“A Lot of Chaos Going On” in Precious Metals Market - Weekly Wrap Up (February 21, 2020)

Announcer: You're listening to the Weekly Wrap-up on "Sprott Money News."

Craig: Greetings once again from "Sprott Money News" and SprottMoney.com. It's Friday, February the 21st, 2020 and it's time for your weekly wrap-up. I'm your host Craig Hemke and joining us this morning is a slightly under the weather Eric Sprott. Eric, good morning.

Eric: Hey, Craig, good morning. What a hairy kind of week we've had here, both on the market front, the gold front, the meta gold front. There's a lot of chaos going on.

Craig: A lot of chaos going on reflected in the gold price, reflected in the bond market, reflecting in the mining shares, finally as well. Hey, and before we get started, we mentioned this last week, I know a lot of folks are going to be headed to the PDAC Conference in Toronto, that's coming up in only about seven or eight days. Sprott Money is going to be hosting a warm-up event, I like the way that's phrased, a warm-up event on Saturday night the 29th from 6:00 to 8:00 at a place called the Pravda Vodka Bar, you know, warm your cockles at least, right? You can add your name to the guest list and come to the Pravda Vodka Bar on us by emailing us at submissions@sprottmoney.com. Obviously this event is filling up fast, so do not mess around. Submissions@sprottmoney.com if you want to join us, 6:00 to 8:00, Saturday, February the 29th. All right, Eric, we are cooking. As we speak gold is up $62 on the week. Something like $16.45, making new all-time highs in all these currencies including the Euro. Silver participating as well, bond market soaring. A lot of this due to the economic slowdown and global impact of the Coronavirus. You've been warning us about this now for about a month. What are your thoughts this week?

Eric: Okay. Well, first of all it's all about the mathematics, right? And the first problem we had with mathematics that showed the vulnerabilities of the world's economies was when the Chinese bases exploded and the deaths exploded and they exceeded SARS in, like, no time. And one of the things we don't know yet, you know, is it really under control there? Are we just getting phony numbers? And of course, sometimes they say it goes up by 14,000 again and then they say it doesn't go up at all and we're kind of losing it. But we have examples other than China, and the first one, of course, was the Diamond Princess cruise ship where it just exploded. You think, "How could it explode that fast? That's crazy." Then middle of this week we got South Korea where all of a sudden they were reporting 50 extra cases a day and it was obvious that in a tight environment, if somebody has it, it just blows out. We also have seen that today, in new information on Chinese prisons, I mean, I just...the thought of what could happen in a prison when everyone's eating in the same room. I mean, it just boggles my mind how bad is this confined space is when someone has the disease. And of course, do you dare go back to work if you're in China? Would you want all these people coming in the same room and all work together? I mean, it just...there's a lot we don't know about this, but there's also a lot to worry about. We have too many examples of rampant exponential increases in cases, so it's very, very worrying.

Craig: It certainly is, and that's being reflected, like you said, around the world. I mean, you see gold's going up, but gold is going up for a reason. Obviously there's concern, safe-haven trade, all that stuff, but also this big move in interest rates downward is going to put a lot of pressure on the Fed as well. You can kind of see where this is headed at this point.

Eric: Well, of course the big concern if you're an investor, you know, you own bonds and you own stocks, and you don't own gold for the most part, okay? So you got to ask yourself, "Well what could possibly hold its value?" And I think one of the obvious ones is gold, and silver for that matter. So it takes this little minute change in the number of people wanting to invest in gold, very, very, very minute, where all of a sudden things go crazy. And you and I, of course we both look at the commitment of trader reports, we had some incredible increases in the commercial short position in the last week. They're losing a billion dollars today, they're probably down ten billion dollars, and it just gets worse. And of course because they've always had to be the sellers, they continued to sell and their short positions continue to get bigger, and yet they probably should be buying, but they're locked, they can't buy. Imagine if the big seller has to become a buyer. What happens? Do we have a palladium here where all of a sudden everyone has to go the opposite way? And I wouldn't be at all surprised to see that happen here. It's exploding. I mean, you sit and watch the television networks and, you know, you got some guy from Houston say, "Ah, look at the gold stocks here." And some other guy, "What the hell? All these people now focusing on these things." And of course you see the technical rampage that gold and silver are on and the stocks are on, and you can't help but, you know, get forced into the tsunami of interest and it doesn't take much increase in interest for the prices to go crazy.

Craig: Yeah. We're seeing the shares move up smartly this week across the board, and obviously with our primary products going up in price, earnings are expanding, everything looks pretty good. We did have a...I guess call it a frustrating reaction to the earnings report or Kirkland Lake yesterday, and I know a lot of folks want to hear from you on that. There was a lot of good news, they increase in dividend by 50%, the earnings are record highs, they announced a massive buy-back of their common stock, but there was, I guess, some worry about reserves and grades going down. I don't know, Eric, I look at that too, but I see the company might make $5 a share this year, so it's trading it at what, a PE of seven?

Eric: Yeah. Yeah.

Craig: What are your thoughts on that because I know people are dying to hear from you.

Eric: Here's what I think about that. Well, first of all, we have known. When I was the chairman of Kirkland Lake Gold, we have to find another Swan Zone in Fosterville. And based on what we saw in the revised reserve estimates, there was...not only did we not find any, but the grade went down with what we had. Why? I have no idea, okay. It's a very complicated subject, I don't know why the grade was a little lower in the Swan Zone, but it was lower. And pretty well every ounce that we produced this year in Fosterville was an ounce that came out of reserves. So we almost had no positive impact, I think they actually picked up 200,000 ounces of mid-grade reserves. When you're, you know, producing reserves that have 40 grams and you're finding reserves with five grams, the profitability of those things would be vastly different.

Now, I have not heard the transcript of the conference call. I don't know what they've said about, you know, future Fosterville opportunities. I know they're spending a lot of money, but I haven't had a chance to get into the conference call and find out all the details. So that was, to me, that's the biggest problem, the Swan Zone. They've maybe only got two and half more years of certainty there, and then you got to go find something. So that's of concern. The positives are, hey, we ended up buying Detour and the price of gold is up 200 bucks an ounce. Well, that can't hurt when you're producing 600,000 ounces of it. You're making an extra 120 million bucks you weren't expecting to make. And plus, I think there's lots of opportunity at Detour in terms of getting the cost down, getting the production up, but we got to, you know, you got to start working on it. We've only owned it for less than month here, so, but that's positive. The earnings were okay, the dividend was great, the buy-back is fine. But, you know, we need to find something to stem the decline in production from Fosterville two and a half years from now. So we'll have to stand-by on that.

Craig: Could you summarize it? I've seen this on Twitter and places like that, Eric, could you summarize it as this is Kirkland Lake going from a transition from a low-cost producer that's really on the rise to now, I mean, it kind of sounds a lot like a Newmont or a Goldcorp or any of the other big ones.

Eric: Well, when you have a Swan Zone your costs are almost nothing. I think their costs go as low as 120 bucks an ounce or something. Most everybody's costs, cash costs, are like $600. And if there was no Swan Zone I'm sure the cash costs would be in those ranges as well. Swan/Fosterville was very unusual. I do believe there's lots of hope there, the company is all around the Fosterville area kind of exploring down there, finding interesting things. I think Kirkland has to find a way that they have a real shemozzle getting a ramp in the right place to drill the Swan Zone, and hairier. The delay is hurting them and they got to do something about it in terms of getting access to the proper drilling stations and let's prove up that there's likely to be another Swan there.

Craig: Yeah. And this buy-back program, is that, I don't know, in your experience, is that helpful? I mean, they issued a lot of stock to buy Detour and now they're buying some back.

Eric: Yeah. It's a big program, I think it's 20 million ounces so you're talking about...

Craig: Shares.

Eric: Sorry, 20 million shares, yeah. So you're talking about 900 million dollars that would be spent over the next two years. I mean, that's certainly all of their cash reserves. Now mind you, this company is going to be rolling in cash here with Detour in there and the price where it is. You know, they're going to be rolling in cashflow here. It's just that the market always wants to know that it's going to continue in the future. Yes, we have [inaudible 00:10:45] doing better, we have probably Detour will do better, but the jury is out about Fosterville now, two and a half years hence, and I can't tell you the answer but they better start finding something.

Craig: All right. So that's the big question mark. All right, thank you for that. That helps provide some clarity. We want to get into some of the names that have been sent to us, we get names every week, you can always send them to us at submissions@sprottmoney.com, and we have four or five this week. I think I'll mention, one of the things that, one of the companies we get asked about often, Eric, is First Mining Gold Corp, it's one that people have held for several years now. And I know that's not one that you know much about and so we never talk about it, but I will kind of as a public service announcement, I spoke yesterday to a guy by the name of Dan Wilton who is the CEO of First Mining Gold. So if anyone wants to know more about that company, because it was a rather insightful interview, I'm actually going to post that at my TF Metals report site this afternoon. Free audio, anybody can show up and listen. So if you want to know more about First Mining Gold Corp, stop by TFMetalsReport.com Friday or over the weekend and give it a listen. So just, for everyone that keeps asking about that each week, I thought I'd put that in there. One of the names that came up this week was Exelon. Do you have anything to say there? They've got some good drill results.

Eric: Yeah. Well Craig, first of all on First Mining, I am a shareholder and I bought it based on, okay, I've seen Keith Newymar do this before where he's buying what everyone is selling, okay, and this company came along, First Mining, and bought all sorts of orebodies bodies when no one was buying them. And of course, with the price of gold having gone from $1300 ten months ago to $1640 today, those orebodies, undoubtedly, very economic. So the opportunity there changes dramatically by the day. Now, but I'm not intimate with each of the properties there, so I don't really want to comment on it, but there's got to be, I've always said, you [inaudible 00:12:54] can own, buy these exploration companies where nobody gives a darn because the price of gold is $1200 or $1300, and the next thing you know it's $1600 and the guy's meta asset value triples. So that's what you got to be looking for.

Craig: Yep. Exelon had great drill results but the stock went down. Hey, that sounds familiar.

Eric: Yeah. Yeah, they had good drill results. One of the things about Exelon, they also produce lead and zinc, and you know, lead and zinc in this environment that we're looking at, and the potential environment, the economic environment, it's hard to imagine those things holding together here. And in fact, as you can imagine, it's hard to imagine anything holding together here. You know, if it just gets...if the Coronavirus gets out of control, man, it's going to be really tough on everybody. These supply lines not working and all kinds of logistical issues that the world might face here. So, and I know Exelon has a very interesting property in Germany that they're doing a lot of work on. I'm a big shareholder, I like the guys running it, but, you know, one or two drill holes doesn't always do things for you. You've got to be able to connect them together, and they're...I would say they're struggling along. You know, we don't make any money yet, although I guess maybe with prices starting with silver. It's such a lagger here, I mean, silver could be so much higher and it would be great for Exelon, and I do hope and expect that should happen here as as the year progresses.

Craig: How about something called New Found Gold Corp?

Eric: Well, you know, that's funny you would ask about that, or something would ask about that this week because they announced that they weren't going ahead with the merger with the company called Mex Gold. I'm a big shareholder of New Found Gold. It's a private company. They had a big drill hole, I think it was 90 grams over 19 meters, something like that. A gigantic hole, and there was some disputes including me with the management thinking of buying, or merging, with Mex Gold. Thankfully that was pulled away. I'm a very big shareholder, Rob McEwen is a big shareholder. And the existing management are big shareholders, and I think there's an opportunity here but it's not in the public domain yet so there's no way for anyone to participate. But it's well worth watching because it could be that this discovery could be very significant, and it's in Newfoundland.

Craig: So somebody else might go after them if this other merger didn't go through. That'd be worth watching, I suppose.

Eric: Yeah, yeah.

Craig: All right. Hey, and just to follow up, someone was asking about De Grey, which is a company down in the Pilbara region, we talked about it last year. We discussed it on the 7th and said we'd revisit it on the 14th. I ask you those, you said you still haven't a chance to look at it so maybe next week.

Eric: Yeah. You know what's funny? Well, there's so many things going on, okay? I mean, between the Coronavirus, I think I said last week, you spend two or three hours a day just studying the Coronavirus and then, you know, Kirkland's earnings come out and have, you know, 150 pages of stuff to read. There's only so much time in the day and all these other companies are reporting at the same time on the drill results.

Craig: That's right. All right.

Eric: So I apologize to the questioner about De Grey, and Craig will remind me to review it before the call next week.

Craig: I will. I will. All right, excuse me, two more. Osisko Royalties, you've had some luck with some royalty companies lately.

Eric: Okay. Osisko Royalties okay. Well, I mean, I'm sort of familiar with Osisko Royalties, I thought you were going to ask about Osisko Mining.

Craig: Oh, sorry.

Eric: The royalties business is a great business. Of course, the price of gold is going up here and every royalty is going up exponentially as the price of gold goes up here. It makes the odds of finding more precious metals in wherever you are go up because you can afford to process lower-grade ore when the price is $1640 than you can when the price is $1340. So that's a great thing for a royalty company because you're getting higher compensation on more ounces of gold. I'm not really a student of Osisko Royalties per se, but I know that they've done some great deals and all these companies get great value, but I can't tell you whether I think it's under or over value versus something else because I'm not a student of it.

Craig: All right. And then finally a company that we've discussed before called Jaguar, and I'd say that's kind of emblematic of a lot of opportunities that are out there these days.

Eric: It is. I mean, I'm looking at some of these producers that I get involved with including Jaguar, and my God, the price of gold in Brazilian, I think it's cruzeiros, it's probably up 45% in the last 12 months and a what a wonderful thing to have happen to you the year you produce 80,000 ounces of gold, which would give you $120 million of US revenue. But because we're in Brazil, their margins would have gone up massively because their costs are in Brazilian currency and the sales are in US currency. So I'm sure it's doing very well, we had an update on some of the drilling and exploration recently, looks good. We're still hoping that, you know, they'll do well north of 80,000 ounces this year. And anybody can do the math here, you know, you add $300 to a guy doing 80,000 ounces you got $24 million more US, that's $30 million more Canadian, and maybe the market cap is $150 million, but you've got $30 million more pre-tax earnings. I see it in, for example, Grand Columbia. They've got 240,000 ounces in production all of a sudden in the last, you know, month, the price of gold is up 150 bucks. Wow. And they had to be cheap. I think, for example, Grand Columbia might be trading at two times cashflow. So that's what the opportunity is.

Craig: Yeah. And those opportunities are abounding. We've seen all these great earnings reports for the producers over the last couple of weeks, and those fourth-quarter numbers are all based off of a gold price that's, what, $150 less than what it is now?

Eric: Yeah, about $160...most of them came in at $1480.

Craig: Remarkable.

Eric: And it's currently, what, $1640? It's almost $160... It's all profit, that's the important thing about that. Change in the price of gold, it's all profit. [crosstalk 00:19:34.903]

Craig: Yeah. Before we go, Eric, anything else on your mind this week that you want to cover before we wrap up?

Eric: I don't think so. I'll continue to... Most of the earnings, most earnings are out now. And quite frankly, Craig, some of the big companies have not done well, okay? Including now Kirkland, not so much on earnings but the reserves. Agnico Eagle didn't do particularly well. So I think the opportunity is in the little guys, the opportunity is in some guy who's already got, let's say, a million ounces of something at five or six grams and he can't scratch together ten million to drill a little further. Well, I think they'll start getting the money now and there could be some big opportunities there.

Craig: No, that's right. That's a good reason to listen every week. It's also a good reason to go to sprottmoney.com and add some physical metal to your stack, the way things are moving. Like I said, we've got all-time highs in all these currencies, including the Euro. It looks like it will be all-time highs in dollar terms before too long as well. So please stop by sprottmoney.com, you'll notice we are in the final week of our Sprott Signature Sale, something we do once a year. More than 25 different bullion products on sale, take advantage of these great prices. Go to the deals page at sprottmoney.com, or again, just pick up the phone and give us a call. 888-861-0775 to get more info and to make your purchase. Eric, go get yourself some tea, some Zinc, some vitamin C, all that kind of stuff, we need you in this fight. We got to have you feeling better next week.

Eric: You'd think I know how to deal with this, right? I talk about it every week.

Craig: Yeah, exactly. All right, well you go take care of yourself. We'll talk to you next Friday.

Eric: That's great, thanks.

Craig: And from all of us at "Sprott Money News," sprottmoney.com. Thank you for listening. We'll talk to you next week.