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Gold & Precious Minerals

January 2018 Commentary

During the period from February 1 to February 8, the S&P 500 declined 8.50%, the Dow Jones dropped 8.8% and the TSX Composite suffered a decline of 5.0% as volatility came home to roost. As one of the calmest periods for equities came to a sudden end in February, the VIX Index rose from a benign reading of 13.33 on February 1st to an intraday high of 50.30 on February 6th. Correlation among various industry sub-groups in the equity space moved up just as quickly, resulting in a uniform sell-off across all industry groups. Almost shockingly, bond yields, as measured by the US 10 year treasuries, continued to rise during this tumultuous period, resulting in a continued decline in bond prices, leaving virtually no shelter for investors who spread their risk across equities and bonds. In short, what we saw transpire over the first week of February was a paradigm shift, which is forcing investors to rethink how to manage risk in their portfolios. 

While the gold price has continued to rise both in USD and CAD terms over the past two years, it has failed to attract investors who saw better returns in the general equity markets, bonds, and even cryptocurrencies. However, following the latest episode of volatility and wealth destruction, we are beginning to see investors once again position into gold, which has again proven to be a reliable store of value. Amid the sea of volatility, gold managed to hold relatively steady, across a basket of major currencies and more importantly, staying in the green for 2018. While gold equities did sell down during the first week of February, in a kneejerk response to falling equity prices, we expect them to recover and rise above their 2018 highs as fundamentals reassert themselves.

For the month of January, the Sprott Gold and Precious Minerals Fund lost 3.00% (Series F) versus the TSX Global Gold Index, which declined by 0.49% in the same period. The top performers for the fund were Primero Mining Corp, Northern Empire and West African Resources. Primero Mining received a friendly takeover offer by First Majestic. While the shares of Primero represented a poor long-term investment to us, we had accumulated a sizeable position in the funds convertible bonds, which were trading at distressed levels and stood above the equity holders. Following the takeover offer, the convertible bonds rose by 41.69% in the month of January and helped add 60 bps of positive performance to our portfolio. Northern Empire rose 31.95% in the month of January on the back of exciting drilling data at their Sterling deposit and helped add 34 bps of positive performance to the portfolio. In a similar vein, West African Resources continued to demonstrate strong drilling results at their M1 deposit in Burkina Faso. Recently, exploration companies have tended to perform better as of late, as new discoveries continue to dwindle and exciting exploration results have been warmly received by investors.

The top three detractors for the month of January were Pretium Resources, Roxgold Mining, and Endeavour Gold Mining. Pretium Resources suffered a steep drop in its share price as its quarterly update fell short of expectations. While the ramp up at its Brucejack projects continues to go well in terms of tonned mined and milled, the ore grade has fallen significantly short of expectations. The miss resulted in a 39.95% decline for the shares and detracted 165 bps from the portfolio. Roxgold Mining reported its Q4 results which production beating estimates, however, its guidance for 2018 production was slightly lower than anticipated by investors. Shares fell by 20.48% in the month of January and cost the portfolio 68 bps. Roxgold has historically outperformed guidance and it continues to remain one of the cheapest names in our universe, so we remain confident in its long-term outlook. Endeavour Gold Mining fell 11.63% in the month of January and detracted 51 bps of performance from the portfolio. While the company continues to deliver operationally, the decline in share price was primarily attributable to an ill-timed offering of a convertible note, which the company marketed in late January.

As gold prices continue to appreciate, we continue to see a tremendous amount of value in precious metals equities. With the increase in volatility across virtually all asset classes, we expect gold and gold equities to regain their luster.

 

1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at January 31, 2018; e) 2001 annual returns are from 11/15/01 to 12/31/01. The index is 100% S&P/TSX Global Gold Total Return Index and is computed by Ninepoint Partners LP based on publicly available index information.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: commodity risk; concentration risk; currency risk; cybersecurity risk; derivatives risk; exchange traded funds risk; foreign investment risk; inflation risk; liquidity risk; market risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; small capitalization natural resource company risk; substantial unitholder risk; tax risk; uninsured losses risk.

Ninepoint Partners LP is the investment manager to the Ninepoint Funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), other charges and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. The indicated rate of return for series F units of the Fund for the period ended January 31, 2018 is based on the historical annual compounded total return including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

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