This holiday season, give the gift of gold shares

Benj Gallander, Ben Stadelmann, and Philip MacKellar
November 15, 2021

So you are racking your brain and trying to decide on something to buy for that special someone for the holiday season. You don’t want to mess up like the time you gave that vacuum cleaner, which you thought would make your partner shriek with delight. (There was shrieking, but no delight.) Socks won’t cut it, again, and the cute little puppy you gave has proven to mean more work than pleasure.

Nah, this year perhaps it is worth sticking with one of the old tried and trues. Gold could be the ticket. Hit the jewellery store, or the internet, preferably on or around Black Friday, when there are bargains galore.

Or, in a slightly less romantic vein, but with the possibility of much better returns than bling (which, like a car, instantaneously goes down in value when departing the vendor), how about gold shares? We own a number in the two Contra portfolios, including Fortitude Gold, Gold Resource Corp. and SSR Mining.

Our most recent purchase, and arguably our favourite, is Yamana Gold, acquired in July at $5.16 a share, which is about where it’s trading now. Our belief is that it can do better than a double from that price.

The company just reported third-quarter numbers, which looked spiffy from this end. All five of its mines had either very strong or record quarters, with an all-in-sustaining cost (AISC) of US$1,041 per troy ounce. Fourth-quarter production is expected to ramp up, with a reasonable possibility that the AISC will fall, not an easy task given rapidly rising labour and fuel costs.

All of its projects have posted positive exploration results, meaning the mineral resource bases will be expanded and mine lives extended. In addition, the studies on the Wasamac gold mine project in Northern Quebec suggest that the mine is eminently feasible, so Yamana is pushing ahead.

The estimated time frame to obtain all approvals, permits and certificates, followed by moving to production, is toward the end of 2026. We will add on a year as these undertakings are rarely completed as planned.

Besides success with the shovel, in August, Yamana redeemed all of the debt due from 2022 to 2024, with a new financing of 10-year notes of US$500 million. Interest rate? A lowly 2.63 percent.

That opens a runway to 2027, before a principal repayment is due. Overall, the balance sheet debt has been dramatically deleveraged, from US$1.85 billion in 2019 to US$782.9 million today. Some of the money saved is being used to pump up the dividend, now three cents a quarter.

Critical to the enterprise being successful, of course, is the gold price and we are agnostic about that. Given the uncontrolled debts and deficits of governments, our feeling is that under “normal” circumstances, the yellow metal’s value would be much higher, easily cresting US$2,000 an ounce.

But from this angle, cryptocurrencies are a major competitor, and many people will choose to invest there, whereas in the past gold would have been their alternative vehicle of choice. We have no idea how much money has been diverted from the realm of this most malleable of all metals, but our guess is that it is substantial.

Yamana has certainly had bad stretches. The enterprise lost money for six years in a row before finally turning a profit in 2019. This could be a major reason why the market remains dubious about future prospects. However, we contrarians are confident in the company’s future.

So forget about buying your partner a self-help book for the coming festivities. Certainly not one about dieting. Instead, the slimmed-down debt load and increasing production from Yamana might make a good present. Definitely a different kind of stocking stuffer.