KL - Gold Forecast 2020: Bullish Gold Holds Optimism for Juniors
The last 12 months have seen a flurry of activity in the gold sector with record-setting mergers and acquisitions (M&A), deposit discoveries and project ramp ups. With the gold price climbing by 15 percent in 2019, gold miners, producers and explorers are hoping the bull market leads to increased investor engagement.
The value of the yellow metal has steadily trended higher for the last six months with few declines, only hindered when the US Federal Reserve lowered interest rates three consecutive times within four months. The value of an ounce of gold hit a five year high of US$1,553 per ounce in early September, and it has remained above US$1,450 since mid-August.
To learn more about what companies see coming in 2020, the Investing News Network (INN) reached out to executives and CEOs in the space for their gold forecast.
We received insight from Felix Lee, president of the Prospectors and Developers Association of Canada (PDAC); Peter Berdusco, CEO, president and director of Guyana Goldstrike (TSXV:GYA,OTC Pink:GYNAF,FWB:1ZT); Jim Pettit, president, CEO and director of Aben Resources (TSXV:ABN,OTCQB:ABNAF); Jeanny So, external relations manager at Pancontinental Resources (TSXV:PUC); Nicholas Konkin of Monterey Minerals (CSE:MREY,FWB:2DK); John LeLiever, consultant at Signature Resources (TSXV:GSU,OTCQB:SGGIF,FWB:3S3); Peter Grosskopf, CEO of Sprott Asset Management; Terry Lynch, CEO of Chilean Metals (TSXV:CMX,OTC Pink:CMETF); and Denis Laviolette, CEO of GoldSpot Discoveries (TSXV:SPOT).
Gold trends 2019: Where is the capital?
Capital is an issue that is top of mind for many of the producers and explorers in the sector, according to Lee of PDAC, which holds the annual PDAC convention in Toronto — one of the largest gatherings of mining industry professionals.
“We continue to hear that members are struggling to access capital and reach new investors, which is a sentiment that has persisted for several years,” he said. “That said, many are encouraged by the recent rebound in precious metals prices and are hopeful that the upward trend continues into 2020.”
Junior companies, the explorers that often pinpoint the large deposits and unearth the major discoveries, have faced the most challenges in the precursor to the current bull market, and they have yet to see the gains expected.
“While a significant proportion of recent fund flow into gold and silver has been directed toward passive investments such as ETFs, junior explorers are confident that a positive trend in metal price will lead to more direct equity investment,” added Lee.
Berdusco of Guyana Goldstrike, which is developing the Marudi gold project in Guyana, told INN that lack of investor interest was the biggest challenge for his company this year.
As gold retains its range above US$1,450, retail investor confidence is expected to grow and hopefully trickle down to the junior sector, but just when is the question that is on the minds of many companies in the space.
“(Retail investors) feel if the gold prices rise, the stock prices should rise,” said Pettit of Aben Resources. “At this stage of the rally that is rarely the case. We need a more mature rally in gold to see the juniors really start to react and sustain higher levels — good results don’t hurt, either.”
If investors remain sidelined for too long, the project pipeline could begin to dry up.
“Last year, exploration activity climbed for the second year in a row, but this was at odds with overall equity financing for the industry and for exploration, which dropped 34 percent and 52 percent respectively versus 2017,” explained Lee. “Typically, if investment drops in any given year, the impact on activity materializes 12 to 18 months later and, as such, we suggested that a potential exploration slow-down may be on the horizon for 2019.”
A slowdown in exploration could lead to a future production reduction, further helping the gold price. Whether juniors can hold out until then will be seen.
“For the junior exploration market, the most challenging aspect is to wait until the money flows to the junior explorers,” said So of Pancontinental Resources. “We have seen some great M&A transactions in the industry and some new money coming into the sector, (but) it has not yet trickled down to the junior explorers.”
The lack of participation by retail investors wasn’t the only concern developers and explorers faced in 2019.
“Strong markets and relatively strong US dollar has made the gold markets challenging,” Konkin of Monterey Minerals said. “Additionally, we believe the diminishing gold reserves within producing companies has not yet been fully digested into the market.”
Gold forecast 2020: More mergers and acquisitions
In recent weeks, there has been an increase in M&A activity within the gold sector. Diversified miner Zijin Mining (OTC Pink:ZIJMF,HKEX:2899) will buy Canadian company Continental Gold (TSX:CNL,OTCQX:CGOOF) for C$1.4 billion, and Kirkland Lake Gold (TSX:KL,NYSE:KL,ASX:KLA) will spend C$4.9 billion to acquire Detour Gold’s (TSX:DGC,OTC Pink:DRGDF) cornerstone asset, the Detour Lake mine in Ontario.
The M&A trend is expected to continue into 2020 as reserves become squeezed and high-grade deposits become increasingly hard to find.
“Be patient. The majors need to move first,” explained Pettit. “Keep an eye out for M&A in the gold space and re-valuations. It doesn’t happen all at once but it will happen over time and it will have an effect on the juniors. More eyes will be on the sector and good results in the junior space will be rewarded in a bigger way. Remember, the discovery phase of the gold market offers the highest rewards in the gold sector.”
The importance of juniors in the commodity chain was a sentiment also echoed by Monterey Minerals.
“When the market fully digests the lack of exploration and new reserves, the junior and micro-cap space will begin to re-emerge — 2020 will be a promising year. It may be a slow recovery, but we do not see it getting worse,” said Konkin.
Gold forecast 2020: Factors to watch
When it comes to the year ahead, most miners and analysts are confident gold will retain its 2019 gains and continue to grow.
“I expect that the gold markets will continue to strengthen,” said Sprott’s Grosskopf. “Yes, the next correction in the stock market will trigger a major move into gold.”
His advice for novice investors: “Gold bullion is like an insurance policy. Gold equity investments require much due diligence and a professional team to manage.”
Diversified junior Pancontinental Resources believes investors need to consider a variety of things when selecting the projects they add to their portfolio.
“Patience, projects and people is what makes a good investment become great,” said So. “You can have the right people and the right projects, but if you are not patient to wait out the storm of the market, you might sell yourself short. If you have people and patience but the project is not a good one, you can have endless fund and a discover will never be found, and if you have a good project and patience but not a technical/management team that can move the project forward, you are wasting your money.”
Beyond assuring that the people, project and timing are good, understanding the fundamentals of the market and how global, national and regional issues may impact the market, the project and your investment is also important.
As LeLiever of Signature Resources said, “Do your research on management and the property being developed and don’t be afraid to jump in if it checks all the boxes. This is one of the few sectors that high risk can be rewarded with extremely high returns, but remember it can be like a slot machine: put the coin in and there is a good chance nothing will come back. Be smart and do your diligence.”
Retail investors are increasingly important to small operations who use the capital to fund next stage development and other initiatives that help realize the project’s potential. Despite retail investment being a driving force in the resource space in past decades, Lee noted how there has been a change in recent years.
“The shift from active to passive management is having a massive impact on the nature of investment, as over 90 percent of mineral industry financing on the TSXV through the first 10 months of 2019 was via private placements,” said Lee. “The balance has shifted materially in just five years as the lion’s share of industry funding used to come from public offerings, with private placements representing just 30 percent of industry investment in 2014.”
The reduction of the investor base has made it more challenging to raise capital to move exploration programs forward, leaving juniors increasingly reliant on strategic investments.
Shrinking investor pools may make it harder for juniors to secure funding; however, deteriorating geopolitical relations and ballooning debt levels will help gold retain its range between US$1,450 and US$1,500 and could draw more retail investor interest to the sector.
Mitigating risk is one way to appeal to investors, and being able to better pinpoint and target a deposit both diminishes risk and increases the likelihood of production.
GoldSpot Discoveries, a company that unites technology and mining, believes explorers and producers that use technology to their advantage are becoming more enticing to investors who want to reduce some of the risk associated with mining investment.
“We’re showing that a lot of the companies that we’ve been working with are getting a lot of interest in a market where not very many companies get interest,” said Laviolette.
Being able to set themselves apart when it comes to presenting to investors can give companies an edge in a somewhat saturated market, especially heading into a year the company head sees as “pivotal” in terms of mergers and acquisitions, as well as junior sector growth.
“(M)achine learning is an important bolt onto the narrative, and you know reducing risk in this space with regards to drilling ultimately reduces investment risk,” he said.
In addition to a prolonged gold bull market and the integration of technology, juniors may also benefit from a newly launched Save Canadian Mining initiative by Lynch of Chilean Metals that is backed by Canadian billionaire Eric Sprott.
The effort is aimed at getting the uptick or tick test rule, which was abolished in 2012, reinstated. It is a stock market guideline that only allowed the short selling of a stock on an uptick.
“I believe the Save Canadian Mining program will get the tick test reinstated and give the junior market a serious boost,” said Lynch. “ We have a structural finance problem, not a commodity problem.”
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Guyana Goldstrike, Pancontinental Resources, Monterey Minerals, Signature Resources, Aben Resources and GoldSpot Discoveries are clients of the Investing News Network. This article is not paid-for content.
The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.