Gold futures climbed on Thursday, poised to score a third straight session gain, as strength in the euro in the wake of the European Central Bank’s decision to leave its policy unchanged pressured the U.S. dollar.
The European Central Bank left its policy unchanged at minus 0.5% and its refinancing rate at 0%, while reaffirming it plans to leave rates at present or lower levels until inflation rises to converge with its target at 2%.
In a news conference, ECB President Christine Lagarde said the Governing Council “extensively” discussed the recent strength of the shared currency, but reiterated that the bank doesn’t target the exchange rate. A Bloomberg report, meanwhile, said that members of the council had agreed to not overreact to euro strength.
“The ECB has confirmed that there is no further need for additional help,” said Naeem Aslam, chief market analyst at AvaTrade, in a market update. “For traders, the ECB’s confidence in the Eurozone’s economy is a good thing and this is the reason that we have seen the EUR/USD moving higher.”
In Thursday trading, the euro EURUSD, +0.80%
traded at up 0.8% at $1.19, but that helped pull the ICE U.S. Dollar Index DXY, -0.45%
down by 0.5% to 92.802. A weaker dollar can provide support for assets priced in greenback, making them less expensive to overseas buyers.
traded 54 cents, or 2%, higher at $27.62 an ounce after climbing 0.3% in the previous session.
In U.S. economic news Thursday, the number of American who applied for unemployment benefits through state and federal programs in the week ended Sept. 5 was unchanged at a seasonally adjusted 884,000, the Labor Department said. Still, continuing jobless claims, the number of people already receiving benefits rose by 93,000 to a seasonally adjusted 13.39 million in the seven days ended Aug. 29.
“The mixed bag of economic data confirms that there is gradual recovery for the U.S. economy,” said Aslam. “However, things are not improving and this is the reason that we are seeing improvement in the gold price. It is likely that the bottom is in for the gold price and it is likely to continue to move higher.”
Other metals traded on Comex also moved higher Thursday. December copper HGZ20, +0.04%
traded at $3.0545 a pound, up 0.1%. October platinum PLV20, +1.89%
added 2% to $943.50 an ounce and December palladium PAZ20, +1.19%
climbed 1% to $2,342 an ounce.
Gold futures inched higher on Monday as the U.S. dollar weakened slightly, but prices still looked to end lower for the month, in the wake of five consecutive monthly gains.
Overall, bullion continues to be viewed as a haven in the face of the COVID-19 pandemic, and the precious metal drew increased attention last week after the Federal Reserve said it is shifting to a policy of average inflation targeting which would effectively see policy makers end the practice of pre-emptively hiking interest rates to stave off inflation. That setup is viewed as a bullish one for gold, which is viewed as a hedge against rising inflation.
Expectations for a low-rate regime in the U.S., and in much of the developed world, and softness in the U.S. dollar also has boosted appetite for gold, experts say.
“Gold will continue to be one of the best beneficiaries of the dollar’s weakness so expect to see a retest above $2,000 in the upcoming weeks,” wrote Hussein Sayed, chief market strategist at FXTM, in a Monday note.
December gold GCZ20, +0.02% GC00, +0.02%
was up $6.20, or 0.3%, at $1,981.10 an ounce. Gold’s latest move comes as the U.S. dollar was off 0.3%, as measured by the ICE U.S. Dollar Index DXY, -0.26%,
a gauge of the buck against a half-dozen currencies.
The most-active December silver contract SIZ20, +2.06% SI00, +2.73%,
meanwhile, added 52 cents, or 1.9%, at $28.31 an ounce.
Hope for some pickup in economic activity, amid optimism over potential coronavirus treatments, also has boosted appetite for silver, which is viewed as both an industrial and precious metal. China’s official gauge of business activity expanded faster in August, with the nonmanufacturing purchasing managers index rising to 55.2, compared with 54.2 in July.
For the month, gold was trading down about 0.3%, while silver surged roughly 16%, according to FactSet data.
Investors are “deferring to a slowing in the pace of growth improvement and U.S. election uncertainty coming into keen focus as the reason to own gold and remain short the dollar,” said Stephen Innes, chief global markets strategist at AxiCorp, in a market update.
Among other metals traded on Comex, December copper HGZ20, +1.12%
traded at $3.0475 a pound, up 1%, while October platinum PLV20, +0.40%
tacked on 0.2% to $942 an ounce and December palladium PAZ20, +3.29%
added 2.5% to $2,286.90 an ounce.
(Source: Hecla Mining – Image: Casa Berardi Mine in Quebec)
The Idaho-based Hecla Mining (HL) can be considered as a “silver” stock, but in fact, the production of gold is still the primary component for the miner now, with 59.98K Au Oz this quarter.
The company released its second quarter of 2020 results on August 6, 2020. Production and revenues were in line with expectations.
One positive development that has a profound effect on Hecla Mining is the recent rally in the silver price, which nearly doubled in less than a month.
We can see that HL has dramatically outperformed the VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) on a one-year basis. This strong stock appreciation is following the bullish price of silver.
The investment thesis is getting more interesting since the silver price started to trend higher. HL could be considered as a potential midterm investment now. The right strategy here is to keep a core position midterm or one or two years, hoping for a better H2 2020 and trade short term around 50% of your position to reduce the risk and add some profit along the way.
“I think it’s not recognized that Hecla produces about a third of all the silver mine in the U.S. There are only five companies that are relevant silver producers in the U.S. and no one buys two of them for their silver production, they’re big diversified miners. The remaining, while we produce almost three times as much silver from our U.S. mines as the next largest primary silver producer does. And when the Lucky Friday reaches full capacity, we should produce more than 40% of all U.S. production.”
Company Balance Sheet And Production In 2Q 2020 – The Raw Numbers
Silver And Gold Production Details For The Second Quarter Of 2020
Note: I have covered the second quarter preliminary results on July 10, 2020. Most of the production indicated here are from the preceding article.
1 – Total Silver/Gold production
The company indicated that the silver equivalent production (SEO) was 12.5 million Oz (10.8M oz in Q1), and the gold equivalent production (GEO) was 119,037 Oz (115,511 Oz in Q1).
Gold production was 59,982 oz, and silver production was 3,403,781 Oz. The output below per mine. Green Creek is the more significant mine producer for the company, while Lucky Friday is slowly ramping up. All mines are producing both silver and gold, except Lucky Friday.
Metal price in 2Q ’20
Gold per ounce
Silver per ounce
Lead per Lb
Zinc per Lb
The takeaway is, of course, the price of gold and silver, which have reached record-high and allowed the company to show a healthy cash generation despite a weaker-than-expected production due to disruption from the COVID-19. However, the silver price is now catching up with gold and trades well over $26 per ounce as I write.
2 – Silver price and AISC by-product is $9.33/Ag Oz
The silver price was up 8.8% from the same quarter a year ago, and AISC (by-product) went up from $11.19 last year to $9.33 this quarter. AISC gold was $977 per ounce.
1 – Total Revenue was a record of $166.36 million in 2Q ’20.
Revenues were $166.36 million in 2Q ’20, up 15.5% from a year ago, and down 21.5% sequentially. Hecla Mining reported a second-quarter loss of $14.03 million, or 0.03 per share, compared to a loss of $46.67 million in the same period a year earlier, or $0.10 per share.
2 – Free Cash Flow was a loss of $26.7 million in 2Q ’20.
Note: The generic free cash flow is the cash from operating activities minus CapEx.
Free cash flow yearly is now a loss of $73.8 million, with a profit of $26.7million this quarter.
The company is paying a tiny dividend of $0.01 per share annually, or 0.18% yield.
3 – The net debt is $442.33 million in 2Q ’20.
The company indicated $75.92 million in total cash. Net debt is now about $442.33 million.
The company issued $475 million of senior notes due in 2028, replacing $506.5 million senior notes due in 2021, reducing long-term debt, and extending its maturity. Hecla Mining has $50 million withdrawn from the revolver. The company expects full repayment of the revolver before the end of 2020.
According to the 10-Q:
“We believe we were in compliance with all covenants under the credit agreement as of June 30, 2020. We drew $210.0 million on the facility during the first six months of 2020 and repaid $160.0 million of that amount during the same period, with the remaining $50.0 million outstanding as of June 30, 2020.”
Hecla had an adjusted EBITDA of $61.3 million and net debt/adjusted EBITDA (last 12 months) of 2.0x.
Hecla Mining agreed with Investissement Quebec to issue C$50 million (US$36.8 million) of senior unsecured notes yielding 5.74%. The company will use the proceeds for purchases of existing 7.25% coupon bonds, and Casa Berardi capital expenditures. The transaction will be completed in the third quarter.
4 – 2020 Production Outlook
From a Previous Presentation
Conclusion And Technical Analysis
Hecla Mining has been on a massive run since scoring a low in March. This simple fact should be enough to push investors to be more caution when it comes to investing in Hecla Mining.
The market tends to factor in most of the future positive and then adjust to what is indicated by the company later. If the facts are not what has been expected, the stock sells off. With such a run-up, it is essential to secure your profit. My recommendation is to trade short term about 50% of your long position. Yes, the silver price is an exciting development, and Hecla Mining should benefit from it, especially with Lucky Friday contributing more silver in H2 2020.
Lindsay Hall said in the conference call:
“As a leading silver producer in U.S. with a diverse asset and commodity mix, we’ve also been able to benefit from the substantial strong gold and increasingly strong silver prices with the gold making up 48% and silver 33% of our total revenues this quarter. This along with the ability to produce silver and gold, the cash costs, which were substantially lower than the realized metal prices, positions the company to capture the significant margin available to us, particularly in the rising commodity environment we find ourselves in today.”
However, it seems that we have reached a plateau for gold and silver, and we may see some retracement assuming a world recovery in 2021, which will cool down the desire to buy precious metals.
Technical Analysis (Short Term)
HL is forming now a symmetrical wedge pattern with resistance at $6.45 and support around $5.60.
We are trading now at pattern support, but I do not think this support is strong enough to hold if gold and silver continue to weaken. I believe better support here is the 50 MA around $4.80-$4.60, where I recommend accumulating again.
HL may eventually drop to its 200 MA around $3.25 if the price of gold and silver experience a severe downside below 1,725 per oz/$21 per oz, which is not likely, in my opinion.
Watch gold and silver like a hawk.
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Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.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: I trade short term HL occasionally
Global dividend payments plunged to their lowest level in more than a decade, as companies moved to protect their balance sheets amid the pandemic, dealing a massive blow to investors that rely on the payouts for growing their wealth.
Total shareholder payouts fell by $108 billion to $382 billion, the lowest second-quarter total since 2012, according to Janus Henderson’s index of global payouts, published on Monday.
The 22% decline was the worst since the asset manager launched the index in 2009.
In a best-case scenario, Janus Henderson now expects global dividends to fall 19% on an underlying basis this year, paying $1.18 trillion. The worst-case scenario could see payouts drop 25%, paying $1.10 trillion.
“Despite the cuts witnessed so far, we still expect global dividends to exceed $1 trillion this year and next,” said Jane Shoemake, investment director, global equity income at Janus Henderson.
Dividends fell in every region of the world, except in North America, thanks in particular to resilience among Canadian companies, where dividends grew 4.1%. This makes Canada one of only two major countries to see payments increase.
Only 10% of U.S. companies cut their payouts, with the “vast majority” choosing instead to suspend stock buybacks, which totaled $700 billion in 2019, according to estimates by Goldman Sachs.
The report noted that U.S. companies set their dividends once a year and pay them in four equal installments starting from the fourth quarter, meaning investors are more likely to see the impact of the pandemic on payouts near the end of the year.
The worst-affected regions were Europe and the U.K., which saw falls of 45% and 54% respectively on an underlying basis.
Shoemake said most European companies pay just once a year in the second quarter, so a dividend cancellation has a disproportionately large impact on the annual total, but it also means 2021 should show a rebound in Europe. “For the U.K., the rebound will be smaller as several companies, not least oil giants Shell and BP, have taken the opportunity to reset their payouts at a lower level,” she said.
In April, Royal Dutch Shell RDSA, +2.38%
lost its crown as the world’s largest dividend payer as it slashed payout for the first time since World War II, while in August, BP BP, +1.82%
cut its dividend in half after the oil major posted a $16.8 billion loss for the second quarter.
However, several U.K. companies have in recent weeks announced plans to restore dividends. On Monday, Bunzl BNZL, +2.45%,
the FTSE 100-listed distribution group, said it would restate its previously suspended final dividend following a better than expected trading performance during the first half of the year.
France, Europe’s largest dividend payer, saw total dividends reach their lowest level in at least a decade, though some of the lost French income will be restored later in 2020, Janus Henderson said.
We’re more than two-thirds of the way through the Q2 earnings season for the Gold Miners Index (GDX), and one of the last Australian producers to report was Perseus Mining (OTCPK:PMNXF). While fiscal Q3 was a tough quarter for the company with challenges at Edikan throwing a wrench in plans of meeting FY2020 guidance, Q4 was much better, with gold production up 12% sequentially. Unfortunately, Perseus still came up short of meeting its FY2020 production guidance, though we can excuse the company for this due to COVID-19 related challenges. The bigger story is that the company’s new Yaoure Mine remains on schedule for a December gold pour, with this mine able to catapult the mid-tier miner into 500,000-ounce per year producer ranks. Based on Perseus having industry-leading production growth and decent operating performance, I would view any 23% pullbacks as buying opportunities.
(Source: Company Presentation)
Perseus Mining released its Q4 and FY2020 in late July and reported quarterly gold production of 64,700 ounces, up ~12% sequentially from the disappointing Q3 performance. While there’s no reason to applaud a 12% increase in production coming off a quarter of very easy sequential comps, it is a step in the right direction, with the Edikan issues sorted out, it seems. Fortunately, the higher gold (GLD) price has made what should have been a satisfactory year an exceptional one, as Perseus finished the quarter with a net cash position of $14 million despite over $150 million spent on construction at its newest Yaoure Mine. This resulted from a cash flow of $40 million in Q4 and FY2020 operating cash flow of $125 million, allowing the company to absorb the high capex year due to Yaoure. Let’s take a closer look at the results below:
(Source: Author’s Chart)
Beginning with the company’s Sissingue Mine, we saw a much better quarter in Q4, with gold production of ~23,400 ounces, up from ~19,200 ounces in the previous quarter. The significantly improved operating results were due to much higher grades in the quarter as mining moved deeper into the Sissingue Stage 2 Pit. As shown in the table below, milled head grades improved from 1.76 grams per tonne gold to 2.42 grams per tonne gold, an increase of 36% sequentially. These grades helped to offset the lower throughput sequentially (314,000 tonnes vs. 370,000 tonnes), while slightly higher gold recovery rates also helped as they increased by 60 basis points. Given the much higher gold production, we saw a solid quarter from a cost standpoint, with all-in sustaining costs coming in at $734/oz, well below the industry average. It’s worth noting that this decrease in costs was despite a minor headwind from higher royalties and higher sustaining capital.
(Source: Company Website)
Moving over to the company’s flagship Edikan Mine, this was a critical quarter, as the Q3 results were disastrous given that gold recovery rates fell off a cliff. Fortunately, the Q3 results proved to be just a hiccup, as quarterly gold production rebounded to ~41,300 ounces, a 7% improvement sequentially. The big news in the quarter was that Perseus seems to have solved the Bokitsi ore issue. As we saw last quarter, the high concentration of Bokitsi ore was putting a considerable dent in recovery rates, with recovery rates dropping more than 2,000 basis points sequentially to a pathetic 61.1%. However, gold recovery rates improved substantially in Q4, and while they’re still well below the trailing twelve-month average, it’s a step in the right direction.
(Source: Company Website)
The Edikan plant processed 1.60 million tonnes of ore during the quarter, down from 1.76 million tonnes in Q3. However, this drop in throughput was expected as we saw a higher proportion of harder ore from Fetish being fed to the mill vs. softer ore from Bokitsi. The good news is that although grades and throughput were down due to this adjusted blend in feed grade, gains were made up in recovery rates, which improved by nearly 1,500 basis points. Therefore, while this could have been a better year at Edikan after softness in Q3 derailed the great start we saw in FY2020, the Q4 results were encouraging. Based on the higher gold sales in Q4, all-in sustaining costs improved from $1,242/oz to $1,049/oz, just a few percent above the industry average costs of $970/oz.
(Source: Author’s Chart)
Finally, moving over to Perseus’ most exciting project, Yaoure, it was a great quarter in progress made on the construction front. The company noted that Yaoure construction is currently 67% complete, and the team believes they should be able to achieve its stretch target for a first gold pour in December. This is excellent news given the COVID-19 related challenges that have plagued many development projects in the sector with hefty delays. It means that we could see up to 3 months of commercial production from Yaoure in FY2021. Based on the estimated production profile of 215,000 ounces for Yaoure at industry-leading costs of $734/oz, this would have a dramatic impact on Perseus’ FY2021 results, with the real benefit to be seen with a full year of Yaoure contribution in FY2022. Assuming both Sissingue and Edikan can fire on all cylinders going forward, there’s a clear path forward to Perseus becoming a 500,000-ounce producer in FY2022.
(Source: Company Website)
So, what’s the bad news?
The only real negative to the Perseus investment thesis is the hedging that remains in place, which has been a bit of a damper on the average realized gold price. While most of the sector was busy reporting an average realized gold price of $1,700/oz last quarter, Perseus’ average realized gold price was $1,575/oz. Currently, the company has 323,000 ounces hedged over the next three years at an average price of $1,442/oz, and this should weigh on margins a little. However, while this sounds like a lot, it’s actually only about 22% of gold production over the next three years, so while it’s a headwind, it’s not material. It’s worth noting that while this will be an anchor on margins relative to unhedged peers, Perseus should see a tailwind from Yaoure’s lower projected costs, which will mostly offset this hedging. Let’s see how the technical picture looks:
As the chart above shows, Perseus broke out of a massive base just over a year ago and has seen a sharp move higher since. The strong follow-through we’ve seen from this base is a good sign, but we’re now nearly 200% above this base, so I would argue that the easy money has been made here short term. Therefore, while I think the stock has a solid fundamental story, I wouldn’t be in a rush to chase the stock at current levels at C$1.42. Instead, if I wanted to be long the stock, I would be looking to buy any 23% pullbacks, which would bake in a margin of safety in purchases. Based on the recent high of C$1.52, this would translate to a drop closer to C$1.17.
(Source: Company Presentation)
Perseus Mining put up a strong finish to FY2020, but the weak Q3 performance made it near impossible for the company to meet its FY2020 guidance. While this is disappointing, I believe it’s more than forgivable due to COVID-19, and it’s hardly relevant to the bigger picture. This is because the real story here is Perseus’ ability to transform itself from a 270,000-ounce producer into a 500,000-ounce producer within the next nine months, which should be a significant tailwind for the stock. Given Perseus’ industry-leading production growth and a transition to a lower cost profile by FY2022, I believe that any pullbacks below C$1.17 will present low-risk buying opportunities.
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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