Stocks in the metals and mining sectors have had a near-term resurgence, in part spurred by inflation worries and potential spending on infrastructure projects. Here are some favorite resource sector buys from participants in this week’s MoneyShow Money, Metals & Mining Virtual Expo on April 20-22. Register for free here.
Joe Biden’s mega-plan for America will require huge amounts of debt to be sold in the capital markets. It doesn’t matter what your political bent is now. What’s most important as an investor is to capitalize on the environment we have now and will have for the foreseeable future.
I recommend you target a new, diversified global materials giant for generous income and juicy potential gains. I’m talking about Rio Tinto Group (RIO).
London-based Rio Tinto produces everything from iron ore and aluminum to copper, diamonds and titanium. It has more than 47,500 employees spread across 60 locations in 35 countries.
Among its far-flung operations are the large iron ore mining, rail transport and shipping facilities in Pilbara, Western Australia … the Oyu Tolgoi copper mine in Mongolia … the Argyle and Diavik rough diamond mines in Australia and Canada … and a long-running borate mine in California, which supplies a mineral used in fertilizer, glass and home insulation.
Basic materials and commodities like these are the global economy’s building blocks. When trillions of dollars are being thrown at that economy — not just here in the U.S. but abroad as well — companies like Rio Tinto are among those best positioned to scoop it up. Lots of it.
In fact, Rio Tinto managed to report a 3% rise in sales, 6% growth in cash flow from operations and a 20% increase in core earnings last year despite the COVID-19 pandemic. That’s because materials demand and pricing rose strongly in the second half of 2020 as stimulus kicked in.
Rio Tinto couldn’t avoid business hiccups entirely. Its aluminum results weren’t as strong as I’d like to see, and currency market movements put upward pressure on costs.
But the firm’s overall outlook is solid. Net debt has been coming down. Rio Tinto’s U.S.-traded shares sport a dividend yield of almost 6%, courtesy of generous regular and special dividends (the firm pays out on a semi-annual basis). And our Weiss Ratings system upgraded the stock to “Buy” territory in December.
The gold universe show growing signs of renewed strength. Price action in the U.S. dollar is key since its the personification of the inflation/deflation dilemma. Dollar strength in itself is deflationary and dollar weakness is inflationary. The rise or fall of the dollar, as well as its probable path, are great indicators for inflation expectations.
Gold continues to bounce up. It broke above a downside wedge pattern, to a new 1+ month high! Price action is very bullish for gold. It’s testing key resistance at $1750 and a break above this level and it’s off to the races. A rise to the August downtrend near $1900 would be likely.
Silver is forming a symmetrical triangle between a downtrend since February and an uptrend since November. The uptrend is formed from two key lows, the November and March lows, showing a solid uptrend.
The decline, a bit steeper, shows weakness. Keep an eye on the $26 level. A break above this level confirms the November uptrend and could push silver to its August/February highs near $30.
B2 Gold (BTG) is looking very good. I have a full position but I’ll be buying more at market. It is breaking above the bullish downside wedge pattern with upside target near $6, which is the August downtrend line.
Moreover, the breakout was lead by Spinner breaking above zero and into bullish territory. The leading indicator is now showing more upside potential.
NovaGold (NG) is also doing great. It extended its rebound rise, breaking above the September downtrend showing signs of strength.
NG is bullish above the March uptrend and has deep support at $8. If the stock now stays above the March uptrend near $9, a continued rise to the double top resistance near $12 would then be likely.
Silver miners remain very volatile. Our positions for the most part are looking strong. Hecla Mining (HL) continues to ride the March 2020 uptrend. HL is very strong above $5.50 and has deeper support at $4.50.
Its leading indicator is rising from an extreme, breaking above zero. Spinner suggests momentum could pick up steam sooner than later. Watch for a break above $6.50, it could open the door to a continued rise to the top side of the March upchannel near $9.
On the gold front, I really like the prospects for Barrick Gold (GOLD). Based in Toronto, Barrick is the world’s largest gold mining company. It has a portfolio of 27 operating mines and advanced exploration and development projects across the globe.
There are 13 gold mines in the world that are projected to produce a half million ounces of gold a year at below-average costs over the next decade. Barrick owns six of them. In fact, the company has projected that it will produce five million ounces of gold a year for the next 10 years.
However, gold itself has been in a bit of a correction recently. The yellow metal has declined 9% from its record high of $2,063 last August. Gold mining companies — whose shares are sensitive to the price of the commodity — have been hit even harder. Barrick shares are down a third from the 52-week high of $31.22. At this level, it is selling for just 15 times earnings and yields 1.8%.
With the global economy heating up and governments here and abroad committed to big deficit spending, I see gold staging a comeback from here. Barrick is a great way to play it. So, pick up Barrick Gold at market today. Place a sell stop at $15.50 for protection.
Our proprietary Aden Metals Index now shows precious metals are a good buy compared to base metals. The index shows a ratio of several precious metals as a group compared to a group of base metals. When the ratio rises, industrials are better than precious metals. And on the flip side, precious metals are better than industrial metals when the ratio declines.
Note in Chart 19 below that the ratio fell to a multi year low a year ago. It was saying it’s time to buy base materials more so than precious metals. It was time for them to shine. And this is what we got over the last six months, a strong resource sector.
But now it’s flashing to buy precious metals over base metals. In other words, it’s time for gold to shine over copper, using this example as the basis for the sectors.
The gold universe is starting the second quarter with a bang. It’s one of the best value investments around. If you don’t have all your positions set in the precious metals, we think that now is a good time to buy new positions.
Meanwhile, keep your precious metals positions, including Franco Nevada (FNV), Wheaton Precious Metals (WPM), Yamana Gold (AUY), Royal Gold (RGLD), Agnico Eagle (AEM).
Metalla Royalty & Streamling Ltd. (MTA) announced two big royalty deals this month. The first deal was with Sailfish Royalty to acquire that company’s 0.75% gross value royalty interest in the Tocantinzinho gold project in northern Brazil, which is operated by Eldorado Gold (EGO).
Tocantinzinho is a construction-ready project with more than two million ounces of gold resources. It is forecast to produce 170,000 ounces per year over a ten-year mine-life. Metalla will spend a total of C$9 million in cash for Sailfish’s royalty on the project.
The second deal was for a royalty on another northern Brazil project — the CentroGold project operated by Australian company OZ Minerals (Australia: OZL). The acquisition adds a royalty on yet another advanced-stage, near-two-million-ounce gold project.
It’s great to see Metalla growing its portfolio with projects that have a real shot of converting into cash flow in the medium term. Assets like these should continue to make the company one of the sector’s go-to royalty company names.
The additions build on the reputation Metalla has established as the most active royalty company in terms of acquisitions. Management’s focus remains on adding royalties on projects operated by large producers.
As it stands, the company has posted almost a six-bag gain from our 2017 entry price. As with some of the other big winners on our list, my hope is that you’ve taken some winnings of this stock. Make sure to keep a stake in Metalla, though, as it still has upside left.
There are three things that have been pressuring gold: the dollar, bond yields and sentiment. Naturally, they are all interrelated. And it’s possible, very possible, that they’ve all run out of steam.
In the last couple of days, long-term yields and the US dollar have backed off. And sentiment may well have reversed. It may be that gold will remain range-bound for a while as it awaits a new catalyst to trigger its next upleg.
Only time will tell. But given gold’s had its worst quarter in 4 years and its worst start in almost 40, maybe sentiment has swung enough that the selling has been exhausted.
From a technical price perspective, we need to see gold regain the $1,770 level, which is its 50-day moving average. If we get that and it holds for a few days, we may be off to the races once again.
Meanwhile, I believe most of the stocks in our gold portfolio are looking oversold right now. Here’s a look at a few of our portfolio holdings:
Calibre Mining (Toronto: CXB) (OTC: CXBMF) announced a positive Pre-Feasibility Study (PFS) for its Pavon gold mine in Nicaragua. Pavon Norte is a producing open pit whose ore it being trucked to the Libertad mill.
Updated mineral reserves and resources at El Limon and La Libertad complexes in Nicaragua generated 202% increase in reserves, the largest in 10 years at the highest grade ever. The shares are exceedingly cheap, and due for a re-rating.
Equinox Gold (EQX) announced a positive Feasibility Study (FS) on its Castle Mountain (California) Phase 2 expansion, which demonstrates an additional 3.2M gold ounces at an average all in sustaining cost (AISC) of $858/oz.
Even at $1,500 gold, it has an after-tax net present value (NPV) at 5% discount of $640M, and an internal rate of return (IRR) of 18%. This will generate nearly $2B of net cash flow at current gold prices. Equinox is very cheap on a forward P/E basis.
SSR Mining (SSRM) reported year-end 2020 reserves and resources. This year SSR Mining should generate about $300 more of free cash flow per ounce of gold produced vs. its peers group.
Debt is $440M while consolidated cash is a robust $897M. The stock currently yields a healthy 1.3%, and is very cheap on a forward P/E basis.
Fortuna Silver (FSM) provided additional insights into its last quarter and last year results at a recent conference call. For the year, silver production was down 19%, due to lower grades and temporary Covid-shutdowns at both silver mines, Caylloma and San Jose.
Higher prices offset lower production and that, together with the onset of the new gold mine in Argentina, saw revenue up around 9%, but because of lower capital spending, free cash flow doubled for the year to almost $79 million.
Following a weak 4th quarter overall, Fortuna has pointed to improvements, particularly at the new Argentina mine, Lindero; this year is “materially better”.
There are still some technical difficulties with specialized equipment. Because of Covid travel restrictions, they are unable to get the vendor technicians on site which is delaying fixing the problem. The company now expects to be at 85% capacity by the end of this month or early next.
The company also said it was going to spend more on exploration, which had been “short-changed” for three years as the company focused on the development and construction of Lindero.
This will include “aggressive” near-mine exploration at San Jose, as well as drilling the nearby El Blanco project in Mexico that it has optioned from Minaurum (MMRGF). Similarly, at Callyoma, Peru, it will be drilling extensions as well as new areas.
And at Lindero, it will be drilling a second gold porphyry, near the main ore, which is looking to be a small, higher-grade deposit, suitable as a satellite deposit. It will also be drilling new projects in both Mexico and Argentina.
As of the end of last quarter, the company has $34 million in cash. With good metals prices, the famously conservative company is looking to strengthen its balance sheet, aiming for “a fortress.” With strong management, a solid balance sheet, and a full year ahead at the new mine, Fortuna, which remains fundamentally undervalued relative to other comparable silver miners, is a buy.
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