Comment August 2023
Gold held up well in August despite the rise in US long rates. In contrast, most precious metals stocks had a very poor month. In this regard, the shares of small capitalized companies tended to do better than those of large ones. Quarterly results for Q2 were disappointing for many companies, especially as costs surprisingly increased for some companies. The reason this time was not higher input costs; rather, operations were not running optimally at these companies. Lower "grades" resulted in fewer ounces produced and therefore higher costs. We understand that "grades" are different in different zones and quarters vary accordingly. What we don't fully understand, however, is the failure of company IR departments to alert analysts to temporarily lower quarterly results. In every other sector, most companies report "better than expected." Not so in the precious metals sector. In Q2, among the producers in our portfolio, 10 companies were better than expected and 18 were worse, with the remainder neutral. These 18 companies saw some massive price losses after the numbers, which negatively impacted our performance. During the month, we slightly reduced positions of companies with African exposure and instead built up royalties. Royalties were the big outperformers in August (they lost less than the market). With an 8% weighting of Franco Nevada in GDX as an example, we always hold too little in the portfolio accordingly. SSR Mining stood out. Q2 numbers were as expected, but the outlook for lower costs has improved. The company forecasts production of 700,000 ounces of gold this year in Turkey and the US. Costs have risen above average to $1,660 over the past two years as poorer "grades" have been processed and production in Turkey has been temporarily halted. In the current 2nd semester, production should increase strongly due to better "grades" (expectation +30% compared to H1) and costs should decrease by almost 300 USD. The company also has a solid balance sheet and buys back its own shares every quarter. In H1, USD 100 million was returned to shareholders. Sentiment in the precious metals sector fell sharply in August, which is countercyclical for precious metals stocks. However, we need falling interest rates for the gold price to break out to the upside.