Ninepoint Gold & Precious Minerals Fund

September 2019 Commentary

As the trade war continued to fuel volatility across global equity exchanges, the Ninepoint Gold and Precious Minerals Fund continued its strong performance in 2019. At the end of Q3, the strategy was up 13.03% YTD and returned 6.94% over the course of Q3 2019.       

While Q3 was positive overall, the month of September saw gold and gold equities take a necessary breather after a torrid July. We had anticipated this and prepared for this by increasing cash levels and reducing exposure to higher volatility names. Our proactive focus towards risk mitigation and volatility reduction has translated into significantly lowered volatility and beta versus the indices.

The top three contributors to the fund performance in the third quarter were Dacian Gold, Ramelius Resources and Echo Resources.  Dacian recently brought its West Australian Mount Morgans Gold operation into production and encountered operational difficulties, cutting short- and medium-term production outlook.  The stock consequently lost  almost 80% of its value from January to June.  The market over penalized the stock in our view.  In Q3 the company made strides towards regaining investor confidence as it provided an updated 8-year mine plan in July and an in-line June quarter.  Dacian appreciated 160% in Q3 becoming the top contributor.  Ramelius is also a West Australian producer and has been delivering consistent production and financial results.  The company announced a 5 year mine plan giving visibility into its production profile.  The stock appreciated 55% in the quarter, but remains one of the cheapest names in our universe as measured by enterprise value to production ounces.  Echo is an Australian gold explorer with the key asset being the Bronzewing Processing Hub, which is a strategic asset in the area.  On August 26th, the company announced that it had entered into a Bid Implementation Agreement, pursuant to which Northern Star Resources would offer to acquire all of the issued and outstanding ordinary shares in Echo at $0.33 per share in cash.  The offer represented a 32% premium to the last closing price of Echo. 

The top three detractors from the fund performance in the third quarter were Energold Drilling, Semafo and White Gold.  Energold….   Semafo is a West African explorer operating two gold mines in Burkina Faso.   The stock was an outperformer in the second quarter, but came under pressure in Q3 because the company announced in early August that a pit wall had failed at one of its mines – this has pushed about 45,000 ounces of 2019’s production into Q1 2020.  As such, the company reduced its 2019 production guidance.  We feel this name represents very good value given its free cash flow generation profile.  White Gold is exploring its extensive property package in the Yukon including its flagship Golden Saddle & Arc deposits.  The company has announced multiple encouraging drill results from the summer exploration program, including a new high grade gold discovery and has identified multiple additional high-priority targets.

While silver has continued to trade at frustratingly low levels, we look towards gold to set direction for the price of silver. Gold bullion traded at a six year high in September 2019, making a new high of $1552/oz. Despite gold trading almost 14% higher than the 2016 peak of $1366/oz, the GDX failed in its attempt to surpass the 2016 high. The GDXJ was even worse off, trading almost 20% below its 2016 high.

The combination of rising bullion prices and investor apathy towards precious metals equities has created a potent mixture for precious metals investors. As bullion prices continued their march higher during the third quarter, we saw something entirely unexpected occur in the precious metal equity funds and related ETFs. Outflows.

Source: Bloomberg

The chart above graphs the year-to-date shares outstanding in the GDX and GDXJ ETFs. As precious metal equities experienced strong gains in June and July, investors responded by redeeming their units for cash. Over the course of the first three quarters of 2019, investors have redeemed 82.10M shares of GDX and 27.70m shares of the GDXJ. This represents 16.36% and 19.52% of shares outstanding for the GDX and GDXJ respectively – a truly staggering amount.

This behavior was not confined to passive vehicles such as ETFs because we saw the same pattern emerge from investors in actively managed precious metal equity funds as well. These divergences are unusual and uncommon, especially given two very important factors.

1. The precious metals sector today are far more leaner and profitable than they were the last time we saw gold prices around $1500/oz after having endured a six year bear market in bullion prices. Senior precious metal equities today trade at one of the lowest P/CF multiple in over thirty years.

Senior Producer Price to Cash Flow Multiples

Source: Scotiabank

2. Similarly, precious metal equities have never been as cheap in over thirty years when measured against their Net Asset Value (NAV). The chart below, courtesy of Scotiabank graphically demonstrates this point.

Source: Scotiabank

The chart below is a classic and it captures investor sentiment at various phases of the market cycle.

We surmise we are currently somewhere between the two Ds of the market cycle, namely, between despondency and disbelief. Following the classic capitulation we witnessed at the end of 2015, investors have been downright despondent and doleful towards precious metals investing over the past few years despite strong returns. The GDX and GDXJ have returned 97.80% and 99.75% from Jan 2015 through September 2019 inclusive of dividends far outperforming the S&P 500 which returned 57.20% including dividends. Equity investors have met the 2019 rally in bullion prices with disbelief. They have responded by cashing in their gains in gold and silver equities, afraid that they may never see these prices any time soon. Therein lies the opportunity for savvy investors who recognize the bargain represented by silver equities.



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 September 30, 2019; 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; sub-advisor 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 September 30, 2019 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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