And yet investors looking for mining bargains haven't got to explorers...
AMID a tempestuous year for the US Dollar gold price, gold has quietly moved up about 6% in Canadian Dollar terms.
That squarely places the focus on gold mining producers with Canadian operations that generate cash flow, says Ryan Hanley, mining analyst with Mackie Research Capital, as he explains in this interview with The Gold Report.
The Gold Report: Why haven't the recent Islamic State attacks in Paris spurred a greater safe-haven gold trade? Does it mean the concept of gold as a safe haven is, for the most part, dead?
Ryan Hanley: I don't believe so. Despite the recent attacks, this is the first time in a long time we've seen the United Kingdom backing France, and the US and Russia on the same page. Gold continues to have an inverse relationship with the US Dollar, and with the US posting strong employment numbers, we continue to believe that the focus is still on the US Dollar and the implications of a rate hike in December.
TGR: What sort of interest rate hike are you modeling?
Ryan Hanley: Our expectation would be about 25 basis points. We believe about 65-70% of that is already priced into the market.
TGR: Where do you peg the low end of the support range for gold in the near term?
Ryan Hanley: With continued economic strength in the US, we expect some near-term pressure to remain on the gold price. We could see it briefly dropping below $1000 per ounce in the near term, but in the long term we're much more bullish, especially given the average all-in sustaining cost of production among the companies we have under coverage is slightly above $1000 per ounce. Typically, we've seen seasonal strength in the second half of the year. We could see gold rebound as early as the second-half of 2016.
TGR: Your investment thesis roughly consists of low all-in sustaining cost production names in safe jurisdictions with near-term catalysts. Did I miss anything?
Ryan Hanley: That's basically it. I might add that Canadian gold producers continue to benefit from the depreciation of the Canadian Dollar versus the US Dollar, which has helped a lot. For example, the gold price has gone down by about 10% over the previous year in US Dollar terms, but in Canadian Dollar terms, once you apply the exchange rate, it's actually up by about 6%.
TGR: At a recent RBC Capital Markets conference in London, a number of companies presenting said they had further room to cut costs. Are the CEOs and management teams in your coverage universe echoing those statements?
Ryan Hanley: For most of the names we cover, there's not significant room for much cost-cutting. We could see slightly lower input costs in terms of mill re-agents, diesel prices, and drilling, so there is a bit of room to boost margins, but not by any significant measure.
TGR: You cover some drilling companies. How much lower are drilling costs now versus five years ago?
Ryan Hanley: I'd say they've come off about 50% on average, but in some cases, it's significantly more. It depends on whether you are in a well-developed camp like Red Lake, Ontario, or Val d'Or, Québec versus northern British Columbia, where helicopters are used to deliver drills. In prime mining camps, drill costs are probably 50% lower, if not more. You can get down to about $60 per meter on your base costs, but in some cases that doesn't include geology or fuel.
On the positive side for the drillers, we have seen some signs of stabilization, with the number of meters drilled and price per meter continuing to increase slightly year-over-year for several consecutive quarters.
TGR: Do you expect other companies under coverage to engage in M&A in 2016?
Ryan Hanley: There may be a couple of other names in our coverage universe where M&A could happen and we expect companies to explore those opportunities throughout 2016. A lot of companies that have production assets in riskier parts of the world could start to target companies with operations in Canada to take advantage of the safer jurisdiction and Canadian gold price.
But the focus is still going to be on cash flow. Investors are typically looking at gold companies generating cash at the current gold price and are not moving down the food chain to exploration projects just yet.
TGR: Will 2016 be the year when this sector finally begins its climb out of the doldrums, or will investors have to wait until 2017 or beyond?
Ryan Hanley: I'm hoping things start to turn around in 2016. We've seen a lot of cost-cutting, especially among the senior producers.
Across the space everyone is looking through a magnifying glass at ways to improve balance sheets. Now we need some cooperation from the gold price. Our belief is that toward the end of 2016, we're going to see something of a rebound. But it's really going to come down to the gold price, which is why the companies we selected as our top picks are fit to weather the storm. Should depressed commodity prices continue for a while, they will still be the ones generating cash flow.
TGR: Thank you for your insights, Ryan.