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Mid-Tier Gold Miners: 2020’s Winners And Losers

The Q3 Earnings Season for the Gold Miners Index (GDX) has finally come to a close, and most producers have been announcing their best results in over a decade. However, we’ve seen extremely bifurcated returns within the mid-tier producers’ group, with year-to-date returns ranging from (-) 40% to (+) 120%. This is because, while the price of gold (GLD) is a key factor for an individual miners’ returns, operational results are just as important. In this article, we’ll look at the winners and losers in the group and their operational performance in an attempt to dissect which might be solid bets for FY2021. I have classified mid-tier producers as those producing between 125,000 and 450,000 ounces of gold in FY2020.

(Source: Eldorado Gold)

The precious metals space has had an incredible year despite the U-turn in sentiment over the past few weeks, with gold up nearly 20% year-to-date and silver sitting on a 30% year-to-date return even after its recent slump. However, returns within the mid-tier producer space have been extremely volatile, with West African Resources (OTCPK:WFRSF) up 120% year-to-date while peers OceanaGold (OTCPK:OCANF) and McEwen Mining (MUX) are down over 20% year-to-date. This is further evidence that the stock-picking in the sector can be tricky even during a massive year for gold. Let’s take a closer look at this year’s winners and losers below:

(Source: Author’s Chart)

The above chart measures year-to-date performance for the mid-tier gold producers, and as shown, the returns have been all over the place. Currently, there are nine names in the group, and the average year-to-date return is 21%. This is well below the average return for the junior gold producers of 56%, but still above gold’s return of 18% thus far. However, despite gold’s strength, there are three names with negative year-to-date returns, with the two worst performers being OceanaGold and McEwen Mining. Similar to the theme we saw with the junior gold producers, the key relationship between these two names is costs, with OceanaGold and McEwen Mining being the two highest-cost producers in the group, with year-to-date costs of $1,367/oz, and $2,132/oz, respectively.

(Source: Author’s Chart)

Meanwhile, in the case of the leading names, all three had significant positive developments this year that dramatically changed their operating outlook. The top-performer was West African Resources, which began commercial production at its Sanbrado Mine in early Q3. Meanwhile, the #2 and #3 performers were Roxgold (OTCQX:ROGFF) and Great Panther Mining (GPL), with year-to-date returns of 54% and 57%, respectively.

In Roxgold’s case, the company’s incredible performance has to do with the possibility of a second mine to add to its arsenal given exploration success at its Seguela Project in Cote d’Ivoire. For Great Panther Mining, the catalyst for outperformance was an impressive turnaround with the company’s Tucano finally delivering and costs down materially year-over-year. Let’s take a closer look at operational performance within the group below:

(Source: Author’s Chart)

The above chart looks at Q3 gold-equivalent ounce [GEO] production, year-to-date GEO production, and FY2019 GEO production to see how companies are performing vs. their FY2019 results. While COVID-19 has certainly thrown a wrench in the gears for many gold producers due to shutdowns, supply chain issues, and the need for social distancing at operations, the above chart is still useful as it allows us to see how names have fared in the circumstances. Obviously, a beat vs. last year’s results is even more impressive after a year plagued with COVID-19 related headwinds. However, some names have seen production drop off a cliff, with COVID-19 being only part of the story. As shown above, the two stand-out names that are tracking quite well against FY2019 guidance are Argonaut Gold (OTCPK:ARNGF) and Great Panther Mining (GPL).

(Source: Company Presentation)

In Great Panther Mining’s case, the company has had an exceptional year at its Tucano Mine in Brazil, with production up 4% year-over-year to ~93,400 ounces with one quarter to go. The improved performance has resulted from increased throughput, which has offset the slightly lower grades. It’s worth noting that despite government-mandated shutdowns at the company’s silver mines in Mexico, Great Panther is still on track to beat last year’s results, assuming the company can put together a strong Q4. Given the company’s projected industry-leading earnings per share growth in FY2021 of 730% ($0.25 vs. $0.03), I continue to see the stock as a Speculative Buy below $0.72.

(Source: Company Presentation)

Moving over to Argonaut Gold, the higher gold production is due to the acquisition of Alio Gold (ALO), which gave Argonaut a new mine in Nevada, Florida Canyon. While a very low-grade mine, Florida Canyon was picked up for below $20.00 per ounce of resources by Argonaut Gold in the Alio acquisition, a very accretive acquisition by a team that has struggled for the past few years. While the production growth is due to growth through acquisition, the company is one of only two names in the mid-tier space on track to grow annual gold production from FY2019 levels.

(Source: Author’s Chart)

When it comes to the losers for the year, their performance shouldn’t be surprising at all, with McEwen Mining and OceanaGold on track to see gold production drop massively year-over-year. While COVID-19 certainly has not helped matters for either company, the pandemic is not to blame for all of the year-over-year declines in output. In OceanaGold’s case, the Haile Mine has had another rough year due to record rainfall, and the company was forced to slash guidance given the lower grades we’ve seen. Worse, OceanaGold has not seen any gold production from its high-grade Didipio Mine after it was placed on care & maintenance due to an ongoing dispute with the Nueva Vizcaya provincial court in the Philippines.

(Source: OceanaGold Company News Release)

When it comes to McEwen Mining, the shutdowns have weighed on annual output at Black Fox in Canada and its 50% owned San Jose Mine in Argentina, but the bigger issue is the company’s new Gold Bar Mine. The majority of Nevada gold mines have not been affected by the shutdowns, and Gold Bar should have been able to pick up much of the slack from San Jose and Black Fox if it was firing on all cylinders.

However, Gold Bar had had a terrible few quarters after a massive write-down earlier this year due to a change in the geological interpretation at the mine. Therefore, while COVID-19 has certainly created a headache for the company with lower contribution from San Jose in Q2 and Q3 in Argentina, COVID-19 is not completely to blame for the dismal results year-to-date. As it stands, McEwen Mining is expected to see production drop by up to 30% year-over-year. Let’s take a look at cost performance within the group:

(Source: Author’s Chart)

As we can see from examining costs across the group, the mid-tier producers have much higher costs on average than the industry average in FY2019 of $980/oz. While this is partially due to costs across the sector increasing due to non-recurring COVID-19-related costs, the majority of senior and intermediate producers have the mid-tiers beat from a margin standpoint. If we look at the chart above, we can see that the two lowest-cost names in the group are Pretium Resources (PVG) and Golden Star Resources (NYSEMKT:GSS) with costs of $971/oz and $979/oz year-to-date. Meanwhile, the two weakest names with negligible margins are McEwen Mining and OceanaGold with costs of $2,132/oz and $1,367/oz, respectively for the first nine months of 2020. Within the group there’s no real stand-outs like there are within the junior gold producers, but there is one name worth mentioning.

(Source: Author’s Chart)

While West African Resources is in the middle of the pack with costs of $1,053/oz year-to-date, these costs are only high because the company just began commercial production and is only beginning to feed high-grade ore to the mill. Based on West African’s mine plan at Sanbrado, we should see production double next year from estimates of ~110,000 ounces this year to over ~250,000 ounces, and this should significantly reduce costs closer to the estimated all-in sustaining costs of $633/oz over the mine life. Therefore, while not obvious from the above chart, West African should be the leader among the group in FY2021 from both a production growth and margin standpoint. In fact, the company will be one of the five lowest-cost gold producers among over 65 names in the sector if it can meet its targeted costs.

(Source: West African Resources Company Presentation)

So, what names look like solid bets?

There are currently two names that stand out as potential leaders, with them being Roxgold and West African Resources, even if they aren’t obvious picks from the above charts. This is because both companies are expected to grow production by over 70% in the next two years, which gives them industry-leading organic growth potential. In West African’s case, production is expected to soar as the company ramps up mining at the high-grade underground M1 South deposit.

As the table below shows, stope ore should be available in Year 1 of production (H1 2021), and this should provide a significant boost to annual gold production from 86,200 ounces the past nine months to over 250,000 ounces in FY2021. Meanwhile, Roxgold’s Seguela Project has a relatively simple path to production, and the low upfront capex of $140~ million should allow the project to be internally funded with only a moderate credit facility. Therefore, while these two don’t stand out for production growth in FY2020, they should be the leaders in the mid-tier space for FY2021 and FY2022, respectively. Currently, Roxgold has $60 million in cash which covers nearly two-fifths of the upfront capex.

(Source: West African Resources Sanbrado Technical Report)

While some investors might believe that OceanaGold and McEwen Mining are the best two ideas given their horrid year-to-date performance, I would argue that West African Resources looks like a better bet in the mid-tier space. This is because the company is currently trading more than 40% below my Q1 2022 target price of A$1.50. In fact, it is being valued like a small-scale mid-tier producer at a market cap of US$520 million, despite being about to graduate into the upper echelon of the mid-tier space.

Meanwhile, the company should enjoy 60% plus margins at $1,800/oz gold, which will make the company a top-5 gold producer from a margin standpoint among over 65 gold producers. For now, I continue to see better value in the senior producer space, with the exception being West African Resources, which I see as a Strong Buy below A$0.80.

West African Resources trades significant volume each day on the Australian Stock Exchange (WAF.ASX) but trades very limited volume on the OTC Market. Therefore, the best way to trade the stock is on the Australian Stock Exchange. There is significant risk to trading the stock on the OTC Market due to wide bid/ask spreads, low liquidity, and no guarantee of future liquidity.

Disclosure: I am/we are long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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