AntonioSolano
The following segment was excerpted from this fund letter.
Equinox Gold (NYSE:EQX)
As a first-order effect, gold has done poorly in a rising real rate environment and a strong USD (although it is at all-time highs in other currencies). The gold price adjustment to real rates appears contemporaneous.
Historically, for every 1% increase in 10-year real rates, there is a reasonably predictable 10% decline in USD-denominated gold price, all else equal. If that historical relationship holds, the current rise in real rates implies a 26% decrease in gold prices, which aligns with the 22% fall from the March highs of this year. However, there is a growing differential between the selloff and sentiment of the precious metal compared to the value of a call option on a complete loss of confidence in central banks.
Equinox Gold has been the most painful position in our portfolio, down roughly 50% since March. The fall in the stock price implies far more has gone wrong at this fast-growing gold producer than has been the case. According to our models, the current share price indicates a long-term gold price of around $1,050 at a 10% discount rate. This appears a significant mispricing.
Political risk has undoubtedly been an issue, with operations at the Los Filos mine being halted multiple times and permit issues at RDM mine in Brazil. EQX is a development story and is in the high-growth stage of its corporate lifecycle, with more construction underway at one time than most mining businesses will experience in their entire operating lives.
We believe Equinox will be a strong mid-tier producer by the middle of this decade, doubling the size of its business over the next three years. We are comfortable holding this position through a price cycle and the ensuing volatility as the business matures.
We are going down to Brazil to visit several Equinox mines in October, so expect a complete commentary on the firm in the 4th quarter.
| Opinions expressed herein by Massif Capital, LLC (Massif Capital) are not an investment recommendation and are not meant to be relied upon in investment decisions. Massif Capital’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is limited in scope, based on an incomplete set of information, and has limitations to its accuracy. Massif Capital recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies’ regulatory filings, public statements, and competitors. Consulting a qualified investment adviser may be prudent. The information upon which this material is based and was obtained from sources believed to be reliable but has not been independently verified. Therefore, Massif Capital cannot guarantee its accuracy. Any opinions or estimates constitute Massif Capital’s best judgment as of the date of publication and are subject to change without notice. Massif Capital explicitly disclaims any liability that may arise from the use of this material; reliance upon information in this publication is at the sole discretion of the reader. Furthermore, under no circumstances is this publication an offer to sell or a solicitation to buy securities or services discussed herein. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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