Gold Rally Finished? Why This Run Is 'Dramatically Different' | Gwen Preston

Key Concepts

• Gold Rally: The current unprecedented surge in gold prices.
• Momentum Play: A market trend driven by increasing prices and investor interest.
• Risk Hedge: An investment strategy to protect against potential losses.
• De-dollarization/De-globalization: A global shift away from the US dollar and US-centric economic systems.
• Central Bank Buying: Foreign central banks increasing their gold reserves.
• Generalist Funds: Investment funds that typically invest across various asset classes, now showing interest in gold.
• Gold-Backed Crypto: Cryptocurrencies that are backed by physical gold, such as Tether's gold-backed coin.
• Economic Calamity: Severe economic downturns or crises.
• US Treasuries: Debt securities issued by the US government.
• Bilateral/Multilateral Trade Agreements: Trade pacts between two or more countries that operate outside the US dollar.
• Non-Correlation: The lack of a consistent relationship between the price movements of two assets.
• Risk-Off Asset: An asset that investors flock to during times of economic uncertainty.
• Risk-On Asset: An asset that investors buy when they are optimistic about the economy.
• Metals Bull Market: A period of sustained price increases in various metals.
• GDX (VanEck Gold Miners ETF): An exchange-traded fund that tracks the performance of companies involved in gold mining.
• Commercial Production: The stage in a mining operation where production is consistent and profitable.
• Ramp-Up: The process of increasing production at a mine towards its full operational capacity.
• Prefeasibility Study (PFS): A study that assesses the technical and economic viability of a mining project.
• Hedge Contracts: Financial agreements to lock in a price for a commodity.
• Satellite Mine: A smaller mine that feeds ore to a larger processing facility.

Unprecedented Gold Rally and its Drivers

The discussion centers on the current "unprecedented rally" in precious metals, particularly gold, which has significantly exceeded forecasts. Gwen Preston, VP of Communications at West Red Lake Gold Mines, highlights that this surge is not just affecting investors but also miners and resource providers.

Key Points:

• Magnitude of the Rally: Gold prices have seen an increase of $500 to $600 in a span of a couple of months, surpassing even optimistic projections.
• Company Timing: West Red Lake Gold was established three years ago with the expectation of a strong bull market, making the current rally "incredibly satisfying" and perfectly timed for their mine ramp-up.
• Sustainability of the Rally: The sustainability of this rally is a key question, with the root cause needing examination.

Drivers of the Gold Rally

Several factors are contributing to the current gold price surge, moving beyond traditional drivers.

1. De-dollarization and Diversification:

• Central Bank Buying: Continued buying by central banks, particularly in China, is a significant factor. This is part of a long-term strategy of de-dollarization and diversification away from the existing monetary system.
• Shifting Global Dynamics: A global sense that "waters are shifting" due to tariff wars and weakening international relations is driving a turn away from the US dollar. This weakening of globalization and a move towards more localized trade necessitates alternatives to US Treasuries.
• Bilateral/Multilateral Trade Agreements: The proliferation of trade agreements outside the US dollar reduces the need for countries to hold US Treasuries, which were historically required for participation in global trade (e.g., oil, soybeans).
• Reduced Demand for Treasuries: As trade outside the US dollar becomes more normalized, the demand for US Treasuries, and consequently access to US dollars, shrinks. This makes gold a more attractive reserve asset.

2. Influx of New Investors:

• Generalist Funds: A notable increase in "big money" showing up at gold mining conferences, with generalist funds that were absent for the preceding 12 years now entering the gold space. These funds are initially focusing on lower-risk exposures like physical gold and then moving into miners.
• Tether's Gold-Backed Coin: The launch of a gold-backed cryptocurrency by Tether is a significant development. This coin is reportedly buying as much gold on a monthly basis as the Chinese central bank, indicating substantial new demand.
• Partnership between Gold and Crypto: The debate about whether crypto or gold would "win" is now seen as outdated. Both are now viewed as partners, with investors turning to them for similar, though not identical, reasons, especially in the context of de-dollarization and cryptocurrencies.

3. Interest Rate Environment and Economic Concerns:

• Interest Rate Environment: The current interest rate environment, coupled with worries about the ability of major economies to withstand tariffs, adds to the underlying concerns driving gold demand.
• Tariff Impact: Many discussed tariffs have not yet fully impacted economies, suggesting potential future economic headwinds.

Differences from the 2020 Rally

The current rally is described as "dramatically different" from the 2020 surge.

• Global Sentiment: The key difference is a global sense of shifting geopolitical and economic landscapes, which was not as pronounced in 2020.
• Weakening Globalization: The weakening of globalization and the shift towards more localized trade are more significant drivers now.

Investor Sentiment and Mining Company Operations

1. Investor Concerns:

• Paradox of High Gold Prices: While a $4,200 gold price should be celebrated, investors are concerned it signals a major economic downturn.
• Signal of Economic Trouble: Some interpret the high gold price as a potential signal of impending economic trouble, leading to caution about investing in stocks, especially junior miners.
• Peak of a Bull Rally/Bubble: It could also signal the peak of an equity market bull rally or bubble, causing investor anxiety.

2. Mining Company Conservatism:

• Coming from a Bear Market: Mining companies are emerging from a long bear market, which has instilled conservatism.
• Aggressive Pricing: Major mining companies are not being overly aggressive with their gold price assumptions. Juniors are slightly more aggressive, but the overall sentiment is cautious.
• Mine Plan Projections: Even recent mine plans, like West Red Lake's for their Rowan project, had upside scenarios for gold prices around $3,600, which have now been surpassed. Companies are not expecting to consistently sell gold at $4,200 but would accept it.

3. Gold's Role as a Hedge:

• Traditional Role: Historically, gold has performed in two scenarios: during economic calamity (as a risk hedge) and as part of a broad metals bull market.
• Tempering the Connection to Risk: The fundamental drivers of the current rally (de-dollarization, diversification) are tempering the direct connection between gold and risk. Gold is being bought for reasons beyond just economic calamity.
• "Putting on Different Hats": Gold can act as a hedge, participate in a metals bull market, or be driven by these new fundamental supports.

Gold Miners' Role and Performance

1. GDX Performance:

• Explosive Growth: The GDX index has seen an "explosion to the upside," moving from $52 in July to $81, a more than 60% increase in less than three months. This is an unprecedented move for the ETF.
• Investor Hesitation: Despite this performance, investors may not be fully "on board" with gold miners, potentially waiting for more clarity on the longevity of the gold price move.

2. Miners' Actions to Sustain Momentum:

• Inability to Control Gold Price: Miners cannot directly control the price of gold.
• Locking in Prices: Producers are considering locking in future production at current high prices through forward contracts, though this carries the risk of missing out if prices continue to rise.
• Managing Downside Risk: The fundamental job of management is to manage downside risk.
• Focus on Proceeds: Companies are focusing on how to deploy the "incredible proceeds" from high gold prices.
• Lessons from Past Bear Markets: Executives leading major gold miners today learned from the mismanagement of capital during the last bull market, leading to a more prudent approach.
• Strategies for Proceeds:
  • Paying Dividends: Making gold miners more attractive as a dividend play for generalist investors.
  • Careful Deployment of Revenues: Being judicious with cash flows.
  • Investing in New Projects: There is a need for more gold mines and expansion, but with a focus on higher odds of success than overpriced acquisitions seen in the past.

West Red Lake Gold Mines: Operational Updates and Future Plans

West Red Lake Gold Mines is transitioning from an exploration play to a producer amidst the current market conditions.

1. Mine Ramp-Up:

• Halfway Through Ramp-Up: The company is approximately halfway through the ramp-up of its Madson mine, which began in June.
• Commercial Production Target: Commercial production is expected near the beginning of 2026.
• Ramp-Up Strategy: The strategy involves starting production while still completing final aspects of the mine to generate cash flow sooner.
• Ore Tonnage: Recent updates show ore tonnage ramping up as planned, providing comfort for hitting the commercial production target.

2. Key Projects and Efficiency Improvements:

• Waste Rock Storage: Underground storage of waste rock has eliminated the need to truck 300-1,000 tons of waste rock daily, a significant improvement.
• Shaft Operations: The upcoming activation of the shaft will allow for moving 350 tons per day, a substantial cost saving and efficiency boost compared to trucking.
• Focus on Ore Tonnage: The critical path for the Madson mine ramp-up is increasing ore tonnage, as it's a fixed-cost operation.

3. Rowan Project Integration:

• Satellite Mine Plan: Planning has begun for the Rowan project, located 30 km away. A preliminary economic assessment (PEA) outlines a satellite mine producing 35,000 ounces of gold per year.
• Processing at Madson: Ore from Rowan would be processed at the Madson mill, which has available capacity.
• Production Growth Path:
  • Madson alone: ~50,000 ounces in 2026, potentially ~60,000 in 2027.
  • Adding Rowan (2028): Jump to approximately 100,000 ounces per year in the Red Lake region.
• Market Focus: The market is currently focused on Madson's success, but West Red Lake is also focused on expanding production to leverage the current gold market.

4. Forward Contracts and Hedging:

• Consideration of Hedging: The company is actively discussing and running spreadsheets on the possibility of selling commodities at a forward locked-in rate, given the current $4,200 gold price.
• Past Experiences: Previous instances of hedging have had mixed results, with some companies locking in high prices successfully and others being disadvantaged when gold prices continued to rise.
• Management Responsibility: It is a requirement for gold miner management teams to explore these exercises.

5. Capital Deployment and Expansion:

• Cash Flow Generation: The immediate goal is to maximize cash flow, pay off debt, and reinvest in machinery and equipment.
• $40 Million Raise: A recent $40 million raise was used to pull forward projects, enabling earlier and potentially higher output from Madson.
• Balance of Ramp-Up and Expansion: There's a balance between completing the Madson ramp-up and pursuing expansion.
• Seeking New Projects: West Red Lake is actively looking for other projects to acquire, aiming for production growth.

6. Mill Capacity and Future Output:

• Mill Capacity: The Madson mill has a capacity of 1,200 tons per day, but has only been permitted for 800 tons per day.
• Leveraging Capacity: This extra capacity can be utilized by:
  • Increasing ore extraction from Madson.
  • Expediting the Rowan project to send 400 tons per day to Madson.
• Permitting Expediting: Optimism exists regarding expedited permitting in Ontario, which could facilitate the Rowan project.

Next Milestones for West Red Lake Gold Mines

• Commercial Production: Achieving commercial production in early 2026, which will be accompanied by guidance on production, grade, and costs.
• Rowan Project Integration: Increasing focus on Rowan and how it will be integrated with Madson.
• New Technical Study: By next summer, a new technical study will combine Madson and Rowan into a single mine plan, outlining the path to significantly increased production.
• Valuation Comparison: The company aims to achieve a valuation similar to companies like Skeena, which have clear paths to significant near-future production.

Gold Price Sensitivity and Mine Planning

• Hurdle Price: The prefeasibility study for Madson used a hurdle price of $1,680 per ounce.
• Flexibility in Mine Plan: If gold prices fall, the company has an economic mine plan in place. However, with current higher prices, they are mining more, including lower-grade material, and operating a larger mine that lasts longer.
• Adaptability: The company has the ability to adjust its approach at Madson within a broad range of gold prices.

Contact Information:

• Gwen Preston can be followed at westlake.com.