Mar 5, 2018

Jon Case's Top Picks: March 5, 2018

BNN Bloomberg

Jon Case , BNN

Jon Case, portfolio manager at Sentry Investments
Focus: Mining stocks

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MARKET OUTLOOK

Long-term outlook:

We see long-term demand for gold as a monetary asset. As people accumulate wealth, comes more savings and more demand: That’s a longer-term magnet pulling up the gold price.

Medium-term outlook:

Our outlook is driven by investors in financial markets, who tend to drive the gold price over shorter-term periods. Financial investors look to gold for two factors:

Gold as a systemic hedge for a portfolio. Our outlook: Positive
- Debt with Trump tax cuts accelerates at 5.5 per cent compound annual growth rate (CAGR) and we think debt-to-GDP will hit 120 per cent in 10 years, a tipping point.
- Too much debt ultimately poses a risk to currency.
- We’ve seen the U.S. dollar sell off lately and gold has got some life, but I think that’s the tip of the iceberg.
Gold as a return driver for a portfolio. Our outlook: Negative
- Demand from this investor is highly correlated to risk off/on behaviour.
- Gold does well in equity market drawdowns: During the last dozen periods where the S&P fell by 20 per cent, gold has on average gone up 7.6 per cent.
- Right now markets are strong, so gold is out of favour for this category of investor.
- As the market moves from quantitative easing to quantitative tightening ($1 trillion less per year in printed money), I think we will see asset prices drop and gold come back into the spotlight.

With one type of financial investor buying but the other not buying or even selling, I see precious metals as range-bound until equity markets weaken or we enter a risk-off environment.

TOP PICKS

ATLANTIC GOLD (AGB.V)

Atlantic Gold is an emerging gold producer in Nova Scotia. The company began producing gold in late 2017 and is now in ramp-up mode, which will take them from 82,000 ounces per year in 2018 to 250,000 over the next four years. The key attributes that I like about Atlantic are:

Valuation: It’s cheap trading at 0.65 times our net asset value (NAV) of $2.42 per share and its 7-times cash flow drops to 5 times 2021 with growth.
Cost profile: Atlantic’s low casts costs of less than $600 per ounce is unique. High-margin assets are attractive because they reduce volatility in asset valuation.
Jurisdiction: We have seen political risks show up in stories like Torex and Tahoe. I expect that to result in higher valuation multiples for assets in Canada, the U.S. and Australia.

DETOUR GOLD (DGC.TO)

Detour Gold is a Canadian producer with production of 625,000 ounces per year from its Detour Lake mines in Ontario. Detour’s near-term profile of the mine calls for production to dip in 2019 and 2020, with the company mining lower grade and high amounts of waste. I think some investors see no reason to own the name for the next 24 months on that basis, and as such it’s off 29 per cent over last year vs. comps down 12 per cent.

In 2021, production jumps back up a cash flow should reach $250 million per year — a yield of 13 per cent. If you have a two-year time horizon, this company looks like a bargain. The book value on just only the mine PPE is $11 per share. Our NAV is $22 per share at $1,300 (0.5 times NAV).

ALAMOS GOLD (AGI.TO)

Alamos gold is a diversified intermediate gold producer with production of 500,000 ounces, two-thirds coming from assets in Canada and one-third coming from Mexico. Alamos recently made a $850-million acquisition of Richmont Mines. Investors viewed that acquisition as overpaying and sold down Alamos. We were large investors in Richmont so we didn’t mind the buyout.

If we look at the value of Alamos now, it’s gone from $10.25 to $6.71: a decline of $1.4 billion with $500 million of that coming from market weakness. That means $900 million, or the value of the acquisition, now comes to buyers for free. Insiders have also been buying stock, which I like to see when it lines up with my fundamental view. Alamos has a high-quality portfolio that is trading below our NAV of $7.50 per share.