Gold vs. Bitcoin

02/15/2018 5:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

The remarkable ascent of Bitcoin and other so-called crypto-currencies in the last quarter of 2017 generated fascination an immense amount of comment. Many analysts and observers are so taken with it that they liken it to a replacement for gold. But is it really? asks Gavin Graham in Internet Wealth Builder.

Advocates of Bitcoin and other crypto-currencies often make the comparison with gold, pointing out that it too has a limited supply, it is no one's obligation, and it has the virtues of anonymity.

They go on explain that unlike gold, however, Bitcoin transactions are not hampered by the need to move physical gold around, insure it, and store it. Moreover, unlike gold, Bitcoin is not liable to taxation on movement into different countries, such as India's import tariff on gold.

While all of these points are valid,  the major vehicle for owning gold in the last decade has been physical gold ETFs, such as the SPDR Gold ETF (GLD), which gives ownership of one-tenth of an ounce of gold stored in vaults in New York City.

This gives all of the advantages of Bitcoin in terms of ease of trading and transfer of funds. Holding gold in this way is not anonymous. Then again, critics point out that the use of blockchain's anonymity by criminal enterprises and terrorist groups is one of the main vulnerabilities of crypto-currency technology.

Whether that argument is valid or not, it seems likely that the authorities will eventually require records of Bitcoin wallets, if only to extract the tax on the massive capital gains made over the last year.

Finally, of course, there's the security aspect as was graphically demonstrated by the recent theft by hackers of nearly US$500 million worth of the NEM crypto-currency from Japanese crypto-currency exchange Coincheck. This comes four years after the implosion of another Japanese crypto-currency exchange, Mt. Gox.

Unlike Bitcoin, which isn't even a decade old yet, gold has been a store of value for more than 4,000 years. As observers are fond of pointing out, almost all the gold that's ever been mined is still around, as it doesn't rust, dissolve, or decompose. It can be used in any number of ways, including dentistry, industrial use (especially electronics), and of course jewelery.

Perhaps most importantly, gold is no one's obligation and no government has the ability to control its supply. Showing the erosion in value of what are known as fiat (i.e., government-issued and printed) currencies, gold is now worth US$1,350 per oz.

The attraction of an asset that appears to mimic many of gold's attributes is understandable, and blockchain is a technology that will undoubtedly be of great importance in the future. How long this process will take and whether Bitcoin or its rivals will still be in existence when it does is very difficult to forecast.

Rather than regarding it as a dangerous rival, it makes sense to stick with gold, the original, historic, proven store of value. Its supply cannot suddenly change, and it is supported by central banks, which still keep a large part of their reserves in gold.

For investors looking for exposure in the gold sector, Agnico Eagle (AEM) is a senior Canadian gold mining company that operates eight mines in Canada, Finland, and Mexico. It also has exploration and development activities in each of these countries as well as in the United States and Sweden.

Agnico Eagle reported excellent third-quarter financials for the period ending Sept. 30, 2017, with net income of $71 million ($0.31 per share) and adjusted net income of $66.5 million ($0.29 per share) against $49.4 million ($0.22 per share) in the same quarter in 2016.

For the first nine months of 2017, Agnico reported net income of $208 million ($0.91 per share) compared with $96.2 million ($0.43 per share). These results came on record quarterly gold production of 454,362 ounces at an all-in sustaining cost (AISC) of $789 per oz.

With record production and strong cash flow generation ($630 million vs. $594 million for the year-ago period, after working capital adjustments) Agnico raised its full year 2017 production guidance and lowered its costs to 1.68 million ounces, up from 1.62 million and an AISC down $10 per ounce, to $820-$880.

Agnico displayed its confidence in gold's outlook by spending $162.5 million to buy out Yamana Gold, its 50% partner in the Malartic gold mine in Quebec, from the Malartic exploration assets in Quebec and Ontario, including the Kirkland Lake and Hammond Reef assets.

Agnico remains the gold miner with the best-regarded management, growing production in politically safe jurisdictions, and a willingness to make opportunistic purchases, such as the Malartic exploration assets, taking advantage of Yamana's need for cash.

Goldcorp (GG) is the largest Canadian gold miner by market capitalization. Its portfolio includes mines in Canada, the U.S., and Latin America.The stock has lagged the broader market for gold stocks, down 15% in the last year, despite steadily improving results. The share price declined through most of 2017, until mid-December when impressive guidance on production and costs helped improve investor sentiment.

Goldcorp, now managed by ex-Agnico CFO David Garofalo, released impressive preliminary guidance for 2017 production and costs, with fourth-quarter and full-year production totalling 646,000 ounces and 2,569,000 ounces respectively, at an AISC of $825, in line with guidance.

The full-year production exceeded forecasts of 2.5 million ounces by 2%. In line with its five-year 20/20/20 plan, which aims for an increase of gold production and gold reserves by 20% along with a 20% reduction in AISC, 2018 production is forecast to remain steady at 2.5 million ounces (+/- 5%), while AISC falls further, to $800 per ounce (+/- 5%) as Goldcorp's cost-reduction program delivers $250 million of sustainable efficiencies.

Gold production is forecast to rise 20%, to 3 million ounces by 2021, while AISC will fall to $700 per ounce and gold reserves will rise to 60 million ounces. as Mr. Garofalo's cost cutting regime takes hold. It's still the cheapest major miner. Buy.

Franco-Nevada (FNV) is a precious metals royalty and streaming company with a large and diversified portfolio of cash-flow producing assets in Canada, the U.S., Australia, Africa, and Latin America.

Performance: This miner has been by far the best performing gold mining stock over the last five years and continued its surge in 2017, with shares climbed as high as $110 back in November. Share price has since retreated somewhat, and at the time of writing is off 7% from my review last May. Still, we are ahead about 191% on my original recommendation.

Third-quarter results saw its gold equivalent ounces (GEO) rise to 123,787, with the company producing $171.5 million in revenue and adjusted net earnings of $55.3 million ($0.33 per share), while posting $533.3 million in cash and equivalents at quarter-end and no debt.

During the quarter, Franco-Nevada continued its strategy of buying royalties on out-of-favor assets by paying $92.5 million for the Orion Thermal Oil Project in Alberta. After quarter-end, it also closed a deal to pay $110 million for oil and gas royalties on the Delaware portion of the Permian shale basin in the U.S.

CEO David Harquail noted that Franco Nevada now has royalties in the top three most active shale basins in the U.S. This month, the company announced the acquisition of the precious metals royalties on 10% of the Cobre Panama project, the biggest new copper mine in the world, which is coming on stream in late 2018.

Costing $178 million, the deal is on Korea Resources Corp.'s 10% indirect interest in Cobre Panama, and is made on the same terms as its acquisition of First Quantum's 10% interest in the project. Franco-Nevada will fund the entire $365 million itself and now has ownership of 100% of the royalties on the project, although the two 10% interests are on slightly different terms than the original 80% royalty.

In exchange for the original 80% royalty, Franco Nevada agreed to provide $1 billion in financing on a pro-rata basis. It had funded $727 million by the end of 2017.

The company pays a quarterly dividend of $0.23 per share ($0.92 a year), for a yield of 1.2% at recent prices. However, those who purchased at my originally recommend price are enjoying a yield of 3%. Franco Nevada continues to thrive by growing its portfolio of first-class projects, diversified both geographically and by type of metal or commodity. Buy.

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