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Gold Miners Recovered from COVID but Stocks Undervalued

Source: Adrian Day for Streetwise Reports   02/16/2021

Money manager Adrian Day reviews the latest news from several of the gold and silver miners on his list, with several "buy" recommendations. Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE,…

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This article was originally published by The Gold Report

Source: Adrian Day for Streetwise Reports   02/16/2021

Money manager Adrian Day reviews the latest news from several of the gold and silver miners on his list, with several "buy" recommendations.

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, US$11.34) reported its latest quarterly results, inline with expectations, with a total of just over 66,000 "gold equivalent ounces" (GEOs) sold in 2020. This is expected to increase to around 85,000 GEOs this year.

In addition to the resumption of all its operations following temporary Covid-related shutdowns, other operations are back on track. The Renard diamond mine, after a long shutdown due to low prices and the bankruptcy of the operator, has restarted operations. And operator Newmont Corp. (NEM:NYSE) has provided guidance of 270,000 ounces for the variable Eleonore mine (on which Osisko holds a royalty). Meanwhile, Osisko Development, in which OR holds 77% of the shares as well as royalties as its assets, said it expects to complete a feasibility study on Cariboo, its main deposit, before the end of the year.

Trading at less than net asset value (NAV), Osisko is at a significant discount to other major royalties, wider than justified. The stock popped Friday from under $11 after the release by the operators of a favorable preliminary economic assessment (PEA) and resource update on the Malartic underground, on which Osisko holds a rich royalty. Initial production is expected in 2023, though the full ramp up will not be for six years after that. The mine is projected to last until 2039, and possibly beyond. Osisko's stream, up to 5% on parts of the ore body, is the company's next large cornerstone asset. Buy.

Quality Royalty and Streamers Can Be Bought

Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$40.20) saw its stock price shoot up on the would-be recent silver squeeze from an exaggerated low of $37.30 to over $46, before sliding back. Wheaton recently acquired a silver stream on a copper-silver mine in Mexico, paying $150 million for half of the silver production. Any return on the transaction depends on operator Capstone converting resources to reserves, a quite likely event. Perhaps more significantly, Wheaton said it was in advanced discussions with Captsone for a gold stream on a large Chilean copper mine.

Wheaton is in a strong liquidity position; it expects to be net cash positive early this year and has $1.5 billion available on its credit facility. Overall, it has a high-quality portfolio, with long-life streams on low-cost mines with high-quality operators. It recently issued five-year guidance, projecting an average of 810,000 ounces of gold equivalent ounces. Wheaton is a buy for long-term investors.

Trading at Discount; Has High Growth Potential

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, US$111.03) saw royalty ounces back to pre-COVID levels, with the good quarter partly due to unexpectedly strong results from Penasquito. The last quarter also saw some sales from previous production and this current quarter's ounces will decline, though Royal's outlook for 48,000 to 53,000 seems low. Two new projects—the Khoemacau copper mine in Botswana, on which Royal has a silver stream, and the Pueblo Viejo expansion in the Dominican Republic, with a gold stream—are on track. These will be the two main drivers of growth over the medium term. Royal has a strong balance sheet with over $180 million in net cash plus $800 million available on its credit facility.

Selling at a discount on a cash-flow basis to its major royalty peers, Royal's reliance on a single asset, the Mt. Milligan mine, has been reduced and next year will be even more so. Royal is a buy, though it is up 10% from its late January low.

Miners See Mixed Results

Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, US$4.80) had a generally positive quarter, with higher production and revenues, though free cash flow fell by almost 50% from the previous quarter on higher costs and capex. Costs were also higher than forecast, with cash costs at $675 per "gold-equivalent ounce" while "all-in sustaining costs" were $1,076. Full-year production was down, largely because of the ongoing restrictions in Argentina, which affected its Cerro Moro mine. This also was the cause of the higher-than-forecast costs.

The company guided for a return to one million GEO this year, a level it will sustain for the following two years until the Malartic underground, a 50/50 joint venture with Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE; see above, under Osisko), commences production. It largely replaced reserves at year-end, with the updated resource estimate on Malartic helping the overall numbers. Again, Yamana's three-year guidance, until this project commences production, is lower than expected.

Further out, however, it has expansions at several mines, including Jacobina, Minera Florida and El Penon, the last two dependent on exploration success. Together with the Malartic underground, this puts Yamana in a better position for reserve replacement in the 5- to 10-year horizon than many other large producers. Yamana also has a dedicated generative exploration program, with several early-stage projects throughout the Americas; the goal is to discover a million-plus deposit to add to its production pipeline. It also continues to look for acquisition, and recently completed a CA$152 million cash and stock acquisition of Monarch with a promising project close to the Malartic mine. The company continues to reduce net debt from asset sales and cash flow.

One potential disposition is the Mara project in Argentina, formed from the integration of Agua Rico and Minera Alumbrera, which integration significantly derisks the project. Mara is a joint venture with Glencore International Plc (GLEN:LSE) and Newmont, Yamana holding 56%. The multibillion, primarily copper project offers various avenues going forward, including potentially selling or reducing its stake.

Yamama is continuing its long turnaround and on several criteria is better placed than its peers. We continue to hold.

Weak Results Anticipated, but Outlook Looks Good

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$7.65) had a soft quarter, with weak results from its San Jose mine, with the lowest grade since the end of 2013. Silver production was down 19%, offset partly by base metals production. Its Callyoma mine in Peru is moving through a part of the deposit with less silver. Overall costs were higher. With mines in Argentina, Peru and Mexico, the company's operations were hit by COVID-restrictions more than most. Guidance for this year from the famously conservative company is somewhat disappointing across the board, with a further decline in silver production expected, while gold output will increase, but less than some analysts were expecting; costs are forecast to be higher than previously expected driven by higher sustaining capex.

Fortuna also received a legal setback in a dispute with the Mexican government over royalties on its San Jose Mine. The ruling is being appealed.

New mine off to good start

The new gold mine in Argentina is progressing well, however, after a delayed initial gold pour in October, with very good grade reconciliation. That augers well for the future. Fortuna stock has trended higher over the past 12 months, and though down from its "silver-squeeze" spike up, which saw it move just shy of $10; it is still up 14% from a late January low. However, as Lindero continues to ramp up, and probably exceed expectations, we think the stock will move higher, and will respond well to any rally in silver prices. Fortuna is a buy if you do not own it.

The remaining three senior gold companies on our list, Barrick Gold Corp. (ABX:TSX; GOLD:NYSE, US$22.14), Newmont Corp. (NEM:NYSE, 58.93) and Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$121.16), are all buys. We shall update these companies following their earnings releases.

TOP BUYS this week, in addition to companies discussed above include Nestle SA (NESN:VX; NSRGY:OTC, US$100.72); Midland Exploration Inc. (MD:TSX.V, 0.79); and Lara Exploration Ltd. (LRA:TSX.V, 0.69).

Orogen Move, Poorly Communicated, Causes Controversy

Orogen Royalties Inc. (OGN:TSX.V, 0.325) announced a change in the board and an investment by the chairman. The move by Paul van Eeden to invest $2.7 million in a below-market transaction, with warrants, caused controversy because of the price and the fact that the placement is not open to other investors. In truth, I think the terms are generous—a market deal would have sent a much stronger message—and more importantly, the way the news was delivered to the market, without providing any rational for the placement, left much to be desired. The announcement generated considerable backlash, and the stock fell.

However, Paul—he is a longtime friend, so first name is appropriate—intends to step up the work he does for the company and this placement is by way of compensation for that work. As chairman, he receives a modest stipend and has no options. It is normal to grant key employees, officers and directors options. In Paul's case, he is paying for his shares and warrants. Paul can bring a wealth of experience and a dedication to the new role as an executive. Having him make a substantial investment in the company at a market discount is a small price to pay for his taking a more active role.

Longtime director Dave Caulfield resigned from the board, a disappointing move given his sterling reputation and exploration insights. The vacancy enables CEO Paddy Nichol to rejoin the board. He had stepped down in order to get the merger with Renaissance Gold completed—a strong signal that he put the company ahead of any ego—but his rejoining the board makes sense.

Originally posted on February 14, 2021.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."

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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Royal Gold, Midland Exploration, Lara Exploration, Orogen Royalties, Yamana Gold, Barrick Gold, Franco-Nevada, Newmont. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Franco-Nevada, Osisko Royalties, Royal Gold, Midland Exploration, Lara Exploration, Fortuna Silver, Wheaton Precious Metals and Orogen Royalties, companies mentioned in this article.

Adrian Day's Disclosures: Adrian Day's Global Analyst is distributed by Investment Consultants International, Ltd., P.O. Box6644, Annapolis, MD 21401. (410) 224-8885. Publisher: Adrian Day. Owner: Investment Consultants International Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor's opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. ©2020. Adrian Day's Global Analyst. Information and advice herein are intended purely for the subscriber's own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.

( Companies Mentioned: ABX:TSX; GOLD:NYSE, FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, FNV:TSX; FNV:NYSE, LRA:TSX.V, MD:TSX.V, NESN:VX; NSRGY:OTC, NEM:NYSE, OGN:TSX.V, OR:TSX; OR:NYSE, RGLD:NASDAQ; RGL:TSX, WPM:TSX; WPM:NYSE, YRI:TSX; AUY:NYSE; YAU:LSE, )

Economics

Just How Big Is China’s Property Sector, And Two Key Questions On Policy And Tail Risks

Just How Big Is China’s Property Sector, And Two Key Questions On Policy And Tail Risks

While the broader US stock market was giddily melting…

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Just How Big Is China's Property Sector, And Two Key Questions On Policy And Tail Risks

While the broader US stock market was giddily melting up in the past week, things in China were going from bad to worse with Evergrande set to officially be in default on Oct 23 when the grace period on its first nonpayment ends, and with contagion rocking the local property market - which as we explained last week just saw the most "catastrophic" property sales numbers since the global financial crisis - sending dollar-denominated Chinese junk bonds to all time high yields.

So even though it is now conventional wisdom that China's property crisis is contained (just as its concurrent energy crisis is also somehow contained), we beg to differ, and suggest that the crisis hitting the world's largest asset class is only just starting and is about to drag China into a "hard landing", with the world set to follow.

And yes, with a total asset value of $62 trillion representing 62% of household wealth, the Chinese real estate sector is not only 30 times bigger than the market cap of all cryptos and also bigger than both the US bond and stock market, but is the key "asset" that backstops China's entire financial system whose deposits at last check were more than double those of the US. In other words, if China's property sector wobbles, the world is facing a guaranteed depression.

So given the escalating weakness in China’s property sector, which has been in focus given intense regulatory pressure on developers’ leverage and banks’ mortgage exposure, and consequent contraction in sales and construction activity, it is natural to ask how significant a hit this could pose to both China's and the global economy. To help people get a sense of scale, below we excerpts some of the key findings from a recent note from Goldman showing just how big China's property sector is.

  1. A wide range of estimates for the scale of China’s property sector — up to about 30% of GDP — have been reported in the media and by other analysts. Different definitions of the scope of the sector largely account for the disparity.
  2. The most important distinctions are what types of building are included (residential, nonresidential, or all construction including infrastructure), what economic activity is included (only the construction itself, or all the value-added embedded in the finished residence e.g. domestically produced materials), and whether related real estate services are also included.
  3. A narrow definition of “residential construction activity as a share of GDP” could be as low as 3.6% of GDP. Expanding this to include all related domestic activities - e.g. materials like metals, wood, and stone produced domestically and used in housing construction, as well as services like financial activities and business services used directly or indirectly by the housing sector - would account for 12.4% of GDP. Adding nonresidential building construction and its associated activity would take it to 17.7%. Finally, including real estate services—which show a high correlation with broader property trends—would take the number to 23.3%. (All these numbers are based on detailed 2018 data, and exclude infrastructure spending not directly related to residential and nonresidential buildings.)
  4. The property sector’s share of the Chinese economy has grown fairly steadily over the past decade, after surging in the stimulus-fueled recovery just after the 2008 financial crisis.

Digging into the definition of the “property sector”, there are three main questions that need to be kept in mind:

1. What types of construction? One important difference is in what types of construction activities are included. Construction broadly consists of three categories: residential housing, nonresidential buildings, and infrastructure-related construction. In China, residential construction appears to be about half of total construction—the rest is either non-residential building construction or civil engineering works, plus a small amount of installation/decoration activity. Specifically, residential and nonresidential buildings represent around 70% of total construction, and residential floor space under construction is typically about 70% of total floor space under construction.

Note that this ~50% share for residential share of total construction is not unusual in international perspective. For example, the residential share is similar in the United States—though it reached into the 60-70% range during the peak years of the housing bubble—and has been about 40-50% in South Korea for some time.

2. What types of economic activity (only construction, or everything necessary to complete the finished building)? An even more important distinction is what types of activities one counts. Strictly speaking, the construction industry itself represents about 7% of China’s GDP. This represents wages, profits, and taxes from the construction sector (regardless of what type of construction or what end users). This is the value added of the construction sector itself, or the narrowly defined activity of building things.

However, the construction industry uses a lot of output from other sectors – both materials (cement, wood, steel, etc.) and services (transportation of materials, financial services) to create finished buildings. Put another way, there are a lot of “backward linkages” from the construction sector: a home purchase requires not just the value added from construction industry, but also the value added from the “upstream” industries that provided the materials and were otherwise involved in the completion of the finished product.

To gain some intuition for this, in the chart below, Goldman shows how much of each industry’s domestic value added ultimately goes into “final demand” of the construction industry (purchases of property by consumers or investment in property by businesses). For example, about one-third of value added in “wood products” goes into construction, about one-half of basic metals value added goes into construction, and essentially all of construction’s value added goes into construction final demand. (Note that this includes direct and indirect requirements—for example, basic metal output that is sold to firms in the metal fabrication industry that then sell to the construction sector would be counted as part of final demand for construction.)

The next chart shows what fraction of the final demand for construction is provided by each sector. Roughly speaking, if we think about this as “the total domestic value added embedded in an apartment”, almost 30% of this is provided by construction activity, 8% from nonmetallic mineral products, etc.

From the perspective of total domestic value added from all industries embedded in the final demand of the construction industry, the overall construction industry’s final demand accounts for roughly one-quarter of China’s GDP. This estimate is based on China’s most recent (2018) “input-output” table—which indicates the final output of each industry, as well as how much input is used from every other.

3. Should real estate services be included. Some analysts focus on property construction only, while others add the “real estate services” sector e.g. the leasing and maintenance of buildings when estimating the impact of the housing sector of the economy. These activities contribute roughly 6-7% of GDP in China. In many countries, real estate services are somewhat less volatile than housing construction. The likely reason is that real estate services relate in part to the stock of existing buildings than the flow of new building construction. Even if there were a housing crash and building construction stopped, most real estate services could theoretically continue.  As evidence of this, in the US housing crash, construction sector GDP fell by ~30% peak to trough but real estate services never declined. That said, in China the “real estate services” sector has been significantly more volatile, almost as volatile as the construction sector itself.

Contributions by type of demand and activity

Taking these three factors into consideration, Goldman next shows estimated shares of China’s activity in the next chart, and breaks down construction into its main components while showing the share attributable to real estate services. The “sector activity” column shows the share of GDP accounted for directly by activities of that sector. In other words, companies and workers engaged in all types of construction activity accounted for 7.1% of China’s GDP in 2018. The “final demand” column shows the share of GDP accounted for by all the domestic economic activities embodied in final demand for that sector. In other words, the demand for buildings and other construction also generates demand for materials and other types of services — and adding the value added in construction and all of these “upstream” sectors together gives the numbers in the right column

Putting the above together, the size of China’s property sector therefore depends on the question we want to answer:

  • What share of Chinese economic activity do workers/companies involved in residential construction represent? Here, one should look at domestic value-added (the left column). This is 7.1% for overall construction and just 3.6% for residential construction only.
  • How much economic activity is driven by demand for residential property construction? Residential property demand drives 12.4% of GDP (right column, second row in table), because in addition to the construction activity it creates demand for all the materials and other services involved in building construction.
  • What about the impact of total demand for property construction? Including non-residental buildings as well as residential, and the total upstream requirements of both, we want to look at the “domestic value added in final demand” of construction of residential + nonresidential buildings. This is 17.7% of GDP (12.4%+5.3%).
  • How much of the economy is at risk from a property downturn? Here, we could potentially add end demand for real estate services to the above calculation. This would be another 5.6% of GDP, suggesting 23.3% of the economy—nearly a quarter—would be affected.

Finally, if one adds all construction and all real estate and all their associated activities, we get just over 30% of the economy (24.5%+5.6%), although it is worth caveating that this may be an overly broad definition for the property sector, as it includes infrastructure-related activity, which if anything is likely to be ramped up by policymakers in the event of severe property sector weakness.

* * *

Yet even a nice big, round 30% estimate for how much China's property sector contributes to GDP, does not encompass all the potential spillovers from a construction sector downturn. There are at least three others:

  1. Second-round effects. A shock to construction (or any other sector) implies a drop in wages and company profits in that sector. This in turn implies lower income for the household and business sectors — and incrementally lower consumption and investment respectively. Such “second-round” or “multiplier” effects aren’t included in the estimates above.
  2. Fiscal spillovers. Land sales represent an important part of local government revenues in China (roughly 1/3 in gross revenue terms). Governments acquire land usage rights from rural occupants and sell them at a premium via auctions to developers. If land sales revenues fall because of a housing downturn (through some combination of fewer successful auctions and/or lower land prices), budgets will be squeezed, which could limit local governments’ spending and investment.
  3. Spillovers abroad via imports. As the world’s largest trading nation, China does not get all of its construction materials and other intermediate inputs domestically. In addition to the estimates above, which focus on domestic value-added, about 11% of the total value added embedded in China’s construction final demand is from foreign sources. (This is about 3% of China’s GDP, although it makes more sense to look at each trading partner’s exposure relative to the size of its own economy.) So, if we wanted to look at the total size of China’s construction sector in terms of driving economic activity, regardless of where that economic activity occurs (perhaps to compare China’s construction sector to other countries with different levels of import intensity) the figure in the top right cell in Exhibit 3 would be 3% larger.

Putting it all together, and China's property sector emerges as the mother of all ticking financial time bombs.

* * *

Which brings us to what is Beijing's latest policy action (if any) to prevent this potential financial nuke from going off, and what are any additional tail risks to be considered.

Well, as noted above, China's property sector began the week with sharp price falls across the board, with China's junk bonds cratering to near all time lows and with signs that the concerns are spilling over to the broader China credit market with spreads widening across the board. Some key updates:

  • Recent news suggest China property stresses are building up. A number of China property HY developers have made announcements over recent weeks regarding their upcoming bond maturities.
  • On 11 Oct, Modern Land launched a consent solicitation to extend the maturity on its USD 250mn bond due on 25 Oct by 3 months
  • Xinyuan Real Estate announced on 14 Oct that the majority of holders of its USD 229mn bond due on 15 Oct have agreed to an exchange offer. Note that Fitch considers both transactions to be distressed exchanges.
  • Furthermore, Sinic announced on 11 Oct that they are not expecting to make the principal and interest payments on its USD 250mn bond due on 18 Oct. These indicate that stresses amongst developers are building.

Meanwhile, the grace period on Evergrande's missed coupon payments is ending soon. Evergrande missed coupon payments of USD 148MM on 11 Oct. This came after missing an earlier coupon payment on 23 Sep. The earlier missed coupon has a 30-day grace period, which ends on 23 Oct, and should that not be remedied in the coming week, the company will be in default on this bond. With Evergrande USD bonds priced at around 20, a potential default is unlikely to have large market impact, though if the company is able to remedy the earlier default, this could provide a positive surprise for the market.

Despite these mounting risks, the market staged a sharp rebound at the end of the week, with news emerging that policymakers are seeking to speed up mortgage approvals (if not followed by much more aggressive easing, this step will do nothing but delay the inevitable by a few days).

And while Goldman's China credit strateigst Kenneth Ho writes overnight that valuation is cheap across the lower rated segments within China property HY, market direction hinges on whether they will be able to refinance and avoid defaults. In particular, he notes that with $6.2bn of China property HY bonds maturing in Jan 2022, policy direction in the coming two months will be key. And since Goldman remains in the dark as to what Beijing will do next, as it remains "difficult to foresee how policy developments will play out in the coming weeks", Goldman prefers to wait for clearer signs of policy turn before shifting lower down the credit spectrum.

* * *

This brings us to what Goldman calls two key questions on China property - policy and tail risks, which will dictate the direction of the China property HY market.

As discussed in depth in recent days, Beijing's tight regulatory stance is increasingly affecting a broader set of developers, as slowing activity levels are adding to worries across China property HY. For the period from early August to the first week of October, the volume of land transactions cratered by 42.5% compared with the same period last year, and for property transaction volume, this fell by 27.0%.

Difficult credit conditions and weak presales add pressure to developers’ cash flows, and these factors are what led to the pick up in defaults and stresses in China property HY. Therefore, unless there are clear signs of an easing in policy direction, Goldman warns that tail risks concerns are unlikely to subside, and these will dictate the direction of China property HY market. As noted by Goldman's China economics team, credit supply holds the key to China’s housing outlook in the near term, emphasizing the need for policy adjustments in order to stabilize the housing market. Incidentally, the latest monthly Chinese credit creation numbers showed a modest miss to expectations, as total TSF flows came in at 2.928TN, just below the 3.050TN consensus, and up 10.1% Y/Y, lower than the 10.3% in August (the silver lining is that M2 rose 8.3%, up from 8.2% in August and above the 8.2% consensus).

That said, given the sharp slowdown in residential property activity levels over the past two months, policy stance appears to have relaxed over the past two weeks if somewhat more slowly than most had expected. The table below summarizes a number of policy announcements and news reports that suggest some easing of policies are taking place.

That said, the announcements and policymakers’ statements do not signal a large shift in overall policy direction yet. For example, the more concrete measures such as home buyer subsidies and the reduction in home loan interest rates are conducted at a city, and not national, level. And whilst Bloomberg reported that the financial regulators have informed a number of major banks to accelerate mortgage approvals, the precise details are lacking. The recent actions are therefore mostly in line with the overall policy stance. On one hand, policymakers remain focused on the medium term goal of deleveraging, and will want to avoid over-stimulating and reflating the property sector; on the other hand, policymakers have stated that they want a stable property market and to avoid systemic risks from emerging, suggesting that they would seek to avoid over-tightening. The problem is that they can't have both, and one will eventually have to crack.

Goldman is somewhat more optimistic and writes that finding a balance will take time, adding that "given the need to balance the competing policy objectives, further measures could continue to emerge piecemeal, and visibility on the timing and the type of policy actions are limited." Furthermore, there may need to be further downside risk towards the property sector before we see a more decisive change in direction in the policy stance. This means that tail risks concerns are unlikely to subside, despite signs that policy direction is gradually shifting.

* * *

Assuming help does not come on time, the next key question is how fat is the tail as large amounts of bonds trading at stressed levels. Currently, the China property market is pricing in elevated levels of stress. Their price distribution is shown below indicating that 38% of bonds (by notional outstanding and excluding defaulted bonds) are trading at a price below 70, and 49% of bonds are below a price of 80.

Are market prices overly bearish on tail risk, or are they accurately reflecting the stresses amongst property developers? With policymakers likely to maintain their medium term goal to delever the property sector, it is unlikely that tail risk concerns for higher levered developers will not subside. However, how “fat” the tail is will depend on the policy stance over the next two months.

A big challenge going forward is that there are sizeable bond maturities in the next year, which will heavily influence tail risk. As noted above, a number of developers have conducted or are seeking to complete distressed buybacks, and defaults rates amongst China property HY companies are soaring. As such, the policy stance in the next two months will be critical.

As shown in Exhibit 2, China property HY bond maturities are relatively light for the remainder of 2021, but pick up substantially in 2022, with USD 6.3bn of bonds maturing in January alone!

A full list of bond maturities from now to February 2022, is shown below.

It goes without saying, that should policy easing over the next two months be insufficient to ease the financial conditions amongst developers, there could potentially be a meaningful pick up in credit stresses at the start of 2022 just as the Fed launches its taper and just as a cold winter sends energy costs to unprecedented levels.

Finally, for any investors seeking some exposure to China's HY market assuming that the worst is now over, Goldman agrees that while valuation is cheap across the lower rated segments within China property HY, the key determinant on market direction won't be valuation, but rather hinges on whether developers will be able to refinance and avoid defaults - i.e., can the Ponzi scheme continue.

Tyler Durden Sat, 10/16/2021 - 18:00
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Precious Metals

Eagle Plains Resources releases Donna drill results, provides Knife Lake update

 
Eagle Plains Resources (EPL.V) has released the assay results from the 12 hole drill program completed at the Donna project in British Columbia. The…

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Eagle Plains Resources (EPL.V) has released the assay results from the 12 hole drill program completed at the Donna project in British Columbia. The drill program was completed in the first few weeks of the summer period but the labs are still slow so it took a while for the company to see the assay results. As a reminder, the summer drill program was directly following up on the exploration activities in 2020 when the Donna activities had to be suspended due to bad weather.

The summary of the more important drill holes can be found above. The best interval was actually hole DO19001 which encountered 1.5 meters of 9.41 g/t gold. That hole was the deepening of a previous drill hole that was completed in 2019. Hole DO21002 was drilled from the same drill pad and targeted the hanging wall and footwall ones. Some gold was detected (with 0.77 meters containing 4.46 g/t gold and 2 meters of 1.33 g/t gold as main features) but the other intervals were less intriguing. Holes 3 to 12 were all drilled at and around the past producing Morgan mine area and while the holes intersected limestone and metavolcanics, and we hope the data from the drill core will help the Eagle Plains geologists to further refine and re-define the exploration targets on the property.

Also keep in mind the surface exploration activities at Donna just continued throughout 2021 and the company’s field team collected in excess of 1,200 soil samples, 84 silt samples and 92 rock samples from the main zones of importance at Donna. All the data from the drill program and field exploration program is being analyzed and the results will be used to put together a 2022 exploration program.

Eagle Plains also provided an update on the Knife Lake project in Saskatchewan,  where partner Rockridge Resources (ROCK.V) has just completed its geophysical program. That summer program included an airborne electromagnetic survey, conducted over 610 line kilometers over the Gilbert Lake area, where no modern exploration activities have taken place.


Disclosure: The author has a long position in Eagle Plains Resources. Eagle Plains is not a sponsor of the website, but related company Taiga Gold is. Please read our disclaimer.

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Marvel positioning itself as a major landowner in Exploits Subzone of Central Newfoundland

2021.10.16
Marvel Discovery Corp. (TSXV:MARV, Frankfurt:O4T1, MARVF:OTCQB) is a company on the move, with active projects in the Exploits Subzone of Central…

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2021.10.16

Marvel Discovery Corp. (TSXV:MARV, Frankfurt:O4T1, MARVF:OTCQB) is a company on the move, with active projects in the Exploits Subzone of Central Newfoundland and the Atikokan gold camp in northwestern Ontario where the junior has been reporting visible gold at its Blackfly project.

Marvel’s business strategy is fairly straightforward: identify virgin ground that has been “passed over” by larger companies, acquire the claims and begin exploring, first running geophysics to identify targets, then drilling them.

An example of this tactic is what Marvel has been doing in Central Newfoundland.

Exploits Subzone

The Vancouver-based company has assembled a sizeable land position, over 100,000 hectares, right in the thick of the Exploits Subzone of Central Newfoundland — potentially one of the world’s last easily accessible, district-scale gold camps. 

It is known to contain deep-seated gold-bearing structures of the Dog Bay-Appleton Fault — GRUB Line deformation corridor, and is home to the high-grade Keats Zone of New Found Gold (TSX:NFG).

See below for Marvel’s map of the area including the major faults shown as heavy black lines.

The Exploits Subzone of Central Newfoundland

This past summer, Marvel was busy snapping up claims and adding to its land package.

The Victoria Lake project is among the most prospective of Marvel Discovery Corp.’s seven Newfoundland properties.

Located within the Exploits Subzone, the property is bolted onto Marathon Gold’s 4-million-ounce Valentine gold project, which is Atlantic Canada’s largest undeveloped gold resource.

Victoria Lake and Valentine exhibit a similar style of gold-bearing veins and have structural and geological settings in common. Preliminary work on Victoria Lake identified several quartz-arsenopyrite veins returning grab samples ranging from 15.5 to 24.9 g/t gold and 18.6 to 139.3 g/t silver.

In 1995, grab samples from Vein #3 featured 162.7 g/t gold and 220 g/t silver.

Marvel’s Victoria Lake project is bolted onto Marathon Gold’s 4Moz Valentine gold deposit.

In mid-September Marvel acquired an additional 53 mining claims at Victoria Lake comprising 1,325 ha, increasing its land position to 7,650 ha. The company says the acquisition is located along the Exploits Subzone and covers a large, highly prospective structural zone proximal to the Valentine Lake Shear Zone hosting Marathon Gold’s (TSXV:MOZ) Valentine Gold Project with  resources of 4M oz. of gold…

Victoria Lake Gold Project is host to interpreted extensions of the Valentine Lake Shear Zone and two major thrust faults, a wide structural corridor interpreted to play an integral part in the Marathon Gold Deposit.

In fact the claims, acquired via an option agreement with a vendor, contain the highest regional gold-in-till sample — 785 parts per billion (ppb) Au. This high-grade surface gold area was never followed up with additional exploration, making it a juicy target for Marvel Discovery Corp.

“These claim additions were a strategic move, not only in expanding the size and potential, but tying up ground with the highest gold till-in-soil samples in the province of Newfoundland,” Marvel CEO Karim Rayani commented in the Sept. 14 news release. “This shows we are in the right place for a potential discovery adjacent to what will likely become Newfoundland’s next and largest gold mine.”

An important part of Marvel’s Newfoundland narrative is the ground it has acquired near Falcon Gold (TSXV:FG), a sister company to Marvel Discovery also headed by Rayani.

Combined, the two juniors are the largest landowner next to Marathon Gold’s monster 4Moz Valentine gold project, and they each have claims on the Hope Brook gold project.

At Hope Brook, Marvel’s land position straddles both the eastern and western extents of recent land acquisitions by the Sokoman/Benton JV partnership, with Marvel now controlling areas of considerable structural complexity marked by large-scale fold and fault structures, which provide important structural controls (traps) for gold mineralization.

Rock lithologies and structures on the property are also related to those associated with Marathon Gold’s Valentine gold deposit, Sokoman’s Moosehead gold project and New Found Gold’s Queensway gold project — the first mover in the highly prospective Central Newfoundland Gold Area Play.

Marvel’s Hope Brook gold property is contiguous to First Mining and the Sokoman-Benton joint venture.

The Hope Brook mine was in production from 1987 to 1997, producing 752,163 oz. Coastal Gold outlined 6.3Mt at an average grade of 4.68 g/t Au, for 954,000 oz in the indicated and inferred categories.

In a phone call with me on Thanksgiving Monday, Rayani positioned the expanded Hope Brook project (19,075 ha now owned by Marvel) in relation to its neighbors:

“To the north you have Matador which I believe is 800,000 oz, to the south you have another deposit by First Mining optioned to Big Ridge which is another million oz of identified [gold], and we have all of the ground right in the middle so we’re tied onto major structures, we’ve got ground at Valentine Lake, we’ve got ground on three of the largest systems out there.”

He emphasized, “Our objective is to cover off whatever is not covered by government mag [magnetic survey] and fly the rest of it ourselves, then package it up and see what we’re going to do. I would like to try and do as much of the work ourselves and then make a decision as to what we’re going to drill.”

Initial permits have been filed for a first phase of exploration at Hope Brook which includes high-resolution magnetic gradiometry surveys that help to sort structural complexities in geological terranes. The company will also be sending prospecting crews to begin baseline prospecting to determine if the magnetic trends highlighted in regional government surveys are due to similar mineralized structures as those hosting the nearby Sokoman/Benton lithium discovery — the first documented occurrence of lithium in the province of Newfoundland-Labrador.  

“Marvel and our sister company Falcon Gold have made a lot of noise as of late not only in acquiring sizable land positions tied on to major structures but also following the structures to find what we believe are hidden gems that have been overlooked and passed by. Sokoman-Benton’s new Lithium discovery is less than 10 km away and is a testament to our business model,” Rayani stated in the Sept. 20 news release.

Blackfly

The Atitokan gold camp in Ontario is one of the country’s most prolific, and the Blackfly project is one of the camp’s earliest gold occurrences, dating as far back as 1897.

The property is in a highly enriched gold neighborhood, located within the Marmion Lake fault zone about 14 kilometers from Agnico Eagle’s Hammond Reef gold deposit, which hosts an estimated 3.32 million ounces of gold in reserves.

Marvel’s Blackfly project is 14 km from Agnico Eagle’s Hammond Reef gold deposit, with 3.32Moz in gold reserves.

Marvel’s mission is to see whether the historical exploration around the Blackfly mine has more to offer. So far the results look promising.  

Drilling commenced on June 24, with nine diamond drill holes out of 16 completed to date for 1,116m. Drilling has concentrated around the historical shaft area with four holes drilled at the Blackfly Northeast Zone.

Visible gold has been discovered in a number of surface samples and in multiple drill holes, a very good sign that MARV may have hit upon a gold system of yet to be determined size. Four sub-parallel gold mineralization trends have been confirmed by drilling.

Specks of visible gold in hole BF21-19 drilled at the Blackfly Northeast Zone.

“We’re just waiting on the final numbers.” Rayani told me, adding that there is a new zone he expects will report better results than former operator Terra-X.

According to Terra-X’s assessment report, the lineament containing the Blackfly vein has alteration and mineralization traceable over a 4.4-km strike length, as shown by the distribution of samples collected along it.

The best gold values from this lineament occur within the historical work, where Terra-X’s grab samples included results of 167 g/t and 85.6 g/t Au.

Conclusion

Marvel represents an intriguing opportunity for investors looking for an undervalued junior in one of the most exciting gold plays on the planet, the Exploits Subzone of Central Newfoundland.

Larger players like New Found Gold and Marathon Gold have seen success at the drill bit and their market capitalizations have grown accordingly. NFG currently trades at $8.82 per share with a market cap of $1.3 billion while MOZ has a market value of $734 million @ a share price of $3.02. Most of the money here, imo, has already been made. Penny stocks like Marvel offer much better opportunity for share price appreciation.

Central Newfoundland is shaping up to be a classic area play, with over a dozen companies having established a presence there, either buying up claims around the big gold deposits, like Queensway and Valentine, conducting exploration programs or in the case of Marvel Discovery Corp., both. Marvel has applied for exploration permits at Hope Brook and has significantly expanded its land position at Victoria Lake.

I wouldn’t be surprised to see further consolidation in the Central Newfoundland Gold Area Play. If a company like NFG, backed by big money, with Eric Sprott and merchant bank Palisades Goldcorp owning a combined 51% of the shares, were to start making acquisitions, the boost to smaller juniors like Marvel could be dramatic.

Over at Blackfly, Marvel’s mission is to see whether the historical exploration around the Blackfly mine has more to offer. So far the results look promising.  

Nine diamond drill holes have been completed to date for 1,116m. Drilling has concentrated around the historical shaft area with four holes drilled at the Blackfly Northeast Zone.

Visible gold has been discovered in a number of surface samples and in multiple drill holes, a very good sign that MARV may have hit upon a gold system of yet to be determined size. 

Marvel Discovery Corp. has everything we like to see in a gold junior, starting with a great property in an established gold jurisdiction. However, the company understands it’s never a good idea to put all your eggs in one basket. Management has acquired claims close to the big players in the Exploits Subzone of Central Newfoundland. The company already has one of the best prospecting teams in the province, and from what I’ve seen so far, great management that understands the lifeblood of a junior is a steady flow of news. Rayani hinted there will be more announcements from MARV before the year is out. Stay tuned.

Marvel Discovery Corp.
TSXV:MARV, Frankfurt:O4T1, OTCQB:MARVF
Cdn$0.10, 2021.10.15
Shares Outstanding 73.8m
Market cap Cdn$7.9m
MARV website 

Richard (Rick) Mills
aheadoftheherd.com
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