The gold correction we have been expecting is now underway, with bullion down almost US$60 from its early April high. Gold had added US$250 in five weeks around the Federal Reserve's last meeting and the "pivot" narrative; the Fed funds futures indicate that the market expects a 75 basis point decline in rates before the end of this year.
We believed that the narrative around the Fed was optimistic and that gold had moved ahead of itself, making it vulnerable to a pullback. We called Fed policy a shift rather than a pivot.
Now, gold is slowly rolling over as the market realizes that the pivot narrative was aggressive. The market now expects another rate hike at the next meeting in early May, as a series of Fed officials have called for that rate increase. One can't time short-term moves in the market, and we don't know what the Fed will do or say at its next meeting, but it is likely that another rate increase and Fed chairman Jerome Powell doing his best hawkish stance will see gold continue this short-term decline.
However, after that, and particularly given the new Fed admission of a likely recession later this year, albeit a mild one, gold will likely bottom and start to recover shortly after. So we have few buys now, but expect within a couple of weeks to be turning to buying again.
Will the Recession Ahead Be Only Mild?
The Federal Reserve staff is now expecting a recession later this year, albeit a "mild" one. We think the economic headlines hide turbulence beneath.
Item one, employment: While the unemployment rate fell to new lows, the low labor participation rate; the number of part-time or low-paid jobs; the rising first-time claims; and the string of corporate announcements of pending layoffs suggest the labor market is not as strong as it would seem.
Item two, the consumer: continued strong consumer spending masks lower savings levels and rising credit card balances and now credit card write-offs against suggesting a deterioration ahead.
We believe that the U.S. economy is falling into a recession that will be longer and less mild than many currently expect.
Royal Gold Sees Flat Production Ahead
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) issued full-year guidance more-or-less flat on last year's production and below consensus estimates; the stock fell nearly 6% in response. Key aspects include the first full year of production from the Khoemacau mine but lower first-half output at Mt. Milligan, which is Royal's largest asset.
However, overall, the guidance seems relatively conservative compared with the guidance issued by at least some of the mine operators. There were no major surprises in the guidance, though again, Royal's guidance suggests a larger impact from various changes across the portfolio than expected. Following the release of its 2023 guidance — Royal does not issue multi-year guidance — it held its annual "investor day" earlier this week, with an emphasis on both its growth profile and its process, as well as the inevitable genuflection before the altar of ESG.
Royal has made several expensive acquisitions recently, with many analysts thinking the company overpaid, especially for royalties on earlier-stage projects. However, there is no mistaking that Royal clinched several keys, long-life assets in North America.
CEO Bill Heissenbuttel states that there are only so many royalties on such assets still available, and Royal is positioning itself for the future, a future that will include higher gold prices.
These recent acquisitions, including another Cortez royalty as well as Great Bear, have extended the portfolio duration.
Focus on Gold With Liquidity To Do Deals
The company indicated that it would continue to pursue growth, though future acquisitions may be smaller than recent ones and would most likely continue to be in gold. Heissenbuttel also discussed what he considers Royal's advantageous size, large enough to compete with the largest, but of a size that mid-size transactions, say of US$250,000, would have a meaningful impact on the company's NAV and revenue.
One-half of all streaming transactions in the last 20 years have been for less than US$200 million, so Royal's current liquidity of almost US$550 million certainly means it can continue to invest.
Royal believes future cash flows will be sufficient to repay all outstanding debt "in a relatively short period of time." The high prices paid for recent acquisitions suggest that Royal has added leverage to higher gold prices. It has a reasonable valuation relative to other large royalty companies. At 20 times cash flow and more than three times book, that's lower than Franco but higher on some metrics than Osisko and others; it also has more debt than competitors.
We are holding.
Altius Reports Revenue Little Lower Than Expected
Altius Minerals Corp. (ALS:TSX.V) announced first-quarter attributable royalty revenue of just over US$21 million, a little below analysts' estimates. Overall, revenues were down from just over US$23 million in the fourth quarter and US$25.5 million in the year-ago quarter.
Potash saw a significant decline, over 8% from the fourth quarter and year-ago revenue as prices stabilized; this was not unexpected. The base and battery metals division revenues, modestly up on the fourth quarter, were less than 50% of the year-ago revenues, largely the result of the closure of the 777 Mine and still lower than expected, and the primary driver of the company's weaker-than-expected results.
Renewal revenue, though higher, was up marginally less than expected, while thermal coal, lower than fourth-quarter and year-ago revenues, was higher than expected.
A financial presentation next month will provide additional detail and analysis. With broad exposure to non-precious metals commodities, Altius often has some sectors perform well while others less so.
Lots of Drilling on Projects in Which It Has Interests
The company's Project Generation business reported an equity portfolio valuation of almost CA$52 million at quarter end, up nearly 4% from year-end, with additional net cash proceeds of CA$1.8 million.
Altius estimates that about 270,000 meters of drilling will take place this year on the various projects on which it has equity or royalty exposure. Although Altius stock is near the low end of its six-month range, it remains fairly valued, given expectations for lower revenues this year. It remains a core holding, and we continue to look for opportunities to add to positions.
Advances at Two Lara Properties, Which Key Asset About To Drill
Lara Exploration Ltd. (LRA:TSX.V) released news of two of its projects in Peru. First, it reported that the Australian explorer Valor Resources has applied for permits for a 120-hole drill program on its Picha copper-silver project, on which Lara holds a 2% royalty on precious metals and a 1% royalty on base metals. It expects to begin testing the main targets this year.
Separately, Lara updated the results of work on its 100% Kenita polymetallic project in central Peru. The projects include the Puituco license that Lara acquired at auction as well as the Kenita license purchases from BHP. Though neither of these projects is the driver of company value right now, the news clearly demonstrates the breadth of projects at various stages in the Lara portfolio, and we expect to see more properties optioned out and more exploration and drilling across the portfolio.
At Planalto, where Capstone earlier exercised its option to become the operator, drilling is expected to commence soon. Although some results from late-year drilling are still to be released, this year's drilling on newly acquired land will be more significant.
Lara remains a favorite junior and continues to be a Buy.
TOP BUYS THIS WEEK, in addition to the above, include Midland Exploration Inc. (MD:TSX.V) and Hutchison Port Holdings Trust (HPHT:Singapore).
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