Jon Case, Portfolio Manager, Sentry Investment

FOCUS: Precious Metal Stocks

Market Outlook:

The gold price has been under pressure because of:
Optimism in other asset classes, such as the U.S. Market, and concern over a tapering of QE, has caused investors and speculators to more out of gold into other asset class.

The selling, mostly out of the ETF, has come at a time when one of the largest consumers in India has implemented an import ban on gold to take pressure off the current trade account, so they have been unable to buy. China is buying every increasing amounts, but growth in China cant offset the removal of India on its own.

Seasonal Weakness
We believe the current supply-demand dynamic as temporary. On the supply side, the ETF sales are already reduced, and at these prices mine supply is not sustainable.
On the demand side India has a new government in power which has stated they will relax the ban, and we are seeing a stronger rupee, which should help bring demand back Indian demand back up.
We don’t see a scenario where gold can stay down here.

Right now, we see demand down 300t but supply off 400t, so we believe there is a 100t deficit, and as Indian demand comes back up we think that deficit will rise.

TOP PICKS:

Detour Gold (DGC TSX)
Detour gold is a single asset gold producer with annual production of 500koz coming from the Detour Lake gold mine in Northern Ontario. The mine is new, and the company is ramping up production. They need to continue execute to get there, but there is a lot of runway for this stock to continue to move higher if they do. With a 15moz reserve, this could asset producing for 20 to 30 years - a strategic asset that could become a M&A target.

Argonaut Gold (AR TSX)
What it is: Mid-sized gold producer, production of ~140koz a year at attractive cash costs. The production comes from two mines in Mexico – good jurisdiction for mining. Cash costs are $775/oz and all in costs are around $950-$1,000/oz - a business that generates cash in this environment. The stock has been under pressure from a weak Q4, driven by lower than expected gold recoveries. The operational results will begin to improve as their main mine moves to a better part of the open pit later this year. The share price weakness looks like a buying opportunity to us.

Alamos Gold (AGI TSX)
Alamos is a mid-tier gold producer with production from the Mulatos mine in Mexico, and development stage assets in Turkey and Mexico. Annual production out of Mexico is 150koz-170koz at cash costs of 630-670 and all in costs of $960-$1,000, so the business generates free cash at spot gold prices. Alamos has one of the strongest balance sheets in the space, lowest costs, and is in a great jurisdiction. If you look at the FCF, the yield is now 4% growing to 10%, which is an attractive entry level for us.