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One of Canada’s largest hedge fund managers is piling into gold stocks in anticipation that bullion’s record-setting rally is only just beginning.
Waratah Capital Advisors has invested in mid-size Canadian producers including Equinox Gold Corp. and Centerra Gold Inc. as well as exploration and development companies including Artemis Gold Inc. in its funds, said chief investment officer Brad Dunkley. He and Blair Levinsky founded Toronto-based Waratah in 2010.
“Gold’s been in the bull market with some ramp-ups and then some periods where it gives back — but if you zoom out, gold’s been very strong,” Dunkley said in an interview. “It’s just getting started.”
Bullion prices have almost doubled over the past two years and hit fresh records above $3,790 an ounce this week. Gold has been among this year’s best performing commodities due to a broad confluence of factors including an easing of Federal Reserve policy, central bank buying and lingering geopolitical tensions that fuel investor appetite for the safe-haven asset.
Gold equities are back in vogue after investors shunned the sector for years due to poor returns. Money typically flows in when commodities rally, with higher prices translating into greater revenue for gold producers since it usually brings improved margins and cash flows.
Stocks of gold companies have now become “compelling investments” thanks to the unprecedented bullion rally, said Dunkley, whose firm manages C$3.64 billion ($2.6 billion). He said mining companies now have “astounding” margins and are piling up cash, with cash flows and profit comparable to software companies.
Mid-size mining companies with low-grade ore and higher operating costs are starting to benefit from rising bullion prices, according to Dunkley, who cited Equinox and Centerra as examples. Shares of Vancouver-based Equinox have more than doubled this year, while Toronto-based Centerra has gained about 67%.
Waratah also is investing in firms it sees as potential takeover targets and early-stage exploration companies. The fund manager sees Artemis and Snowline Gold Corp. as companies likely to be acquired by bigger firms amid dealmaking momentum that typically happens during a commodity price rally.
The firm’s Waratah Special Opportunities Fund is the most exposed to gold. Returns for the C$88 million strategy rose almost 29% for the first eight months of this year, according to an investor letter seen by Bloomberg. The fund has produced average annual returns of almost 13% since inception in 2013. Waratah Performance, a C$817 million fund, is the second-most exposed to gold. Returns climbed 12% during the eight-month period.
Home bias
Waratah is also eyeing companies that stand to benefit from what it expects will be a boom in exploration activity for precious metals and critical minerals. It’s pursuing Canadian companies that can build mines within the country, Dunkley said. A new mine with a long reserve life and “very high margins” would be an ideal candidate for investors wanting to deploy money in Canada.
“One of our themes is jurisdiction matters,” he said. “Canada’s a great place to build and operate a mine, and it’s a safe political jurisdiction.”
One company that fits the bill is Goliath Resources Ltd., according to Dunkley. Goliath’s stock has more than tripled since the start of the year. The Toronto-based firm is exploring a large high-grade gold deposit in British Columbia.
Waratah also likes copper and counts Hudbay Minerals Inc. as an industry favorite given its prospects of being able to take advantage of US President Donald Trump’s push to revive America’s copper industry.
“They have this thing called Copper World in Arizona,” Waratah’s investment analyst, Grant McAdam, said in the interview. “The US administration has made it very apparent that they want domestic production and this is one of the ones that’s fully permitted, ready to go.”
(By Layan Odeh and Yvonne Yue Li)
