Dollar strength risk-related
Of course, investors' expectations for the dollar may change in July if June's data proves to be more upbeat, especially in the producer inflation side. But as of now, investors have pushed their expectations for the first US rate hike further away. They have become more downbeat about the chances of the first rate hike by the Fed in nine years happening this year, and have returned to being deeply entrenched in dollar positions, especially against the euro.
Why? As you might have guessed, it's because of Greece. However, this also means that if the threat of an imminent Greek bankruptcy were removed, investors would return to short the dollar. The clock is ticking, though, and a Greek solution, even if only temporary, must happen this week, before Greece has to pay €300M to the IMF, according to its bailout terms. And it currently has no way to pay, because its treasury reserves are empty. Of course, if Greece goes bankrupt, all bets are off and investors will push the dollar even higher.
But what if the crisis is resolved? The dollar correction that has been on hold for the past few weeks could quickly resume. As illustrated in the EUVIX index, which measures implied volatility of the euro, euro volatility is at cyclical highs. This means that euro implied volatility could soon fall back, and just as when the VIX falls it's positive for the S&P 500, as the EUVIX falls it will signal that appetite for the euro is back and the dollar correction is no longer on hold. So before you plan to ride on a dollar rally once again, think twice, because the derivatives markets suggest that the dollar correction is not yet over.http://www.ino.com/blog/2015/06/dollar-correction-not-over/#.VW8SQ-ZteGw
Strength of U.S. DOllar Compared to that of the Canadian Dollar
I’m seeing the strength of the U.S. dollar relative to the Canadian dollar. The strong U.S. dollar is helping to boost profit margins in Canada. That’s because Canadian mining companies pay most of their costs in Canadian dollars, but then sell their gold in U.S. dollars. That’s a big break for mining companies that are trying to control costs now that their margins have contracted dramatically.
Investor preference for safe jurisdiction, coupled with a weak Canadian dollar, makes Canadian mining assets especially appealing.
We’ve already seen a significant rush into Canadian assets as a result, besides the Osisko takeover. Goldcorp acquired Probe Mines in March 2015 for its deposit located in Ontario near an existing Goldcorp mine.
Soon after, Centerra Gold entered into an expensive joint venture agreement with Premier Gold Mines to develop its Hardrock gold deposit in eastern Canada. In April, Alamos Gold tied the knot with AuRico Gold through a merger in order to gain exposure to its Young Davidson Mine in eastern Canada.
We’ve also just seen Yamana Gold announce a takeover of junior explorer Mega Precious Metals for its Monument Bay gold project in central Canada.
As you can see, there’s a strong amount of interest in Canadian gold mines and deposits right now, and I believe it may continue.
There’s a short list of Canadian gold deposits and mines still on the market, which may look attractive to a major miner.
Based on my experience, majors will try to acquire medium-sized or large mines that will be able to produce at least 100,000 ounces of gold per year once they’re in operation.
As we saw in Goldcorp’s acquisition of Probe Mines, big miners also prefer to have mines that are close to their existing operations. This minimizes additional costs for new infrastructure or mine planning. Their labor force is already close by, and geologic conditions are likely to be similar, meaning they will have the right expertise in-house to develop the mine efficiently.
For mines that are further from where they are currently producing, an acquisition target will likely need to be larger and high-grade, with sufficient economics to warrant the strain and costs of extending out to a new area.
So which potential acquisition targets are left standing?
In my view, a short list of well-followed companies would include the following:
Detour Gold Corp. (DGC.TO) is probably the most-followed company on this short list. Its mine in eastern Canada produced around 105,000 ounces of gold in the first quarter of 2015. Detour has been increasing this number quarter over quarter and shareholders have taken note of this accomplishment. Detour’s share price has risen from a low of around C$4 in December 2013 to around C$13.50. I believe that many investors are speculating on a takeover, similar to the Yamana and Agnico-Eagle takeover of Osisko in 2014.
Lake Shore Gold Corp. (LSG.TO) owns the Bell Creek Complex near Timmins, Ontario. It reached 53,000 ounces of production in the first quarter and hopes to produce even more thanks to additional discoveries of gold in nearby zones. Investors have warmed to its story, bidding shares up from around C$0.50 in December 2013 to around C$1.21 today.
Richmont Mines Inc. (RIC.TO) owns the Island Gold Mine in Ontario and has ramped up production to around 26,000 ounces in the first quarter. Richmont hopes to increase production further by taking the mine deeper underground, where it has recently discovered additional gold. Richmont’s share price has risen on its progress from lows near C$1.20 in December 2013 to around C$3.90 today.
Kirkland Lake Gold Inc. (KGI.TO) has ramped up annual production to 155,000 ounces per year at its Kirkland Lake mine, in Ontario. Investors long doubted whether Kirkland Lake would achieve the production numbers it was forecasting due to the complexity of its underground operations. Now that the company is reaching significant production levels, investors are entering the story. The share price has risen from around C$2.30 in December 2013 to around C$6.47 currently.
Claude Resources Inc. (CRJ.TO) owns the small Seebee mine in Saskatchewan, Canada, which produced around 21,000 ounces of gold in the first quarter. Investors have rewarded Claude’s ability to ramp up production. The share price increased from lows near C$0.15 in December 2013 to a price of around C$0.68 today.
Some of the companies on this short list have been producing from a mine for several years. Others have recently built new mines that are now beginning to run smoothly at ramped-up levels, generating stronger cash flows.
Today’s market is rewarding companies that deliver this kind of tangible success.
Of course, we don’t know when a takeover could occur, and prices of these stocks could drop from here. Shareholders waiting for a takeover can often be left disappointed. If no takeover occurs, share prices can decline as investors lose interest, and a takeover can occur at a price that’s below where some investors purchased their shares.
Still, in my view, the trend of mergers and acquisitions for control of Canadian assets will continue and more companies could receive bids, offering the possibility of attractive returns to shareholders in the midst of a bear market.
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