November 2016 was a historic month in which two monumental market shocks took place – the election of Donald Trump to the U.S. presidency and the surprise deal reached by OPEC to put an end to the worst oil bust in decades. Both of those shocks will bring windfall profits to one sector in particular: gold.
While investors are trying to figure out if defense manufacturers will be a good bet under a Trump administration, or which oil and gas company will get a boost from OPEC, they would be better off focusing on the gold sector, which will benefit from both the Trump presidency and higher oil prices. And within the gold sector, investors will do well with the big boys such as Barrick Gold (NSYE: ABX) and Newmont Mining (NYSE: NEM), but there is not a more exciting play right now than Fiore Exploration (TSX: F.V).
But before we look specifically at Fiore Exploration, let’s look at why these two November shockwaves will be good for gold.
Trump will stoke inflation.
President-election Donald Trump will be a godsend for gold producers. That is because he has promised to bring radical change to U.S. fiscal policy. Just days ago, Trump’s pick for Secretary of Treasury, Steven Mnuchin, said that Americans should expect the "largest tax change since Reagan,” with promises to cut corporate taxes, income taxes, and completely repeal the estate tax and the alternative minimum tax. There will also be an effort to repatriate some $1 trillion in untaxed overseas corporate income. On top of that, the Republican-led Congress will likely scrap Dodd-Frank financial regulation.
While Trump will likely bring a massive supply-side economic stimulus, he also promises a Keynesian-style spending spree. Trump’s gargantuan 10-year $1 trillion infrastructure plan to rebuild roads, bridges, tunnels, airports and the like could boost economic growth.
But it would also fuel inflation. A spending stimulus made sense in 2009 when the economy was in freefall, but seven years into a recovery, spending $1 trillion could have some unintended side effects. Fed Chair Janet Yellen cautioned against such a spending spree at time when the economy doesn’t need it.
The spending program alone would be enough to raise concerns about inflation, but doing it while simultaneously slashing taxes across the board will cause inflation to rise to heights not seen in years. The unemployment rate has now dropped to 4.6 percent, the lowest level in almost a decade, making inflation an unavoidable result from such prodigious levels of spending and tax cuts.
On top of that, the math doesn’t add up without blowing a colossal hole in the federal budget, adding trillions of dollars to the national debt.
The bottom line: Trump’s arrival in Washington DC will lead to more growth, but more debt and much higher inflation. Many can dispute the wisdom of such plans, but the undisputable fact is that it is all good news for gold. If the U.S. economy sees higher inflation and the value of the U.S. dollar falters, investors will flock to gold as a safe haven.
OPEC provides boost to gold
Gold prices have been sinking for the last few weeks, but the long-term effects of the OPEC deal will be great news for gold. OPEC’s agreement has already added about 14 percent to the price of crude oil, and more gains are likely well into 2017. This is good for gold for a few reasons:
- Higher oil prices will boost inflation, which is always good for gold (see Trump, above)
- Higher oil prices can dampen economic growth, and gold can offer an alternative to investors looking for yield
Gold prices have been hammered over the past few months on the strengthening dollar, dropping to its lowest level in nine months below $1,200 per troy ounce at the end of November. But the gains for the greenback are likely at an end. The Fed will raise interest rates this month, but the tax cuts and higher spending levels from the Trump administration will weaken the dollar, laying the groundwork for a recovery in gold prices in 2017 and beyond.
If gold is a winner in this new world order, then which companies should investors look at?
Picking a few of the large gold miners would be an obvious choice, but one of the most exciting plays out there right now is Fiore Exploration (TSX: F), a small Canadian-based gold mining company with assets in Chile.
According to the Fraser Institute Annual Survey of Mining Companies in 2015, Chile ranked 11th in terms of investment attractiveness for mining, and ranked first in Latin America. Chile is the 14th largest gold producer, a position that is likely to rise in the years to come with a stable investment climate and attractive gold reserves. Chile is a top country to mine for gold, and Fiore Exploration just happens to have prized assets in the country.
Investors should be aware of Fiore Exploration for a few reasons.
- Assets next to world-class gold mine. The small Fiore controls three blocks to the north, west and south of Yamana Gold’s (NYSE: AUY) Pampa Augusta Victoria mine, which forms part of the world-class mining El Penon complex that produced 227,000 ounces of gold and 7.7 million ounces of silver last year, with cash costs of US$621 and $8.38 per ounce, respectively. Fiore also has another project, Cerro Tostado, a few miles southwest of Yamana’s Augusta Victoria. Yamana is a $2.8 billion company and the company itself describes its El Penon complex as its “flagship precious metals mine.” Fiore Exploration pulled off a coup when it acquired blocks immediately adjacent to this prolific mine, with similar geological features. For such a small mining company to hold assets right next to such a successful gold mine means the upside potential for investors is huge.
- Fiore started drilling program. In October, Fiore began drilling its El Penon holdings, targeting high-grade epithermal gold-silver veins. Tim Warman, Fiore’s CEO is bullish on the prospect. “Just two months after acquiring this promising exploration ground immediately adjacent to an operating world-class mine, we’ve completed a geophysical survey and have begun drilling our top priority targets. We look forward to seeing the drill results over the next weeks and months, and are also in discussions for additional property acquisitions as we continue to grow the company,” he said in a statement. The results will provide a near-term catalyst for the company’s stock.
- Cash in the bank. Fiore will spend a little over $1 million on its exploration program, but it has around $14 million in the bank, a large cushion for such a small junior exploration company. That will allow the company to expand operations if the early results look good.
- Infrastructure in place. Chile has one of the best business climates for mining, and on a more regional basis, Fiore is operating in an area that has a mature mining presence. It is located adjacent to Yamana’s mine, which offers facilities and infrastructure for miners. It is also near good quality power lines and highways, located a little over an hour’s drive to the port and mining city of Antofagasta. Tim Warman, Fiore’s CEO, told Pinnacle Digest Podcast that it is one of the easiest places he has ever worked.
- Experienced management. Tim Warman has 25 years as a geologist, and used to be the VP of corporate development for Aurelian Resources, where his company made “one of the best discoveries of the century in Ecuador in 2006, with 13.7 million ounce Fruta del Norte deposit,” he told the Midas Letter, a mining podcast. He also worked for successful mining explorers in Argentina and Northern Ireland. He also played a role in the C$1.2 billion takeover of Aurelian Resources by Kinross Gold Corp, which delivered a windfall to Aurelian shareholders.
- Stock price down by 50 percent. Fiore’s stock is down roughly 50 percent since October. But early results of its drilling program will be reported in the next few days and weeks, which opens up the opportunity for a huge bounce.
By James Burgess of Oilprice.com
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