1、North America Equity Research30 May 2019Equity Ratings and Price TargetsMkt CapPriceRatingPrice TargetCompanyTicker($mn)CCYPriceCurPrevCurEnd DatePrevEnd DateAgnico-Eagle(CN)AEM CN9,787.28CAD55.91OWn/c65.00Dec-19n/cn/cAgnico-Eagle MinesAEM US9,746.35USD41.26OWn/c50.00Dec-19n/cn/cB2GoldBTG US2,599.64
2、USD2.56OWn/cn/cn/cB2Gold(CN)BTO CN2,603.80CAD3.46OWn/cn/cn/cCia de Minas Buenaventura SAABVN US3,652.33USD14.38OWn/c18.00Dec-19n/cn/cEldorado(CN)ELD CN557.29CAD4.75UWNn/cn/cEldorado GoldEGO US557.28USD3.52UWNn/cn/cFranco-Nevada(CN)FNV CN13,908.00CAD100.20Nn/c97.50Dec-19n/cn/cFranco-NevadaFNV US13,88
3、6.42USD74.14Nn/c75.00Dec-19n/cn/cHecla MiningHL US637.33USD1.32Nn/cn/cn/cKinross(CN)K CN4,012.25CAD4.30UWNn/cn/cKinross GoldKGC US4,016.53USD3.19UWNn/cn/cNew Gold(CN)NGD CN385.97CAD0.90UWNn/cn/cNew GoldNGD US384.84USD0.67UWNn/cn/cNewmont Goldcorp CorpNEM US25,912.00USD31.60OWn/c43.00Dec-19n/cn/cPan
4、American(CN)PAAS CN2,161.08CAD13.92Nn/c26.00Dec-19n/cn/cPan American SilverPAAS US2,157.79USD10.30Nn/c20.00Dec-19n/cn/cNOVAGOLD(CN)NG CN1,225.99CAD5.13OWn/c8.00Dec-19n/cn/cNOVAGOLD ResourcesNG US1,228.67USD3.81OWn/c6.00Dec-19n/cn/cSource:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All
5、prices as of 29 May 19.Gold and Silver UpdateThe haves,the have nots,and the have lots.We downgrade EGO,KGC,and NGD from Neutral to UnderweightPrecious Metals&CoalJohn Bridges,CFA,ACSM AC(1-212)622-Bloomberg JPMA BRIDGES J.P.Morgan Securities LLCSiddharth Mishra(91-22)6157-J.P.Morgan India Private L
6、imitedSee page 61 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the
7、 objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.The gold equities are coming to terms with the realities of the gold sector with consolidation substituting for the lack of reserve replacement.The market has identified some
8、 better positioned smaller companies were calling the Haves,and with this note we are adjusting our ratings to highlight the differences between the company groups weve identified here.While some like JPMs Thomas Anthonj have highlighted(here)that recent dollar strength looks extended,the increasing
9、ly inverted US yield curve suggests the US$could just be firming into typical recessionary strength.And seasonally this is the time when gold can begin its summer time-out.We are very positive longer term on the sector based on the likely MMT-driven stimulus we wrote about here and tight gold supply
10、,but for now we are cautious on the sector and are moving three stocks to Underweights.Reviewing the Have nots,we conclude that while gold and silver prices look oversold,given recession risks and trade uncertainties,we feel its difficult tosee significant weakness for the US$,and thus a bounce for
11、gold.Consequently,were lowering our ratings on the following three stocks from Neutral to Underweight.oEldorado(EGO)has just refinanced its debt and should be a cash generator beginning H219.The stock reacted positively to the news that the more business-friendly New Democracy was well ahead of SYRI
12、ZA in the latest European elections.Yet with 33%of the vote any new government in Greece will depend on the shape of any New Democracy coalition.2North America Equity Research30 May 2019John Bridges,CFA,ACSM(1-212)622-oKinross(KGC)is about to begin to benefit from its investments at Round and Bald M
13、ountain and later at Fort Knox.But with its relatively short-lived projects the company is considering new spending at Tasiast and Marte Lobo.In a rising gold price environment the companys lean operating model makes it popular,but the current lackluster metal prices make us cautious.oNew Gold(NGD)h
14、as limited NAV remaining,and while it hasa plan to trade out of its predicament,weaker copper prices are not helping.And the prospect of 50%higher interest charges on its 2022 debt,currently priced at 6.25%,is not helpful.3North America Equity Research30 May 2019John Bridges,CFA,ACSM(1-212)622-Summa
15、ry and ratings changesWe see three groupings in the gold sector today.The chart below shows the significantly different relative performance of the groups(relative to the HUI index).We feel the Haves separate themselves by demonstrating skills in replacing reserves without incurring excessive diluti
16、on.The Have nots,for a variety of reasons,have been less successful with reserves.In the case of Kinross,the major purchase of the Tasiast asset disappointed;Eldorado had the reserves,but politics in Greece,and now metallurgical problems in Turkey,have cut into viability.The Have lots have the large
17、st production rates and thus the largest exposure to the disappointing performance of greenfield exploration in adding new projects.The Haves separated themselves from the other precious metals companies in the last five years.Silvershowing its elevated volatilitycaught up on metals price strength i
18、n 2016 but has since slipped.The Have lots(inlcluding Newmont)were tracking in the middle ground but made up some ground recently as they outlined a more sustainable business plan and accessed the Nevada synergies.Figure 1:Composite index performance of Haves,Have nots,Have lots,silver vs.the HUI in
19、dexSource:Bloomberg.Note:Allindexes are Market Cap weighted.“Haves”include AEM,BVN,BTG,and FNV;“Have nots”include NGD,KGC,and EGO;“Have lots”include NEM;and Silver Composite includes HL and PAAS.Higher cost of capital and the debt refi bluesJust as precious metals sector costs are rising,the sectors
20、 cost of capital is moving up.Previously investors were patient waiting for higher metal prices to lift shares.No more.Now miners are paying bigger dividends to attract attention.But now debt is getting more expensive.Eldorado recently refinanced$600m but was only able to find support for$300mm new
21、bonds requiring a term loan for another$200mm.The rate on the new bonds was expected to be 8-9%but priced at 10%.Next up for debt refinancing are Hecla and New Gold.050100150200250HUI IndexHaves IndexHave Nots IndexHave Lots IndexSilver Composite Index4North America Equity Research30 May 2019John Br
22、idges,CFA,ACSM(1-212)622-In more detailForecasts for our covered equities suggest that current operations have achieved some level of stability as shown below.Figure 2:StabilizationSource:Company reports and J.P.Morgan estimates.Yet costs are rising with a driver being increased exploration expense
23、as miners try to catch up with their next projects.Project spending was cut aggressively at many companies after gold prices fell from their 2011/2 peak,creating balance sheet stress.Figure 3:But costs are moving up againSource:Company reports and J.P.Morgan estimates.0200400600800100012001400160018
24、00Cash Cost by productMargin/ozGold price rec.59%64%53%50%47%53%53%58%54%49%47%43%41%46%54%65%69%53%50%48%49%49%500600700800900100020142015201620172018201920202021Cash cost/ozG&A/ozExploaration/ozSustaining capex/oz$919/oz$875/oz$909/oz$862/oz$632$613$595$634$926/oz$943/oz$587$675$677$695$914/oz$924
25、/oz5North America Equity Research30 May 2019John Bridges,CFA,ACSM(1-212)622-Silver prices have lagged gold,and the metal is approaching 30-year lows relative to gold.Figure 4:Silver is unusually cheap relative to goldSource:Bloomberg.Low silver prices probably exacerbated the decline in silver suppl
26、y shown below.Figure 5:Is silver be sending a message?Source:Silver Institute.Gold supply holding upfor nowbut the situation is challenging.Free cash flow was improved by cuts to operating costs and capex between 2013 and 2015.However,increased exploration costs are heralding a new capital cost cycl
27、e at a time when investors are not keen to put money to work in the sector.10.020.030.040.050.060.070.080.090.0100.0110.0Jan-70Jan-72Jan-74Jan-76Jan-78Jan-80Jan-82Jan-84Jan-86Jan-88Jan-90Jan-92Jan-94Jan-96Jan-98Jan-00Jan-02Jan-04Jan-06Jan-08Jan-10Jan-12Jan-14Jan-16Jan-18Gold/Silver Ratio0.0100.0200.
28、0300.0400.0500.0600.0700.0800.0900.01000.0Global Silver Supply6North America Equity Research30 May 2019John Bridges,CFA,ACSM(1-212)622-Figure 6:While not as weak as silver;gold has been range bound since 2014Source:Bloomberg.After booming with the gold price peak in 2011/12 capital spending has plum
29、meted,and with reserves now falling the larger companies cant just depend on sustain capex and must build new mines to replace depleting reserves.Figure 7:Capex spending is low.for nowSource:Company reports and J.P.Morgan estimates.The cuts to capex and asset sales did allow miners that over extende
30、d in the late 2000s to repair their balance sheets.While lower,net debt/EBITDA is still elevated compared with average 2000s levels.With investors still wary of investing in the precious metals sector,miners are looking to alternatives to project debt.100011001200130014001500160017001800190020002.04
31、.06.08.010.012.014.016.0Total Capex7North America Equity Research30 May 2019John Bridges,CFA,ACSM(1-212)622-Figure 8:Theres little capex forecast for new projectsSource:Company reports and J.P.Morgan estimates.The Have Lots,like Newmont,are positioning to be stable producers at(undetermined)post ass
32、et-sale production levels.We see this as the best strategy for the industrys largest producers since they have the biggest exposure to the failure of the explorers to find large new gold depositsBy accumulating as many of the largest and potentially most cash flowing assets,the largest companies sho
33、uld have the financial strength to finance the new projects in their pipelines.This is especially important because its difficult to know when equity investors will bring new money to the sector.At present,finance seems to be more readily available from higher cost sources like royalty companies,pri
34、vate equity,and credit sources.While the larger gold companies seemed to have secured their futures with deals like Randgold and Newmont Goldcorp,smaller companies are busy seeking finance.Eldorado,Newgold,and Hecla are refinancing debt.Yamana sold its flagship Chapada copper/gold mine to repair its
35、 balance sheetAustralian miner St Barbara has put in a bid for Canadian-listed Atlantic Gold in line with our Australian partner Mathew Hockings note that the Australian miners were cashed up and looking for deals.Perhaps enlivened by this deal,Iamgold has hired bankers to see if there are buyers fo
36、r all or parts of its asset base.The cost of finance has been moving up.Eldorado just refinanced$300m of senior secured second lien debt at a cost of 9.5%(plus a 2%discount)compared with the maturing debt priced at 6%.The HavesAgnico(AEM).Agnico is a graduate of the“University of Metal Cycles”after
37、its 60-plus years of operations.It generally moves conservatively and avoided the write-downs suffered by a number of its peers after the 2011/12 gold price peak.B2Gold(BTG).B2Gold is a younger company but continues with the same Bema Gold management group that began operations in the 1970s.The comp
38、any-1.0-0.50.00.51.01.52.02.5-5.00.05.010.015.020.025.02000200120022003200420052006200720082009201020112012201320142015201620172018201920202021Net DebtNet Debt/EBITDAAvg.Gold Price received/oz8North America Equity Research30 May 2019John Bridges,CFA,ACSM(1-212)622-has demonstrated an ability to find
39、,develop,and operate gold mines without undue dependence on financial markets for growth.For its Fekola project the company avoided issuing equity and instead took out a gold loan,which it is now paying back.Buenaventura(BVN).BVN is another company with a 60-plus-year corporate memory.The company op
40、erates in Peru,which has a rich mineral endowment,and the company has grown from just operating the Julcani mine in the 1950s into a growing mid-tier producer with numerous international alliances in JV projects.Franco Nevada(FNV).Franco Nevada grew quickly after the discovery of the Goldstrike depo
41、sit in Nevada.Franco owned royalties on the asset and grew from C$50m seed capital in the early 1980s into multi-billion dollar companies.oFranco Nevada opportunistically transitioned from its royalty foundation to the more flexible streaming model.Its strong balance sheet post the late 2000 commodi
42、ty peak served it well by allowing it to partner with diversified miners thatafter many years of requestsbecame willing sellers of precious metals streams from their highest quality assets.This has given Franco its Antapaccay,Antamina,and Cobre Panama streams.oWe understand that the streaming market
43、 has switched away from favoring buyers.Francos David Harquail says that the company has locked up enough streams to support the dividend for decades,so the company has turned its attention to oil and gas.While this is still only about 11%of the portfolio,the company sees more upside in this sector
44、at present.We would have included Randgold Resources in this group too.Randgold was a Have with its growth in value per share and production.The Have NotsKinross(KGC).Kinross had hoped that the Tasiast mine would be the mainstay mine it has always wanted.However,the strong cash flows it hoped for di
45、ssipated after costs rose and metal prices slipped.After much study the company was able to detail and then build the phase 1 expansion project,but it is now reviewing a 1.5 expansion scenario rather than the full phase 2 it had hoped for.Eldorado(EGO).After a successful period operating mines in Ch
46、ina and Turkey the company bought projects in Greece.Unfortunately,this timing corresponded with the ballot box success of the SYRIZA party in the country.SYRIZA is something of a coalition group,and some elements have been anti-mining and have slowed down the development of Eldorados development pr
47、ojects at Skouries and Olympias.oThe SYRIZA government has announced elections in late June or early July,and after its win in the European elections last week the more business-friendly New Democracy party looks set to be the winner in the local vote.However,with only 33%in the Euro elections,New D
48、emocracys policies will have to be agreed with other parties.New Gold(NGD).New Gold was created from a number of mature assets and two new ones.Of the first generation of mines,only New Afton is still operating and needs reinvestment to access the deeper portion of the ore body.9North America Equity
49、 Research30 May 2019John Bridges,CFA,ACSM(1-212)622-oThe company has invested heavily into developing its Rainy River project.With its low grade gold reserve the project really needed a trouble-free build to be successful;unfortunately,there were problems with the tailings dams and a slow ramp-up at
50、 the mill leading to cost overruns.oThe company under new leadership from Renaud Adams has three key targets:1)ramping up throughput at the Rainy River mine,2)finding capital for the C zone project at New Afton,and 3)optimizing the Blackwater project.We feel this strategy makes sense but is not guar
