Tuesday 4 February 2020

Streamers are the backbone of a miner portfolio

Seasoned investors in mining stocks have seen all of what a commodity cycle brings: fortune but above all hardship. Mining is a 'wasting asset' and anyone expecting 'leverage' on precious metal prices must have realized that such is not uncommon on any upswing of metal prices, but rather general on any decline.
Avoiding or minimizing the inherent mining risk is what serves investors best.  Evidently, streamers and royalty companies then come in the picture. You can't talk about streamers without mentioning the market leader among gold streaming & royalty companies: Franco Nevada.
Franco Nevada (FNV) in USD over five years (click to enlarge).

Five years ago the last year had started of what was turning to be a nearly five year bear market of miners. It candidly had started even before gold reached it August/September 2011 top at $1900/Oz: during 2011 miners had been moving sideways, unable to catch up with a rising gold price. The bear market was to end mid Jan 2016 which was to be the start of the 2016 boom/bust for miners. 
Franco Nevada managed to hold on to at least part of its 2016 gains and made a higher high in the second half of 2017. The year 2018 again brought misfortune for miners with the HUI setting a 2.5 years low early September. Again Franco Nevada put down a higher low than after the Dec 2016 bust. The new gold bull fully translated to a rise of the Franco Nevada stock price setting a fresh 5 year high. Over the 5 year observation period, FNV has doubled while from low to high FNV is up 175%.

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The royalty and streaming business models in a nutshell.

A streaming company invests in a future production stream by an upfront payment to a producer, allowing that miner to complete its investment in a production site. The miner does not need to access capital markets issuing new shares, nor do they need to take more debt on their balance from possibly reluctant banks. Instead the miner agrees to sell part of its metal production to the streamer at a negotiated given price, below the market price at the moment of the contract, but above production costs. A typical example is the silver or gold byproduct sold by a copper producer to a streaming company. In exchange for an upfront investment financing, a royalty company requires a payment (royalty) by the producer depending on the turnover realized at that production site. It therefore applies to all metals produced, but it is a purely financial operation.

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While FNV is convincing in its price trend and its limited volatility, I nevertheless like to compare to Van Eck's gold miner ETF GDX and to a few individual gold miners.


Van Eck's gold miner ETF "GDX" in USD over five years (click to enlarge)

GDX is up close to 30% over the full 5 year observation period and from low to high it added 140%. However that high was reached in early Aug 2016! Afterwards followed a dreadful decline bottoming in Sep 2018 when GDX slid below its end Jan 2015 starting price. GDX distributes received dividends to its share holders. As miner dividends were little impressive, so where the annual dividends of GDX (indicated 'D').

Could you have done better holding on to a single miner? Below you find the 5 year graph of Agnico Eagle Mining (AEM). AEM is a mid-tier miner with a solid top line growth since they're still expanding production volume.
Agnico Eagle Mining (AEM) in USD over five years  (click to enlarge) 

AEM is up about 75% over the five years: far better than GDX but not quite as impressive as FNV. The miner is up about 150% low to high also challenging but not surpassing FNV. Moreover AEM set its top at the recent gold rally high in Aug/Sep 2019, thereby surpassing the 2016 boom/bust cycle top, though not too convincingly. The Sep 2018 low doesn't dive below the end Jan 2015 starting position either. The better long term performance, higher highs in 2019 and higher lows in Sep 2018 all beat the GDX track record. Yes you can do better than GDX, but it's fairly hard to beat Franco Nevada over the long run.

One reason not to discard GDX straight away seems obvious when factoring in what you would have experienced when holding a position in Eldorado Gold (EGO). Once comparable to AEM and successful in the first decade of the century, EGO saw an almost steady decline over last five years. The below graph is factoring in the 5:1 share rollback. At the 2016 peak of the boom/bust cycle, EGO didn't make it to its initial price tag. An almost unabated decline was to follow, only bottoming early 2019. Posting a 100% gain from bottom to its Sep 2019 top still looks bleak when realizing where the stock came from. Eldorado missed on all parameters. Huge delays after permitting troubles at its Greek mines and budget overruns wiped away investor confidence.
Eldorado Gold (EGO) in USD over five years  (click to enlarge) 

Yet another story for Pretium gold (PVG) which evolved being a junior miner from its Bruce-Jack development project it still was five years ago. While up well over 60% over the whole observation period, PVG exhibited an above average volatility. Yet its recent Aug/Sep 2019 top was well above the triple top level it managed to reach during the 2016 boom which PVG equalled early 2017 and once more during autumn 2017. Illustrative for the above average volatility are frequent and abrupt sell-offs under high volume, esp in Jan 2018 and more recently late Oct 2019.
Pretium Gold (PVG) in USD over five years  (click to enlarge) 

While still a decent pick over the long haul, the price graph of PVG illustrates the huge impact of specific mining risks and the market perception of their impact on production volume, cost and benefits.

A mining major to end the story with: Newmont mining (NEM) over 5 years. From $25 till $45 or up 80% over 5 years. NEM is one of the more successful among its peers. It acquired GoldCorp which had got itself in some trouble, lacking the funds and credit lines to complete its development projects. NEM had a better cash position which made the deal a win-win situation... apart from the Goldcorp shareholders who locked in the decline they had incurred over the previous downturn. It remains however uncertain whether GoldCorp would have managed recovering on its own.

Newmont mining (NEM) in USD over 5 years,  (click to enlarge) 

NEM nearly tripled from its bear market low to the 2016 boom high, but didn't surpass that peak during the 2019 rally. NEM currently is challenging its 2016 peak. NEM of course is an important component of GDX and its performance seems almost indicative for that of GDX.

Whether junior miner, successful mid-tier or major, it is hard or almost impossible to beat streamer and royalty company Franco Nevada over the long haul. There will evidently turn up some examples of stellar rallies eclipsing all peers and even FNV, especially over shorter reference frames. But how many investors knew even their name before they rose from dimes to dollars?

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