Chinese Buyers Join Central Banks To Drive Gold Higher
Contributed Opinion

It is well known the central bank's buying of gold over the past 18 months has been at record levels, driving the gold price higher even as gold ETFs have seen steady net outflows and coin sales remain subdued. Now, gold has closed Friday at $2,178, an all-time high close, adding over $130 so far this month and breaking out of a multi-month tight trading range.

This comes in the face of a relatively strong U.S. dollar and a growing consensus that rate cuts have been pushed back. Has anything changed in demand patterns?

Central banks are continuing to buy, adding about 40 tonnes in January, with China —  around 12 tonnes — buying for the 16th consecutive month; its official gold reserves are up by 15% in the last year. Surprisingly, neither institutional nor retail investors in North America nor Europe have joined the party yet.

ETF Outflows and Weak Retail Demand Continue

Gold ETF continues to see steady net outflows for nine consecutive months now and every week this year. This year has seen outflows of over 49 tonnes, more than all of last year combined, and so far, there is no indication that this is reversing. Most of those outflows have come from North America. Asian gold ETFs have seen the 12th consecutive month of inflows.

Data for the next couple of weeks will tell us if Western investors are reversing course. Recent surveys suggest not: while 75% of U.S. advisors have less than 1% exposure to precious metals, fewer than 10% say they have any intention of adding.

Of course, only a small shift can have a meaningful impact on price and the trend. Retail interest is also low and declining, with sales of American Eagle coins down 67% year-on-year but 82% month-on-month; Perth Mine certificate sales are also down.

China Bucks the Trend

Again, China provides a contrast. Gold sales in China have been stronger than in Europe or North America throughout the year. And over the Lunar New Year Holiday in mid-February, gold and gold jewelry sales were up 24% on last year.

During the long pandemic period, China's households accumulated strong savings, but they faced a dilemma as to where to place that money: banks and real estate both have been unstable in recent years, so gold attracted much of those savings. Data from the Shanghai Gold Exchange indicates a recent surge in local investment demand.

So, if central banks did virtually all of the heavy lifting since the autumn of 2022, it appears that Chinese investors have provided significant and growing assistance this year.

So far, Western investors — institutions, money managers, and retail investors — continue to be net sellers. When they turn, then the moves in gold should be truly dramatic, and will finally include the gold stocks.

We may not be there yet, but we are close.

Without Cobre Panama, Franco Remains Strong Company, With Growing Revenue

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) reported mixed results for the fourth quarter, though it met its revised full-year guidance and analyst expectations following the closure of the Cobre Panama mine (its largest asset), as residual sales from that mine were higher than anticipated (though oil and gas fell). Gold-equivalent ounces ("GEOs"), taking out Cobre Panama, were up on the prior year.

Cobre Panama, however, provided the major news, as Franco decided to take a full impairment, recognizing a loss of $1,169 million. From here, there is only upside, either from a restart of the mine or from arbitration. Franco said it had notified the Panamanian government of its intention to initiate international arbitration (separate from that of mine-owner First Quantum Minerals Ltd. (FM:TSX; FQM:LSE)) with a claim for at least $5 billion. There is some hope that fresh contract negotiations could be launched after a new government takes office in May, but any restart of mine operations will not happen quickly.

New Mines This Year Provide Growth

Franco issued 2024 guidance omitting any contribution from Cobre Panama in a range of 480K to 540K Gold Equivalent Ounces (GEOs), a modest increase in 2023 (ex-Panama). This includes initial ounces from three major new mines, Greenstone in the second quarter and Tocantinzinho and Salares Norte (in the second half).

The company also continues to add to some existing royalties and bought a new royalty portfolio on Haynesville gas properties. It also noted plans for expansions at several major mines on which it holds streams, including Antamina, Candelaria, and Detour Lake.

Franco ended the year with cash of $1.4 billion, no debt, and $1 billion available on its credit facility. However, it also said that its exposure risk in its ongoing Canadian tax reassessment has increased to $559 million. It increased its dividend for the 17th consecutive year.

Franco Remains a Top Holding, Still With Upside Potential From Cobre

Franco remains our top holding in the gold space, with a solid balance sheet and management, broadly diversified assets, and a deep pipeline. Some high-quality mines on which the company holds royalties or streams are coming on stream over the next couple of years, and several expansions are planned for major mines in the years ahead, while Cobre is now all upside potential, either from a mine restart or an arbitration award.

Although the stock has bounced off its lows with the gold price movement, the lows were a gross exaggeration, and the stock remains a Buy.

Strong Operations and an Improving Balance Sheet Will Re-Rate Fortuna

Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) had a strong end to the year, with a record production of 136,000 gold-equivalent ounces; gold achieved guidance while silver missed by 7% due to the work stoppage earlier at San Jose.

All mines in both Latin America and West Africa are operating well, except San Jose, which is scheduled for closing by the end of the year. The company generated $66 million of free cash flow in the fourth quarter, down slightly from $70 million in the prior quarter.

As mentioned previously, the company is using this strong cash flow, boosted by its new low-cost Séguéla mine in Cote d'Ivoire, to reduce debt, paying down another $25 million over the last couple of weeks in addition to $81 million since July.

The company expects to have zero net debt later this year. Séguéla produced 37% more gold in the fourth quarter than in the prior quarter, outperforming guidance, at a very low cash cost of $323 per ounce ($376 if capital leases were included). This helped bring down the company-wide cash costs per GEO to $840, down from an already low $873 the prior year. Costs at the mine are expected to be up this year due to a higher strip ratio.

Exploration Spending Boosted Now Mines Operational

Now, with the Séguéla mine construction ended and the mine operating, the company is putting more money into exploration, with a $38 million budget for the year. The main focus of this is the newly acquired Diamba Sud property in Senegal as well as continued new resources at Séguéla.

The company has also budgeted $5 million for continued exploration at San Jose in Mexico to see if the mine can continue operating beyond its planned year-end closure.

With strong, conservative management, a solid and improving balance sheet, five mines, and good exploration upside, Fortuna is a Buy.

Now, with operations continuing to perform well, Fortuna should begin to see a warranted re-rating after being in the penalty box ever since the expansion into West Africa nearly three years ago.

Metalla To See Three, Maybe Four, New Royalties This Year

Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American) will see three new royalties coming on this year, with significant expansion at one. First up, and potentially most important, is IAMGOLD's new Cȏté mine, with the first gold pour scheduled for the end of the month.

Metalla holds a 1.35% royalty covering the northern part of Cȏté and all of the adjacent Gosselin deposits. IAMGOLD recently announced that resources at Gosselin had increased by 2.4 million ounces to 7.4 million ounces (both indicated and inferred); drilling continues. A decision on integrating Gosselin into the mine is expected to be taken in 2025.

Two other mines over which Metalla holds royalties are expected to commence production in the second half, Tocantinzinho in Brazil and Agnico's Amalgamated Kirkland in Ontario. A fourth mine could potentially start this year, with the possibility of restarting the Endeavor mine in Australia near the end of the year.

Tocantinzinho and Cȏté/Gosselin could each generate upwards of $4 million a year once fully ramped up. The transformation of Metalla following its acquisition of Nova Royalties is underway, with debt reduction a priority after years of aggressive acquisitions with commensurate equity and debt issuance.

Beedie Capital has elected to convert some accrued interest on its loan facility into equity, increasing its ownership to 9.99% but reducing outstanding company debt and interest payments. The company has stopped its At-The-Market equity program. With six producing royalties, at least three more this year, and over 100 royalties and streams in total, Metalla is set to increase cash flow, and the new capital allocation strategy ensures the stock price will reflect that

Metalla remains a Buy.

BEST BUYS this week, in addition to above include Nestlé SA (NESN:VX; NSRGY:OTC), Barrick Gold Corp. (ABX:TSX; GOLD:NYSE), Midland Exploration Inc. (MD:TSX.V), Kingsmen Creatives Ltd. (KMEN:SI), and Hutchison Port Holdings Trust (HPHT:Singapore). Given the recent sharp moves in many gold stocks, we are holding off adding to positions in many for now.

UPCOMING EVENTS Later this month, it's off to Zurich for the Swiss Mining Institute's two-day conference, 20th and 21st, with mining executives and analysts in the iconic Dolder Grand. Register here. Let me know if you are attending.

At the end of the month, on Wednesday the 27th at 7 pm (Eastern), there is another On The Move webinar, co-hosted by Rich Checkan of ASI and yours truly. Our special guest will be Lobo Tiggre, editor of The Independent Speculator, where we will discuss, with his trademark candor and openness, gold, silver, and uranium, among other topics. The webinar is complimentary, but you must register, which you can do here.

And it's time to make reservations for Rick Rule's premier resource conference, to be held July 7 to 11 in Boca Raton. This has developed into the must-attend event for anyone interested in investing in resources, with a distinguished line-up of speakers including Grant Williams and Sean Roosen. It is bound to fill; register now, here.

Important Disclosures:

1. 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 Corp., Fortuna Silver Mines Inc., Metalla Royalty & Streaming, Barrick Gold Corp., and Midland Exploration Inc.
2. Adrian Day: I, or members of my immediate household or family, own securities of: All. My company has a financial relationship with: All. I determined which companies would be included in this article based on my research and understanding of the sector.
3. Statements and opinions expressed are the opinions of the author and not of Streetwise Reports, Street Smart, or their officers. The author is wholly responsible for the accuracy of the statements. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Any disclosures from the author can be found  below. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy. 
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