With the stock market booming and bonds near the lowest yields in history; investors have enjoyed a huge boost in asset prices. Each week, indexes like the S&P 500 and NASDAQ are hitting new highs. Most of this increase has come on the heels of stimulus from central banks around the world in the form of quantitative easing and more. These “emergency measures” have been going on for years now and global growth is still just slugging along.
The VIX, which measures market volatility, hit the lowest point in history at 8.84 back in July. Just yesterday, the market finally fell due to hostile talks between the U.S. and North Korea. This caused the VIX to spike, in a long awaited move. A long list of potential issues are just around the corner including the U.S. debt ceiling, next Fed meeting, and latest numbers on the Chinese economy, which could mean more volatility coming soon.
VIX Chart: The Measure of Market Volatility has been Low
Due to these factors, it’s no wonder that gold has broken out to the upside as investors seek safe-haven assets. Well-respected hedge fund managers have begun to hammer point this home, including Ray Dalio in his recent letter released on LinkedIn. In the note, he reiterated his long-held view that investors should hold 5-10% of their assets in gold; something we’ve long advocated for.
He went on to say, “The emerging risks appear more political than economic, which makes them especially challenging to price in,” wrote Dalio, who rarely makes specific market recommendations.
Among the risks Dalio mentions: “Two confrontational, nationalistic, and militaristic leaders playing chicken with each other” and “the odds of Congress failing to raise the debt ceiling (leading to a technical default, a temporary government shutdown, and increased loss of faith in the effectiveness of our political system) rising.”
There are several ways to get exposure to gold including holding psychical coins or bars, using ETFs, and buying shares in gold miners. We’ll explore three mining stocks on the move and lay out our bullish case.
Chart: Gold Breaks Above the Important 200-DMA (Day Moving Average)
Chart: ETF GOLD, representing a current gold price of $1,286
Our Case: Junior Miners to Consider
Kirkland Lake Gold is a mid-tier gold producer targeting 530,000 – 570,000 ounces in Tier 1 mining jurisdictions of Canada and Australia. The company is known for a solid base of quality assets, which is complemented by district scale exploration potential, and supported by a strong financial position.
Just recently, the company announced positive news about high-grade drill results at depth from underground drilling at the Fosterville Mine, which is the largest gold producer in the State of Victoria, Australia.
These recent drill results returned from six underground holes returned intervals of extremely high grades with visible gold.
Tony Makuch, President and CEO, said, “[The] drill results continue to demonstrate both the continuity and growth potential of the high-grade Swan Zone within the Lower Phoenix gold system. The Swan Zone is the highest-grade area of the Fosterville Mine, with a recently released mineral reserve including 532,000 ounces at an average grade of 58.8 g/t gold.”
He went on to say, “We intend to accelerate progressive step-out extension drilling on the Swan Zone of Lower Phoenix gold system during the second half of 2017, which remains open down-plunge.”
Also released in the quarterly earnings report was the news that the company repurchased 1,311,700 common shares in Q2 2017, an other extremely positive signal that they felt the stock was undervalued.
As you can see from the 3-month chart, the stock has been up over 45% and based on this positive news, it has the potential to go even higher pending results of the next drill.
TSX:KL
3-Month Chart
SSR Mining is a precious metals producer with three operations, including the Marigold gold mine in Nevada, U.S., the Seabee Gold Operation in Saskatchewan, Canada and the 75% owned and operated Puna Operations joint venture in Jujuy Province, Argentina.
Shares spiked just this week on the news of positive earnings, as well as positive cashflow. The company reported adjusted net income of $13 million, which was a more than $0.02 a share ahead of what Wall Street had been expecting.
Paul Benson, President and CEO said, “We delivered another strong quarter as production exceeded 100,000 gold equivalent ounces, which generated free cash flow to further strengthen our balance sheet to over $350 million in cash.
The other component to the positive news comes from their revised full-year outlook. The Production forecast at its flagship Marigold mine is unchanged at 205,000 ounces to 215,000 ounces, but the cash costs payable per ounce were lowered to a range of $640 to $670, down from $655 to $705 an ounce.
Furthermore, it upped its gold production outlook for the Seabee mine, which was acquired when it purchased Claude Resources last June.
The company has worked hard to lower costs, improve its cash flow, and reduce its reliance on silver; even going so far as to recently change their company name from Silver Standard after 70 years of business.
As you can see from this 5-day chart, investors reacted quickly to the positive news. Based on the positive factors we laid out, SSR seems ready for more gains ahead.
NASDAQ/TSX:SSRM
5-Day Chart
Alamos is a Canadian-based intermediate gold producer with diversified production from three operating mines in North America, including the Young-Davidson Mine in northern Ontario, Canada, and the Mulatos and El Chanate Mines in Sonora, Mexico. The Company has a leading growth profile with exploration and development projects in Mexico, Turkey, Canada and the United States and is committed to the highest standards of sustainable development.
The company recently announced strong Q2 earnings and reporting that it made “significant gains,” achieved “record production,” and produced “the highest combined free cash flow from our operations in years”. Shares of the miner were up 11% on the news and have increased over 23% in the past three months shown in the chart below.
Alamos produced 105,900 ounces of gold at a cost of sales of $1,053 per ounce in the quarter. Most of the gold was sold for an average price of $1,262 per ounce, producing $131.3 million in revenue for the company. CEO John A. McCluskey told investors that the same wide divide between its costs and its selling price for gold will “continue in the second half of the year with stronger production and lower costs driving strong free cash flow growth from our operations.”
One of the biggest concerns in this space is how much debt a company takes on. One key metric of financial health of a miner is to compare what it earns against the amount it pays as interest. This shows the company’s ability to service debt during a downturn. Since earnings are currently at least 5x larger than it’s interest payments, that indicates there is less of a risk of defaulting on its debt.
A market cap of nearly $2 Billion, Alamos sits in the mid-cap category. Often times the smaller and mid-tier miners get less attention and paltry coverage by Wall Street analysts. Based on their latest quarter, and solid financial footing, the company has a strong chance of topping estimates again and continuing on a strong growth path into year-end.
TSX:AGI
3-Month Chart
We believe precious metals have bottomed and are beginning to break out following the summer doldrums. August and September are typically two of the strongest months and many quality junior mining stocks remain deeply undervalued. Subscribe now to get our top stock picks, monthly newsletter, model portfolio and trade alerts for just $99. You will also gain access to our top cryptocurrency picks and the initial coin offerings (ICOs) that we believe have the potential for 5X returns.
