Summary

David & Tony believe indicated that supply is beginning to return. In a number of sectors company balance sheets have never been in a stronger position, and in addition, have benefited from low energy costs, where one third of mining industry’s operational incursions are. Furthermore, they suggested that COVID has meant the deferral of 2020 growth capital, which GMR expect to be shifted into 2021.

On Gold, Tony sees recent corrections as unnecessarily pessimistic, especially given gold’s current spot price, of $1,800 per ounce. Gold companies are still generating significant margins, on $950 an ounce, and this, combined with strong balance sheets, indicates the downturn of the gold price is unwarranted. They are bullish Kirkland Lake, which is attractive due to its “best-in-class balance sheet” and as one of only two gold companies with buybacks programs; Barrick, notable for its transformation from a highly leveraged and highly indebted entity into the number two gold business in the world - In the last quarter net debt was reduced to just $400 million whilst generating $1.3 billion of free cash flow; Northern Star, which is finalising a $4 billion mega-merger with Saracen and for which GMR forecasts the highest level of growth of seniors over the next 3 years, growing by about 20%. On the flip side: they have Agnico as a sell, despite everyone having this as one of their strongest buys - they see it as priced to perfection, trading at 2.8x P/NAV, and has failed to deliver its expected growth this year; B2 gold is overpriced, trading 2.2x P/NAV and with 80% of current production coming from Africa, they see headwinds over the next couple of year as extremely troubling with production decline forecasted in ‘21 and ‘’22.

Tony spoke on how strong iron ore prices have allowed the sector as a whole to go nearly debt-free. With very high cash flows, and very high dividend yields, iron ore will remain strong even with their assumption that prices will be down $30 to $40 a ton from present, with the market sitting on 5x EV/EBITDA. The stocks are not expensive and their best picks are: BHP on the FTSE, Teck in Canada and Vale in Brazil, with their best sell being Anglo-American, which is a pure valuation call. Explaining their preference of BHP over Rio they downgraded Rio after backing it for a number of years due to several key factors: no current CO, Juukan Gorge’s ESG cost, Orlyitogo issue and the Hennessy iron stripping and grade issues. Of the iron ore dominated stocks Vale is easily the best value.

David discussed how 2020 had been an extremely volatile year for copper: As a GDP linked commodity, it has reacted strongly to the impact of COVID-19, but has since been supported by the combination of lower projected production out of South America, Chinese opportunistic imports, low inventories and, now, the market looking optimistically at 2021. Copper sector has a higher level of debt to other sectors in the mining space, necessitating the high numbers of stocks still in a de-leveraging phase. More optimistically margins have expanded “very, very rapidly” and are robust today. Copper equity prices are getting a little bit hard to justify and as a result GMR are treating them with more caution and downgrading these stocks in the short-term. Three key sells are: Aero Copper, MMG and KGHM whilst Aero is the most “controversial,” the market has placed high valuation on exploration potential which cannot justify the current price as it already assumes a major discovery. On positive copper stocks: Cobre Panama is ramping up strong performance again, trading at just 1x P/NAV and generating strong, free cash flow. Oz and Lundin also look good, emphasising the latter as providing a lot strong, free cash flow in the short term, while suggesting that Oz has the best growth potential over the mid and long-term."

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