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SWOT Analysis: A Timely Opportunity to Buy Klondex

Commentaries & Views

Strengths

  • The best performing precious metal for the week was palladium, falling just 1.39 percent. Sillwater Mining’s CEO told investors that palladium prices are likely to rise further due to growing demand in China, despite auto sales declining in the U.S. Comments released by the Fed following Wednesday’s meeting, reinforcing the interest-rate hike schedule despite a slowdown in U.S. growth, left gold traders split this week. Bloomberg reports gold traders and analysts are divided on their gold price outlook with seven bullish, six bearish and three neutral. This week gold declined a bit, but Jonathan Barratt, CIO of Ayers Alliance, says these levels represent “fair value.” Similarly, BullionVault’s Gold Investor Index, measuring client buyers against sellers, fell to 52.1 versus 54.2 in March, as prices rallied during the month.
  • During the first quarter of the year, China’s demand for gold bars and coins jumped 30 percent year-over-year, reports China Daily. According to the World Gold Council, this is the fourth strongest quarter on record. Overall demand in the Chinese market grew 8 percent year-over-year, making China the world’s top gold consumer. In India, gold imports jumped to the highest level since 2014, with net inbound shipments more than doubling to 270.1 metric tons.
  • A Dubai technology company, OneGram, has started the first-ever currency backed by gold in an initial offering, reports Reuters and Bloomberg News, citing CEO Ibrahim Mohammed. “The token called OneGramCoin is considered an Islamic financial product, whose offering is open to all types of investors,” the article continues

Weaknesses

  • The worst performing precious metal for the week was silver, trading off 5.02 percent followed closely by gold. Silver and gold fell this week as a tentative deal by U.S. Congress to avert a government shutdown curbed safe-haven demand for the precious metals, reports Bloomberg. Analysts from BOCI believe gold has a “more challenging” outlook moving forward, according to a report this week, citing two more rate hikes and the Fed’s balance sheet unwind. U.S. stocks resumed their advance this week, with optimistic earnings reports pushing the dollar back up and gold lower.
  • The Perth Mint released April sales numbers this week, reporting that April gold coin and minted bar sales came in at 10,490 ounces. This is a drop from sales of 22,232 ounces in March. Silver sales also dropped in April to 468,977 ounces from 716, 283 ounces in March.
  • Workers at Freeport McMoRan’s Grasberg copper and gold mine in Indonesia started to down their tools at 12am local time, reports Bloomberg. The company’s labor union and PTFI management have yet to agree on labor issues and around 8,000 employees have joined the stoppage. Workers plan to down tools until May 30 to protest job cuts, the article continues.

Opportunities

  • DoubleLine Capital’s Jeffrey Gundlach believes that now is “not the time to give up on gold,” reports Bloomberg. In a Tuesday webcast, Gundlach said that gold prices are likely to head higher and also noted his secular bear view on oil prices because of improving fracking technology that cut costs. This week was a bad one for oil as it retreated to a level not seen since OPEC forged its landmark agreement to cut output last November, Bloomberg writes. “With all the shale producers coming online in the States, it’s very much taking the wind out of sails of the uptick we got from the OPEC agreement,” said James Audiss of Shaw and Partners.
  • In a press release Wednesday, Red Pine Exploration reported the intersection of visible gold in new drill holes south of its Surluga Deposit. “Visible gold observed in all seven holes drilled in the southern extension of the Minto Mine shear zone,” the release notes. In separate mining news, the Commission of Appointments in the Philippines has voted not to confirm Regina Lopez as Secretary of the Department of Environment and Natural Resources, reports Argonaut. Lopez had taken a hard stance on mining with a view that the sector had negatively impacted the environment and farming communities. Now mine closures are unlikely to proceed. Over to China, gold production in the first quarter saw a significant drop with mined output falling 9.3 percent. One report notes Chinese gold miners have reduced output due to low prices.
  • Klondex Mines (KDX CN, KLDX) reported financial results on Thursday after the close with the stock hitting a 52-week low that day. Klondex’s share price has been depressed by a series of events, much of which are unrelated to its operational performance. Back in March the Van Eck Vectors Junior Gold Miners ETF (GDXJ) was supposed to sell its top 3 holdings and reinvest the proceeds into existing holdings, which meant around 10 million shares would be bought by the ETF. However, the GDXJ ETF did not follow the asset mix provided by their index provider because they would have ended up owning 20 percent or more of the shares outstanding for many of their holdings, which would trigger certain Canadian stock exchange rules concerning takeovers. Next Klondex had to delay its operational reporting by one week because the shareholder base shifted to majority U.S. holders which required the company to switch from IFRS accounting to US GAAP. Klondex bought the True North Mine out of receivership and the Hollister acquisition from private owners last year. Although both properties had resources in the measured, indicated, and inferred categories there were no proven and probable reserves. Under SEC rules Klondex had to treat all the capital improvements on both properties as expenses, thus hitting the income statement, and appeared as though the company missed on its earnings. Later in mid-April, the GDXJ announced a new method for re-weighting the stocks it owns by down-weighting the existing holdings, including Klondex, and using the proceeds to buy mid-tier gold producers. The messaging on the Klondex earnings call on Friday was well received. Much of the re-positioning for the upcoming GDXJ rebalancing trade seems to be in the market now and investors now have a timely opportunity to buy Klondex Mines after touching a 52-week low, largely on issues unrelated to the operational performance of the company.

Threats

  • Major bulk miners have some of the same issues seen in the gold sector. According to a report from Deutsche Bank, large miners’ “stay-in-business” (SIB) capex could increase 20 percent in 2018. “While total capex will likely remain low near-term ($30 billion in 2017, $90 billion in 2013), we will see sustaining/SIB capex increasing over the medium term as most miners catch up on the underinvestment over the past five years,” the report notes. Bottom-up analysis suggests that while truck fleet replacement will remain low, waste stripping will increase significantly, it continues.
  • In November, Steven Mnuchin hinted that the Trump administration would entertain the idea of selling ultra-long bonds, reports Bloomberg, with Wall Street coming to a consensus: Don’t do it! And on Monday, the article continues, Mnuchin provided the clearest signal saying this plan “could absolutely make sense.” Jeffrey Gundlach says that DoubleLine would not buy 100-year Treasuries for its mutual funds should they become available. In fact, he said “It opens the door to burdening our great-grandchildren to a significant degree.”
  • Investors pulled $778 million dollars from the VanEck Vectors Gold Miners ETF, reports Bloomberg, the largest outflows on record. The withdrawals coincided with the outcome of the first round of the French presidential elections, the article continues. In a similar note, Jeffries reported Monday that large cap ETFs increased their assets by 1.9 percent via inflows of almost $7.4 billion, with small caps increasing assets by 4.8 percent via inflows of over $4 billion. The group also noted outflows across most of its categories being muted, with the biggest being technology and GLD, with about $216 million in withdrawals.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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