Gold & Gold Miners – A Haven of Safety
Gold miners continue to deliver strong returns relative to paper gold (NYSE: GLD) and the S&P 500. Last week the market was spooked by iconic investors Stan Drukenmiller and David Tepper sounding the alarm about overvalued equity markets.
Gold is one of the primary beneficiaries of the recent bearish sentiment on Wall Street. Market exuberence was muzzled during the week with the S&P 500 down -2%, while gold and gold equities rallied meaningfully. The VanEck Vectors Gold Miners ETF (NYSE: GDX) and the VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ) were up 5% and 7% respectively vs. the SPDR Gold ETF +2%.
Investors in gold mining equities need to get compensated for the operational and financial risk they take, that compensation is translated into beta vs. the gold price.
Gold & Gold Equities Performance May 11th-15th, 2020.
Gold Miners Have Lagged Gold Bullion Significantly Over the Last Decade
Gold miners have been structural underperformers relative to gold since 2008, most institutional fund managers have left the sector entirely as a result of the abysmal returns.
It’s clear the gold equities have now put in a bottom relative to gold, there is a significant catch up trade here.
Copper – The Last Remaining Pocket of Deep Value in the Market
Mark Bristow, the CEO of Barrick Gold (TSX: ABX, NYSE: GOLD) is one of the mining industry’s legendary operators who has a great nose for unrecognized value. Last week in an interview with the FT he stated that he was looking to take advantage of the downturn in copper prices to make an acquisition in the sector.
Copper Miners vs. S&P 500
Copper consumption remains invariably linked to global economic growth, particularly as we move to a world where transport is driven by electrification. When the economy recovers from COVID-19 so will the global demand for copper.
Global Copper Consumption: 1900-2019
Sierra Metals – A Well Positioned Copper Recovery Play Trading at a Deep Discount
Sierra Metals (TSX: SMT, NYSE: SMTS) released solid Q1 2020 results last week, with mining and financial results well ahead of consensus estimates. On a year-on-year basis, the company increased copper equivalent production by 43% and grew EBITDA by 33%.
Since announcing results after market on May 14th, the stock has rallied 14% in the subsequent two trading days. We believe the company’s attractive copper, silver and gold exposure will attract interest from investors looking for value opportunities in the market.
On a year-to-date basis Sierra has sold off more than it’s peers, offering a compelling entry point for value orientated mining investors.
Base Metal Mining Stocks Have Sold Off Year-to-Date
SSR & Alacer Gold Gain Big on Merger of Equals
On May 11th, SSR Mining (TSX: SSRM) announced that it had agreed to buy Alacer Gold (TSX: ASR) in an all-stock, zero premium deal. Alacer shareholders will receive 0.3246 SSRM shares for each ASR share.
Both stocks rallied nearly 20% on the back of the deal announcement, this is a very positive development for the gold mining sector.
Mergers of equals are typically shrugged off by the market, but in the current environment investors are viewing this as the prudent corporate move. In a merger of equals no new capital is infused into the company and therefore the the merged entity must choose the higher ROI projects in both of their development portfolios.
Market Welcomes Merger of Equals: SSR Mining & Alcer Gold
Sierra Metals is a market awareness client of Capital 10X.
