire, the Spanish Empire and now the American Empire. All empires ended when the empires became financially insolvent. While there are hopes that the Biden-Xi summit will help bridge differences, President Xi noted that neither wants to fall into the “Thucydides Trap,” referring to the past 500 years when a rising power threatened to displace a ruling one, history showed that to counteract the economic emergence in 12 of 16 cases, the outcome was war. This new world disorder has just roosted.

The Age of Insecurity

At the same time, as the presidential race draws nearer, the Middle East was shattered by the surprise attack by Hamas creating a trifecta headache for Biden joining Ukraine and China as divisive issues. Domestically, the war has fractured tribal politics opening long-term schisms and a growing race problem. Despite the decades-old goal of the UN’s “two state” solution, the war has shifted global dynamics, already battered by a series of shocks over the past five years. The dynamics of the globe are altered by Saudi Arabia’s strategic collaboration with the Chinese on everything from energy to resources to artificial intelligence to computer chips, and even the brokering of a diplomatic deal between Saudis and Iran. China is now a major actor in the Middle East, the region's biggest oil importer and a key player in BRICS+, a new global paradigm.

After American policy spent more than two decades of appeasement, disasters in Iraq, Syria and Afghanistan, America’s military footprint has shrunk as it confronts a daunting set of geopolitical challenges. Mr. Biden’s attempt to out-Trump Trump led to a failed Middle East policy from the humiliating withdrawal from Afghanistan to almost handing over $9 billion to Iran, to the lack of ambassadors in Egypt, Kuwait and Oman. Today another miscalculation could spark the next world oil crisis. Wars change nations. From the US misadventures in Iraq to Vietnam, to the Israel-Hamas conflict and threats of an Iranian backed Hizbollah, America’s power is being eroded on multiple fronts at a time when America can least afford it. Ironically, this geopolitical conflict in which the US is not directly involved has exposed deep fault lines both domestically and abroad.

Then on the domestic front, America’s profligate deficit spending is coming home to roost. As yields rise on long dated bonds, the reversal in rates sparked deflationary concerns setting off a sharp sell-off in government bonds and turbulence across debt markets, which inflicted huge losses for banks, insurers, pension funds and asset managers. After 2008, America spent more than a decade making its banks stronger, only to lose three of them when rates rose earlier this year. Of concern is that yields have only returned to the mean levels over the 20th century, whilst inflation is increasing. America’s Covid response cost almost 20% of GDP and 1 million American lives were lost as well as infecting many millions more. Costly was that their refusal to observe science, lockdowns and hospital bed shortages. At the same time, the Biden administration embarked on the largest spending spree in recorded history including the $400 billion Inflation Reduction Act which followed the extra spending on pandemic relief, fueling the inflation of today. And there is the reflationary monetary stimulus of the government’s unfunded liabilities like Social Security, federal pensions and Medicare which shows no signs of moderation. America’s finances are in disarray – and with it the credibility of US statecraft.

America’s Out of Control Finances

Bidenomics is simply a huge boondoggle wrapped in a zero-emission blanket which hands out trillions in subsidies, warping free markets and risking skepticism of other important policies. It also boosted a protectionist view that caused the US deficit to roughly double to $2 trillion. Deficits today have become the norm. And as America's military arsenal runs low, it is an inconvenient fact that arming itself will prove very costly and with the upward climb in interest rates, the government’s borrowing costs will climb past $1 trillion on interest payments alone, more than they spend on defense.

Since 1970 onward the US has shifted to a deficit spending model – spending more than current revenues. Not surprising the government is forced to print more money to finance the deficit gap, worrying bond investors, sending long-term borrowing costs up. Deficits didn’t seem to matter, averaging 3% of spending between 1950 and1969. Then President Lyndon Johnson’s “guns and butter” policies saw spending and deficits skyrocket as he tried to finance a war along with a new Great Society, which ended in inflation forcing President Nixon to abandon the gold standard in 1971 as foreign creditors opted to have their debt paid in gold rather than paper dollars. That left Fed Chair Paul Volcker’s storied rate hikes to clean up the inflation mess. However, without the discipline of a gold standard, governments were allowed to spend whatever they pleased. Deficit spending was the solution. Awash in a sea of debt, the Fed kept the credit wave alive with its fiscal largesse adding to the economy’s sugar rush. In the 1980s when Jimmy Carter left office, the country’s debt to GDP ratio stood at 32% in 1981. Today it is 122% of GDP, excluding entitlements and, the fiscal deficit to GDP is a staggering 8%, the widest since World War II. Long-term bond yields have risen in hocky-stick fashion along with government expenditures, from 3.3 percent during the financial crisis to 5 percent, the highest since 2007.

The biggest threat to the dollar comes not from others but from the US government itself. And that is a worry because the burden of debt is America’s Achilles heel. Currently, President Biden wants to spend trillions on a greener, more sustainable world while also aiding friends wage two battles overseas and a cultural war at home. He will discover a “guns and butter” policy won’t keep the lights on at home.

A meltdown in Treasuries now ranks among the worst Treasury crash in history with 10-years collapsing 46% in the last three years while the 30-year bond erased 53% of gains. The meltdown has just begun. The yield curve has inverted as in 2008. The source of those losses is inflation. Wall Street was rattled by disruption in the $25 trillion Treasury market when Industrial and Commercial Bank of China (ICBC) was hit by a cyberattack and temporarily owed $9 billion to BNY Mellon, the world’s largest custodian to settle trades, exposing the fragility and risk in the US Treasury market. And where is the saving grace for bond buyers, a recession? Not on the horizon as politicians and central bankers call for more spending despite yet another debt limit showdown. Inflation is here to stay, particularly when the Fed, the world’s biggest issuer of debt made a disastrous mistake of not refinancing its trillions of debt when rates were near zero. Today that mistake has proven costly with borrowing costs at 22-year highs.

With $33 trillion in debt, American debt is the most in the world. The collapse in the bond market has just begun, particularly with US banks’ cumulative losses pegged at $500 billion and soon to breach $700 billion, a new record. The big hedge funds and prime brokers have joined the big banks in a basis trade arbitrage raising risks in the US Treasury market of a repeat of the toxic derivative implosion in 2020 and 2008. Who will then absorb the additional supply of government debt associated with the higher deficit, and at what price? America’s addiction to low rates and profligate spending debases the dollar, eroding its dominance, central to America’s credibility in financial markets. We believe this fiscal unsustainability will show up in even higher yields and pain, from the shopping cart to corporate balance sheets, to taxpayers as those chickens are only coming home to roost.

We also think that the situation is similar to what happened in 1987, when the market fell more than 20% in a single day on October 19, 1987, commonly known as Black Monday, after it had earlier soared in the first part of the year. Computer-driven program trading was given as the excuse and the meltdown ended after newly appointed Fed Chair Alan Greenspan slashed interest rates. However, a strong US dollar put pressure on exports, widening the trade gap with market valuations a lofty 20x. In fact, the Fed’s on and off tightening of today is similar to back then when 10-year yields rose sharply from 7% to 10%. And just as back then, the Middle East is again a powder keg with tensions between Iran and the United States near-war conditions.

This disarray and fragmentation of the world, in our opinion, undermines the dollar's hegemony as a reserve currency. And as before, crude pushes higher with OPEC+ and Russia now controlling more than half of the world’s supply, trading in other currencies than the dollar. In addition, the US Strategic Petroleum Reserve (SPR) is half empty at 40-year lows following the government's earlier 200 million barrel release to lower oil prices ahead of the midterm elections last year. That leaves the US vulnerable to supply shocks, particularly if the conflict in the Middle East escalates in a replication of oil shocks of the 1970s and 1980s. There are two types of wars: total war with only one victor and forever or endless wars. Markets are not ready for both.

Guns and Butter Redux

While there has been a liquidity bazooka aimed at greening the economy, much was at the expense of improving economic growth as governments spent trillions in the quest to limit CO₂ emissions. Yet scientists know the cause, but no one knows the remedy. Like a black hole, once you are in it, it is impossible to get out. We are currently in a green, black hole when it comes to greening our economy. While EVs are heavily subsidized, public subway and bus systems are left out of the bonanza. Worrisome too is that despite the billions of subsidies, wind-makers are losing billions as Ørsted, the world’s largest offshore wind developer, cancelled two giant offshore projects to deliver power to New Jersey. Also, Ford announced that they are losing $36,000 on every EV they sell. Yet Chinese carmakers can produce EVs at a profit today. Western carmakers will find profits elusive just as the EV bubble is beginning to deflate. Biden’s Green Deal is something between a mirage and boondoggle as high interest rates, permit delays and supply problems become the new reality.

Meantime, the US dollar itself is changing on a geopolitical level as in regard to oil now that the US has weaponized its usage. Mr. Biden has a problem of his own-making since the major Middle East oil producers have teamed up with Russia and cutback production to boost prices. Further the big Asian buyers are using alternate international payment systems and currencies such as the petroyuan rather than petrodollars. The dollar's reserve status is threatened by de-dollarization, especially now that the US is exporting energy rather than importing it. Such problems mean fewer recycled dollars and coupled with a dysfunctional government and growing debt sustainability, the dollar is not forever.

The strength of the American economy was one of the main reasons the US won the Cold War with Russia, allowing them to build a global defense behemoth which the Soviet Union could not match. America’s over confidence led to arrogance and now complacency. Today, America is strapped from fighting wars in Ukraine, Middle East and a cultural war at home, akin to Lyndon Johnson’s “guns and butter” spending when he chose both to fight the war in Vietnam as well as fund an ambitious domestic Great Society. That spending ended in inflation and an American default. Today’s high rate of inflation is simply a preview of what might occur if the US is forced to monetize the bulk of its national debt. The danger is that a US-China financial war is beginning to take shape. China’s economy supports a debt to GDP ratio of 77%. The US debt to GDP is 122%. America is in denial. It will need financing. The state of affairs will be laid out next year in another polarising election when over half of the country questioned the legitimacy of the last one. The next result may be handed to the courts, with an isolationist Trump administration threatening the world’s most powerful democracy. One group being played against the other. Country against country. Gold is going to be a good thing to have.

The Golden Rule

Despite its relative performance, the gold price is frustrating everyone. Gold is difficult to analyse. For a start, there are haters and lovers and a deep divide between the two. To some, it is barbaric (John Maynard Keynes) but others, the ultimate hedge (Auric Goldfinger). Because gold doesn't pay interest, fundamental players avoid its benefits. Nonetheless, gold has outlasted all assets—including fiat money—for thousands of years.

Simply, gold is an alternative to money and lately has outperformed the greenback. The total supply of gold is limited while the supply of fiat currencies like the dollar is unlimited. Gold cannot be debased nor created by a click of a mouse and thus is an effective inflation hedge. Gold peaked at an all-time high of $2,075 in August of 2020. Since 1971 when President Nixon defaulted and took the dollar off the gold standard, gold has gone up 726% while the US dollar has lost 98% of its purchasing power. Going back further in 1933, President Franklin D. Roosevelt refused to repay Treasury bondholders with gold in yet another default of the dollar. Others including China are aware of America’s historic penchant in abrogating agreements.

Recently China has led central banks as the largest buyer of gold adding to its reserves for 12 consecutive months, underpinning the gold price. The rush to buy gold was driven by gold’s role as a hedge against inflation and reduction of central banks’ reliance on the US dollar. Poland, Singapore and Turkey were also large purchasers. Noteworthy is that the domestic price of gold in China rose to a new all-time high and the country’s reserves stands at 2,215 tonnes.

Equally important is that China’s nearly $3 trillion in reserves allows it to take a leadership in the creation of a new monetary role as part of the multi-polar world. China’s accumulation of gold makes it the fifth largest holder of gold and its currency was once on a silver standard. China is not as indebted as the West nor dependent on outsiders for financing. China could peg the renminbi to gold, given its huge manufacturing base, international profile and the fact that entities such as the Shanghai Gold Exchange is the largest physical gold player in the world. History shows that fiat currencies don’t work so maybe the Middle Kingdom’s renminbi may prove to be the solution to the financial disorder of today. No wonder gold is trading at a record $100/oz premium in China.

Recommendations

Earlier this year gold flirted with breaking the August record because of the regional banking crisis but subsequently its “non-performance” was due more to the fact that it tends to move inversely with the dollar. The recent strength of the dollar hurt the gold price. However in yen, gold is up 25%, in pounds 11% and in Russian rubles up 81% from a year ago. Our belief is that mounting inflation, de-dollarization, heightened geopolitical risks, global debt and the rise in populism provides a positive backup for gold – it is a good thing to have. We continue to target $2,200/oz.

We observe that ahead of the Fed rate hikes, the market led by the algos dumps gold and buys the dollar. But each time, gold recovers and records fresh highs. Another demand factor is that foreign money and central banks have loaded up on gold instead of US Treasuries. Since March 2022, rates have increased 525 bps. Gold in that time has actually increased almost 2% in dollars and gold/euros is up 7% in the same period, better than markets. Consequently, market fears of higher rates hurting gold are misplaced – simply it is a buying opportunity because gold helps to preserve capital.

Meantime the gold producers are market laggards despite their robust free cash flows, solid balance sheets, dividend increases and historic low valuation of in-situ reserves. The majority of miners had trouble replacing their depleting reserves, despite spending heavily on exploration and production. Moreover, there have been few skookum discoveries. Newmont already the largest gold miner in the world closed on the $19.2 billion acquisition of Newcrest in Australia in a quest for growth. Since reserve growth is a problem, we believe M&A activity will continue but in this game of musical chairs, there are fewer and fewer chairs. Simply it is cheaper to buy ounces on Bay Street rather than spend scare capital and time on exploration and development.

Among the sector producers we like Agnico Eagle, Barrick Gold and B2Gold. We also like the developers such as McEwen Mining and Endeavour Mining. We also believe Eldorado, Lundin Gold and Centamin are future chairs in the game of musical chairs.

Agnico Eagle Mines Ltd.

Canada’s largest miner reported solid quarterly production of 850,000 ounces from a year ago. The nine-month results met Agnico's guidance, and they are on track to produce 3.4 million ounces this year at a cash cost of $1,150/oz. Major contributors were Detour Lake as Agnico plans an increase to one million ounces a year with increases in the mill and grade in a couple years. At 100% owned Canadian Malartic, the shift to Odyssey will improve results. And at Macassa, the newly commissioned shaft will allow efficiencies. Agnico is also expecting an imminent decision from the Finnish Supreme Court on Kittila’s operating permit. At Amalgamated Kirkland, satellite zone ore will be sent to LaRonde where there is spare capacity. Agnico has been successful in using existing facilities to process surrounding satellites deposits with minimal capital investment. As an example, they plan to ship ore from Upper Beaver and Wasamac. Agnico has a strong balance sheet with $355 million in cash and $1.1 billion in available liquidity under a revolver. Noteworthy is that Sean Boyd who took over from founder Paul Penna almost four decades ago and is the chief architect of Agnico’s growth, will remain as Chair but drops his executive responsibilities. We continue to view the shares as a buy for their growth profile, solid array of assets and execution capabilities.

Barrick Gold Corp.

Barrick lowered their guidance slightly this year due to delays in the ramp-up from Pueblo Viejo (PV) in the Dominican Republic. Barrick expects to resolve the issue by Q1 next year. Also in Nevada, a slower ramp up at Gold Rush affected their production plans for the year. Barrick on the other hand plans to spend $2.5 billion next year with the bulk going to Reko Diq in Pakistan and the Lumwana super-pit expansion. Consequently, Barrick will produce 4.1 million ounces with operating cash flows of about $1 billion per quarter. In Nevada, joint venture Nevada Gold Mines performance was led by Turquoise Ridge where a major turnaround boosted overall output as well as contributions from Leeville in the Carlin trend and Gold Rush in the Cortez trend. Down the road, the Fourmile project, adjacent to Cortez, while not included in plans is being expanded. Barrick also acquired a major substantial land position in Ecuador and gave more details on the revival of the massive $7 billion Reko Diq project partnering with the Pakistan government and Saudi Arabia, minimizing geopolitical risk. Reko Diq is one of the world's largest undeveloped reserves of copper and gold and Barrick plans to start mining in 2028. With assets primarily in Africa, Nevada and South America, Barrick has the largest array of Tier-one assets, and thus diversified enough to offset risks at Reko Diq. We like the shares here.

B2Gold Corp.

B2Gold shed light on the recently acquired Goose Project in the Back River district in Nunavut. The project remains on track for the first gold production in the first quarter of 2025. The mine will cost almost a billion dollars and should produce about 300,000 ounces of gold for the first five years, as it accelerates higher underground plans elsewhere. B2Gold is still waiting on permits to expand flagship Fekola in Mali. Otjikoto had a weaker quarter. Guidance remains unchanged with a better fourth quarter planned. A PEA is planned at Gramalote after acquiring the balance. We like B2Gold here for its development pipeline.

Centerra Gold Inc.

Centerra had a strong quarter producing almost 87,000 ounces in the quarter maintaining guidance at 340,000 ounces this year. Mount Milligan in BC is a modest copper gold project producing about 60,000 ounces this year at AISC of $1,050/oz. Meantime Centerra’s other asset, Öksüt in Turkey produced 86,000 ounces and is a low-cost producer. Goldfield is more of an exploration play than development project. Centerra also talked about the restart of the Thompson Creek moly mine, noting that it could be a major moly producer. However, a PFS showed a modest return of only 16 percent at $20 a pound moly price with a potential startup date in 2027. On the other hand, Centerra has almost $500 million in cash plus a $400 million revolver, but its growth profile is limited. We do not think the moly project is worthwhile at this time and Centerra should use its stellar balance sheet to look for another flagship replacement for Kumtor. We prefer B2Gold here.

Eldorado Gold Corp.

Eldorado had a good quarter producing 121,000 ounces maintaining guidance. Kışladağ in Turkey had a better quarter due to increased tonnage on the leach pad and installation of an agglomeration drum. At Lamaque in Québec, the third quarter was also better than the first half, but development work slowed operations. Olympias in Greece produced 18,000 ounces. Overall Eldorado should produce about 480,000 ounces at AISC of $1,250/oz. At potential crown jewel Skouries in Greece, Eldorado reduced planned spending to $170 million due to delays but will not impact plans for first gold in mid 2025. Eldorado had negative free cash flow of $19 million due to Skouries’ spending and the company reported a loss in the quarter. At the quarter end, Eldorado had cash and equivalents of $477 million. At Efemçukuru in Turkey, third quarter production was about 21,000 ounces in line with estimates. Eldorado is a mid-tier producer with mines in Canada, Turkey and Greece. Eldorado is a hold here.

IAMGOLD Corp.

Mid-tier player IAMGOLD’s Côté Lake near Sudbury is about 90 percent complete with first production slated sometime in the first quarter of next year but the processing plant is delayed slightly so commercial production is likely towards the end of next year. Côté Lake’s price tag has increased to a whopping $3 billion with about $325 million still to be spent. Currently the company is RC drilling to tighten up resources with processing plant development ongoing. Côté has reserves of 233 million tons but at a low grade 0.96 g/t containing about 7.2 million ounces. The key to profitability will be to process higher grade sections but we believe Côté is a company destroyer rather than a company builder and given the project’s low grade and high capital costs, IAMGOLD will be hard-pressed with their partners to make any money. Sell.

Lundin Gold Inc.

One of the richest mines in the world, Lundin Gold had a fantastic quarter producing almost 130,000 ounces at a low cash cost of $644 per ounce at Fruta del Norte (FDN) in Ecuador. Free cash flow was $132 million in the quarter and cash on hand was $275 million. Guidance for the year is about 475,000 ounces at AISC of $850/oz. The low cost is due to one of the richest grades with an average grade of 11.6 g/t at 89.3 percent recovery after relining the SAG and ball mills. Lundin Gold is also conducting an ambitious drill program looking for extensions from the FDN deposit as well as regional exploration. We like the shares here for yield and growth. Buy.

McEwen Mining Inc.

McEwen Mining had an improved quarter producing 38,500 GEO and on track to produce 150,000 GEO. McEwen also shed light on Los Azules in Argentina with the sale of additional interests in McEwen Copper to Stellantis and Rio Tinto sub resulting in a much better balance sheet at an implied value of $800 million. At the Fox complex in Ontario, the mine will produce 42,000-48,000 ounces at AISC of $1,300/oz or doubling since 2020 lows boosting processing closer to 1,400 tpd. At Gold Bar in Nevada, a lower strip ratio, new leach pad and processing of higher-grade ore should help results. We like McEwen Mining here for its development prospects, 48% stake in McEwen Copper and at the current valuation for McEwen Copper, an investor would get the gold mines for free. Buy.

New Gold Inc.

New Gold had a decent quarter generating $22 million of free cash flow, but cash costs were high due to lower grades. New Gold has $179 million in cash and equivalents, but long-term debt remains of almost $400 million. Rainy River produced 65,000 ounces due to better grades and improved throughput. New Afton produced about 18,000 ounces and 13 million pounds of copper. Consolidated AISC though was $1,500/oz. Both Rainy River and New Afton are in transition, and it will take time for these mines to turn around and make decent money if at all. We prefer McEwen Mining here.

Newmont Corp.

Newmont closed the long-awaited deal to acquire Newcrest of Australia. Newmont produced 1.3 million ounces of gold and 10,000 tonnes of copper generating EBITDA of $933 million but AISC was a whopping $1,400/oz. The results were disappointing because flagship Peñasquito in Mexico was shutdown due to a lengthy work stoppage that has ended. The strike at Peñasquito hurt output as well as lower production from joint venture Nevada Gold Mines PV. Ahafo in Ghana also had issues, resulting in lower output. Newmont lowered its guidance to 5.4 million ounces this year. At Tanami in Australia wet weather impacted results. Newmont is the world's largest gold company by production and reserves. While Newcrest adds to ounces and production, it also is yet another work-out situation integrating five new operations which will have to sort out just as they had to deal with the legacy problems at Éléonore, Peñasquito and Cochenour after spending $10 billion to buy Goldcorp. Lihir is a mature operation and both Brucejack and Red Chris have yet to operate at optimum levels. Coincidentally, Newmont wrote off $1.3 billion at Cripple Creek & Victor bought in 2015. Investors have become impatient with the slow progress and promise of turnarounds at the problem-prone mines. Nonetheless Newmont has a healthy cash of $3.2 billion and reserve position, but it's what they do with those reserves is important. We prefer Barrick here.

John R. Ing 

[email protected] 

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