Sprott Gold Report: Gold Equities are Currently on Sale

Authored by Shree Kargutkar, Portfolio Manager, Sprott Asset Management LP

The month of November has traditionally been relatively uneventful for the gold complex (as shown in the chart below). For this reason, we entered the month with a slightly defensive bias in our active gold strategies. November witnessed several bullish developments for both traditional and contemporary assets, including progress on the U.S. tax bill, continued buoyancy of the U.S. equity markets and speculative bitcoin surpassing US$10,000. It is encouraging to us that gold equities remained stable in November amid such exuberant sentiment extremes.

The Gold Miners Investment Opportunity: Inexpensive and Poised for Strong Earnings

Despite the strength in broad equity averages, spot gold has remained resilient throughout 2017, trading largely in a $100 range (between $1,200 and $1,300), and logging a year-to-date gain of 8.95% through 12/15/17. By contrast, gold equities have lagged the metal as demonstrated by the 5.11% gain for gold mining equities1 and an actual decline of 0.29% for a junior gold mining equities.2 This presents an opportunity for investors, as Trey Reik discussed last month (see Bridging the Performance Gap Between Gold and Miners).

The chart below also shows that the 2017 performance of spot gold (the gold line) has bucked the relatively recent trend favoring mid-December lows for the gold complex (red line represents past-five-year average). Should gold benefit in early 2018 from its traditional first quarter strength, we believe that high-quality gold miners are positioned for strong earnings performances.

 2017 Cumulative Average Daily Change in Spot Gold versus Historical Time Frames from 1972-Present


Source: Nick Laird; Sharelynx. Data as of 12/13/2017. This chart uses the London PM Fix to calculate gold price returns.

Volatility Should Benefit Miners

As we have communicated in the past, we believe volatility among traditional asset classes is likely to increase in the coming months.To us, valuations seem stretched for most U.S. financial assets. For example, U.S. equities have roughly tripled from their Q1 2009 lows. Between 3/31/09 and 11/30/2017, the S&P 500 Index (including reinvestment of dividends) generated a total return of 298.44%, with the Index rising from 797.87 to 2,647.58. During roughly the same span, the "free-cash-flow" of S&P 500 companies has only increased 27.68%, from $89.46 in calendar 2008 to an estimate of $114.22 in calendar 2017. More instructively, the free-cash-flow yield of the S&P 500 has plummeted from 11.21% at the end of Q1 2009 to 4.31% on 11/30/17. On the fixed-income side, credit spreads across the quality spectrum trade today near historically thin levels despite well-documented highs for every conceivable global debt measure.

Against this backdrop of stretched valuations for traditional financial assets, we are bullish about precious metal miners, among which 10% free-cash-flow yields and P/E multiples around 10x are increasingly common. In essence, gold shares resemble today the attractive valuations for high-quality companies available in the S&P 500 during the lows of 2009.

The Attractive Risk-Reward Proposition of Miners

Among gold miners, we are especially optimistic about several companies in Australia, namely Kirkland Lake Gold, Dacian Resources and Northern Star Resources, which all posted strong results in November. Kirkland Lake Gold’s exploration at the Fosterville operations continues to generate exceptionally high grades. Dacian Gold continues to execute well in the construction of its Mount Morgan project. Dacian Gold’s pending emergence as Australia’s newest mid-tier producer promises to continue its ongoing rerating. Northern Star Resources reported strong operating numbers at the end of October. Both Kirkland Resources and Northern Star Resources, remain inexpensive in our view, with roughly 10% (2018) free cash flow yields at current prices.

Despite their inherent volatility, we remain especially optimistic about the risk-reward proposition of precious metal miners.

1 VanEck Vectors Gold Miners ETF (GDX) seeks to replicate the NYSE Arca Gold Miners Index (GDMNTR), which is intended to track the overall performance of companies involved in the gold mining industry.
2 VanEck Vectors Junior Gold Miners ETF (GDXJ) seeks to replicate the MVIS Global Junior Gold Miners Index (MVGDXJTR), which is intended to track the overall performance of small-capitalization companies that are involved primarily in the mining for gold and/or silver.

The information contained herein does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.

Forward-Looking Statement

This report contains forward-looking statements which reflect the current expectations of management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this document. These factors should be considered carefully and undue reliance should not be placed on these forward-looking statements. Although the forward-looking statements contained in this document are based upon what management currently believes to be reasonable assumptions, there is no assurance that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this presentation and Sprott does not assume any obligation to update or revise.

Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any fund or account managed by Sprott. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any fund or account managed by Sprott will be invested.

Past performance does not guarantee future results. The views and opinions expressed herein are those of the author’s as of the date of this commentary, and are subject to change without notice. This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family,


Shree Kargutkar
Shree Kargutkar
Portfolio Manager
Sprott Asset Management LP

Sprott Asset Management LP is the sub-advisor for Sprott Gold and Precious Minerals Fund and Sprott Silver Equities Class.
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