Update on the Sprott-Falcon Gold Equity Fund by Doug Groh, Fund Advisor Sprott Asset Management:
Basically, despite the disruptions in the market, we have not changed our fundamental positive view on gold and the gold equities. The Sprott-Falcon Funds are in a relatively good position with their cash levels at this time. The correction of the precious metals complex and the equities is certainly unsettling and appears to be largely driven by an immediate need for liquidity. Gold prices sold off late last week and this week on the back of margin calls and hedge programs.
The global central bank stimulus and lowered interest rate environment actually provides greater support for gold exposure over the longer term. Recalling the correction in 2008, when gold prices fell about $250 per ounce or about 20-25%, that was the precursor for gold’s move to $1900 per ounce in subsequent years. The same scenario could play out in this market, especially with the tremendous stimulus presented to the market.
We continue to monitor global mining operations, and while mines have not shut down yet, we expect that each company represented in the fund will have to reduce its activity for a period of time. Each company will have unique situations and approaches to dealing with the virus, whether that is providing a safe environment for their staff or logistical challenges because of supply disruptions or responding to government mandates and business interruption plans.
While gold stocks are reflecting better valuations after declining over the past month, the fundamentals remain quite positive even with these corrected gold prices. Margins have been quite good year-to-date, and even with a gold price correction profits should be quite robust. Offsetting that, may be some reduced gold production, in coming months, from operations that experience reduced activity. We are not yet inclined to be overly aggressive buyers in the current market but note that the more liquid and larger cap names, which we have added to over the past month, are likely to do better.
Over the past month, we have been buyers of Agnico-Eagle which was oversold after reducing guidance, Kinross Gold on a relative improvement in fundamentals, Osisko Mining on positive resource expansion results, and Newmont on its positive outlook. Positions in Argonaut Gold and Gold Standard Ventures were reduced as those companies adjust to their capital requirements which are out of step with the capital that is available in the current market where liquidity is at a premium. Some more liquid names were trimmed to balance the Funds, such as Wheaton Precious Metals, NovaGold, and Royal Gold, which is also facing some cash flow timing issues from its royalty/streaming contracts. Yamana Gold was also reduced to emphasize more liquid names purchased during the month.
As the global economic developments around the world are changing so rapidly, we think it best to stay the course and focus on those companies whose businesses are best suited to weather the volatility and generate cash flow in a consistent manner. That is what we are looking at now and the theme of our conversation with managements. The current correction will likely create a greater spread in valuation amongst the larger cap and smaller cap names, and as markets settle down, it may make more sense to re-emphasize the smaller cap names, but for now we think larger caps should do better.