Whether the Fed has already ended rate hikes or there are a couple more to come this year, we are clearly near the end of the rate hiking cycle, suggests Adrian Day, editor of Global Analyst.
There is a very strong probability that the Fed will end rate hikes before inflation is firmly under control, and with the economy already heading into a recession. That will be extremely bullish for gold.
The yield curve is more inverted now than it was ahead of the last four recessions, and indeed is the most inverted since at least the early 1960s. This indicator has a strong predictive value, but normally works with a long lag.
In short then, we believe there is still the likelihood of at least one more rate hike, while the economy is inevitably moving towards recession. The Fed will stop raising rates before inflation is crushed, leaving us with high rates, a recession, and inflation — a triumvirate that will hurt stocks but boost gold significantly.
Once it is clear that gold has bottomed, and it stays firmly and consistently above the psychologically important $2,000 level, then interest will return to the gold stocks. The miners have their lowest valuations since 2018, and on many metrics close to their lowest valuations in 20 years.
Continuing to accumulate at these levels, across the spectrum — the large royalty streaming companies, the best of the large miners, cashed-up exploration companies — will reap strong rewards in a year or two.
Osisko Gold (OR) is finally closing its protracted transaction for the CSA Copper Mine in Australia, giving it exposure to both silver and copper.
The mine is currently expected to end production in 2029, but the new owners are expected to come out with a plan to extend that mine life, though at lower levels of production. Looking at the streams separately, analysts give a better-than 8% Internal Rate of Return to the silver and over 11% to the copper.
It is a high-quality, long-life mine in a top jurisdiction, with — notwithstanding some operator risk — high potential for expansion. This is another good asset for Osisko, diversifying its product base and geographic exposure, with meaningful growth potential. After an 11% drop from its early-May high, Osisko is a buy again.
Royal Gold (RGLD) has acquired three new producing royalties on two mines in Brazil, from ACG, which is a London company. The first royalty is for gold from Serrote; the second for gold, platinum and palladium from Santa Rita; and the third is a copper/nickel royalty on both.
Total cash consideration is $250 million, part of a financing package for ACG’s acquisition of both mines. The net asset value of the royalties on current reserves is not far off the purchase price, so Royal gets any expansion and exploration upside free. The royalties amount to a little more than 5% of Royal’s operating NAV.
Royal has the balance sheet to complete the acquisition, with half-a-billion available on its credit facility in addition to $134 million in working capital; that’s after repaying $100 million on its facility earlier this month. The stock is down about 18% from its late April highs.
On many metrics, Royal is trading below the valuations of its senior peers. Its balance sheet is not quite as strong, but certainly solid. However, given its valuation, growth profile, and stock price, it is a buy at this level.
Wheaton Precious (WPM) has made a couple of additional stream purchases, with the news offset by the suspension of Peñasquito in Mexico. It increased its stream on Canada's Blackwater Mine currently under development for an additional $40 million in committed funding, with the first $32 million of a total of $180 million being paid earlier this month; and last month it added a $300 million gold stream on Lundin’s Cangrejos project in Ecuador.
These transactions continue Wheaton’s recent trend of mid-sized and smaller investments on longer-term development projects. Though not particularly undervalued, Wheaton is a high quality play, with a strong balance sheet and exposure to multiple long-live projects. If you do not own it, the stock can be bought here.