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Gold Market Healthy Despite Sluggish Stocks

TOM BUTCHER: Recently, gold has being going up and gold stocks have been going down. What has been going on?

IMARU CASANOVA: When you look at the performance of the stocks year to date, you will notice that they had been outperforming gold [bullion], as they should in a rising gold price environment, up until about mid April. In April, gold increased about 1.5% while gold stocks were down. The gold miners index, the GDM,1 was down almost 2%, and the junior gold miners index2 was down almost 11%.

Where does this underperformance come from? In the case of the larger cap equities, the underperformance was driven by a 12% drop in the share price of Barrick Gold.3 Barrick Gold represents about 10% of the GDM. On April 24, Barrick Gold reported Q1 2017 results that missed expectations, and although the "miss" was driven by operational issues that are temporary in nature and the company expects to resolve them shortly, the market took it very negatively. The market reacted negatively because Barrick Gold has consistently, over recent years, met or exceeded expectations.

In the case of the junior gold companies, we believe the underperformance was related to trading activity that followed an announcement on April 12 regarding a rule change for the junior gold miner Index (MVGDXJTR).2 The rule change expands the number of companies that can be included in the Index. It appears that the market's reaction was to sell down those names that are expected to be reduced. We expect this high volatility to continue affecting many of those names until the rebalance date. The rule change is not effective until June 17. We don't know exactly what companies are going to be added or deleted, so this volatility will probably continue until then. In the longer term, we expect companies to trade in line with fundamentals.

BUTCHER: I understand companies are now reporting Q1 earnings. What have the results been like?

CASANOVA: Results have generally been pretty good. There were some negative surprises, but for the most part, companies are reporting results that are in line with expectations or above expectations. The health of the sector, in general, is very good. Costs are contained and now the gold mining companies are back to focusing on their growth projects and exploration.

BUTCHER: Does any company, in particular, stand out?

CASANOVA: Yes. Agnico Eagle,4 which is one of our strategy's top holdings, had a phenomenal quarter. The company beat expectations for earnings, for production, for costs, and have increased their 2007 production guidance. They have met or exceeded expectations and improved guidance now for several years. I think this justifies why Agnico Eagle trades at a premium. It meets expectations, it has an unmatched growth profile. We estimate Agnico production will grow about 25% in the next five years, while most of the other seniors are struggling to sustain production. It also has an excellent pipeline of projects that are likely to increase the company's potential for further discoveries.

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1GDM refers to the NYSE Arca Gold Miners Index (GDMNTR). GDMNTR is a modified market capitalization-weighted index composed of publicly traded companies involved primarily in the mining for gold. The Index is calculated and maintained by the New York Stock Exchange.

2MVGDXJR refers to the MVIS Global Junior Gold Miners Index. MVGDXJTR is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company's revenue from gold or silver mining when developed, or primarily invest in gold or silver.

3Barrick Gold Corporation was 1.89% of the VanEck International Gold Fund as of 4/28/2017.

4Agnico-Eagle Mines Limited was 5.49% of the VanEck International Gold Fund as of 4/28/2017.

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