Ian Ball: Putting a Fair Price on Gold Right Now

As the world begins to gradually shed restrictions put in place to curb the spread of COVID-19, investors are asking themselves what’s next for gold.

Predicting the yellow metal’s price trajectory is a difficult task, but Ian Ball, president and CEO of Abitibi Royalties (TSXV:RZZ), has an idea of what a reasonable price range would be.

“When I look at the factors right now, I would think that a fair price of gold is probably somewhere on the low side of US$1,750 an ounce and closer to US$2,450 on the high side,” he said.

A reasonable price range for gold

Ball was speaking via phone with the Investing News Network, and he said he believes the gold price is tied closely to the US budget deficit.

He noted that prior to the coronavirus outbreak, the deficit was approaching US$1 trillion, and gold was starting to rise. That’s in contrast to the last couple of years that Barack Obama held the presidency.

“The deficit was closer to a half a billion (at that time), and gold was obviously suffering because of that,” Ball explained.

Now, with the American government dedicating unprecedented amounts of money to economic stimulus efforts, the deficit is at US$2.5 trillion — and Goldman Sachs (NYSE:GS) is estimating that it will reach US$3 trillion to US$4 trillion. “(That) is obviously the highest ever,” said Ball. “And the US total federal debt right now is about US$24.7 trillion.”

While that bodes well for the gold price, he noted that market watchers will still have to keep an eye on the performance of the US economy, as well as economies globally.

“I think they’re all to various degrees linked — what happens in the US is probably going to be somewhat reflective of what happens in Canada, what happens in Europe,” Ball said.

“Is it going to come out with a V-shape, a U-shape — or they’re saying an L-shape? I don’t think anybody really knows, and on the back of that, how much more government stimulus is going to be needed to push the recovery? I think that’s what’s going to be the driver for gold further out in 2020.”

Ball thinks a U-shaped recovery is the best scenario that can be expected. “I think it’s very hard to say that we’re going to see a V-shape,” he said.

COVID-19 not a problem for royalties business

As its name indicates, Abitibi Royalties is a royalty company, which means that it has deals in place that allow it to receive a percentage of revenue from producing mines.

Gold royalty companies, along with gold streaming companies, are often presented as a safe bet because they offer exposure to gold without the risks associated with gold exploration or mining stocks.

But what happens when the companies that a royalty business works with are forced to slow their work or shut down entirely?

According to Ball, it hasn’t been much of a problem, even though Abitibi Royalties is focused on one specific mine. That’s Canadian Malartic, owned by Agnico Eagle Mines (TSX:AEM,NYSE:AEM) and Yamana Gold (TSX:YRI,NYSE:AUY). It was forced to shut down from March 24 to April 14 due to COVID-19.

“The impact on Abitibi has been pretty, pretty minor at this point,” he said. “We’ve been very fortunate that we do have other sources of income that are beyond the royalty, so we could pay our G&A (and) pay our dividend without having to worry about whether the royalty income was coming in or not, per se.”

In the fourth quarter of 2019, Abitibi Royalties received approximately C$999,000 from royalties. At the time of the interview, the company had about C$50 million in cash and securities, plus no debt.

Aside from that, expenses are low to begin with — Ball mentioned that Abitibi Royalties has only three-and-a-half employees, and he invests all of his compensation back into the company. It also doesn’t have to deal with the same fixed costs associated with running a mine.

“We’ve always run the company in a very conservative fashion. So we had a more than ample cushion to get through this,” he explained.

Opportunities still the name of the game

The coronavirus has made planning difficult for companies, but Ball said that Abitibi Royalties continues to look for opportunities in the market.

“There’s been a couple of sources for that. We’ve reached out to a few companies and made offers to acquire royalties or to create new royalties on projects,” he said.

Some of those offers have been rebuffed, but the company has also been getting inbound calls from people looking to sell royalties. “We’re certainly doing our homework on some of the earlier-stage opportunities that we’re seeing.”

One challenge that he mentioned that is unrelated to COVID-19 is the details behind older royalties.

“Sometimes when you look at pre-existing royalties, the agreements are 10, 20, 30 years old. There’s actually a lot of legal hiccups in these royalties where the title is sometimes not abundantly clear,” he explained. “That’s actually been probably our number one challenge (when) looking at future royalties.”

One way or another, Abitibi Royalties plans to keep growing this year, with one aim being to add another producing royalty to its mix. Ball said the company will also continue to pay its monthly dividend, which it increased in January, and will keep going with its share buyback program. It will also of course be watching exploration activity at Canadian Malartic.

“We have grown over the past six years from C$0.35 a share to now being over C$19 a share, and we’re doing it with the smallest share account in the mining industry,” Ball said. “We have a lot of attributes going for us that perhaps a few other companies do not.”

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.