It’s been a volatile couple of months for most gold producers as the correction in the price of gold (GLD) has taken a bite out of many miners’ share prices. Great Panther Mining (NYSEMKT:GPL) is one of the names that has run into some selling pressure with the stock correcting 25% from its August highs. While this has likely left some investors that overpaid for the stock frustrated, the good news is that the stock just came off another solid quarter, with quarterly production of 39,800~ gold-equivalent ounces (GEOs). Given the higher metals prices and improved operations this year, we’ve seen analysts pull their earnings estimates higher, with FY2021 annual EPS estimates now sitting at $0.21. While I see more attractive producers elsewhere in the sector, I see Great Panther as a Speculative Buy at $0.72, given its very reasonable valuation.

(Source: Company Website)

Great Panther Mining released its preliminary Q3 production results last week and reported quarterly production of 39,800~ GEOs, a 3% increase from the 38,500~ GEOs produced last quarter. The company’s flagship Tucano Mine has now produced 93,400 ounces of gold year-to-date, and the mine remains on track to meet its FY2020 production guidance midpoint of 125,000 ounces. While the share price has been under pressure recently due to the sector-wide slump, it’s worth noting that Great Panther has only gotten more attractive as earnings estimates have continued to climb over the past two months. Based on current estimates of $0.21 for FY2021, the stock is trading at just below 5x FY2021 annual EPS estimates. Let’s take a closer look at the most recent quarter below:

(Source: Company News Release)

Beginning with the company’s Tucano Mine in Brazil, it was a relatively soft quarter, with gold production coming in at 31,800~ ounces vs. 35,400~ ounces

Adds details on consolidation, comments on Mali, Grasberg mine, and Congo

JOHANNESBURG/TORONTO, Oct 7 (Reuters)Barrick Gold ABX.TO CEO Mark Bristow on Wednesday said the gold industry in Africa should consolidate further, as he warned of a “serious reserve crisis” looming for the sector.

A dearth of exploration has seen average mine life across the gold mining sector fall from 20 years to closer to 10 years, he added, speaking at the Joburg Indaba mining conference.

“The prospect of a serious reserve crisis is looming,” said Bristow. Gold production across the industry has only increased by 1.6% every year for the past two decades, he said.

Bristow said this week’s deal between Northern Star Resources NST.AX and Saracen Mineral Holdings SAR.AX was a “great example” of industry consolidation that should be celebrated.

On Mali, where Barrick is among the biggest investors and operates the Loulo-Gounkoto gold mine, Bristow said the transition after an August military coup has been “very well” run.

“Everyone agrees that 18 months for transition back to full civilian rule is doable, and that’s ambitious,” Bristow said, adding that “none of the organs of state has stopped functioning.”

Bristow again signalled his appetite for acquiring Freeport-McMoran’s FCX.N Grasberg mine in Indonesia, the world’s biggest gold mine and second-biggest copper mine.

“There are not a lot around, and so by deduction of course we remain interested in being able to add to our portfolio any tier 1 asset out there,” he said.

Bristow said he has no doubt the company will be able to repatriate $500 million which belongs to its Kibali joint venture in the Congo.

“That paperwork is far down the road,” he said. At the start of July, Bristow had said the money would be cleared to leave the country “very soon”.

“There’s

2020 has been a historical volatile year for high-yield bonds even more than equities. The high-yield bond market crashed 23% in a matter of days in March and saw yields rocket to over 6%. Since then, the Federal Reserve has increased support for recently downgraded “fallen-angel” bonds which has caused most to climb back to historically low dividend yields.

The Fed’s support of below-investment-grade bonds creates a bit of a conundrum in markets. On one hand, there is a supply of money that can support the market if it drops again. On the other, the promise of support has caused risk premia to decline tremendously, causing junk bonds to be priced like higher-quality bonds during a generally poor economic environment. If it were not for belief in this support, junk bond ETFs like (HYG) would likely be trading at least 10-20% lower.

Importantly, that support will phase out as the Fed’s aim was to purchase recently downgraded ‘fallen angels’. Today, they’re really not buying any high-yield bonds. If the bonds in HYG continue to downgrade, they are unlikely to see any Federal Reserve support as they are all already non-investment-grade. This means that if there is another market sell-off, HYG will likely decline far more than it had in March. Quite frankly, the fund could see a 20-40% decline as it had in 2008. See below:

Chart
Data by YCharts

As you can see, junk bond yields are at an all-time low today despite the highly uncertain economic and political environment. This makes the ETF very risky, and as I’ll demonstrate, a crash in junk bonds may be the most likely scenario.

Low Maturity is A Double-Edged Sword

HYG’s weighted-average maturity length is much lower than normal at 3.9 years. This means that, on average, bonds in HYG must be refinanced

Looking at the Federal Reserve balance sheet over the past month it appears as if there is really nothing new to announce. The Fed continues to buy securities to hold outright in its portfolio.

The Fed added $58.9 billion in U. S. Treasury securities to its portfolio between September 2 and September 30. During this time the Fed also added $33.6 billion in mortgage-backed securities.

Overall , however, Reserve Balances with Federal Reserve Banks, the proxy for excess reserves in the banking system dropped by $107.4 billion to rest at $2,743.23 billion on September 30. That is the U. S. banking system held a little more than $2.7 trillion in excess reserves at the end of September.

The reason for the decline in reserves was primarily related to a $129.9 billion increase in the Treasury’s General Account at the Fed. On September 30d, the U. S. Treasury held almost $1.8 trillion in its primary account, the account that it collects taxes in and from which it writes checks.

In addition, the public added to its holdings of cash during this time of $10.7 billion.

Over the past four banking weeks the effective federal funds rate has remained almost constant at a 0.09 percent level.

Everything in the banking system and the financial markets seem calm and collected.

Since The End Of May

The next division of time I take is between the banking week ending May 27, 2020 and the banking week ending September 30, 2020.

The reason for the selection of the earlier week is that central bank liquidity swaps peaked in that week. On May 27, Central Bank Liquidity Swaps peaked out at $448.9 billion.

One of the major actions the Fed took in March was to help out the world financial system by opening up its window

“Risk comes from not knowing what you’re doing.” – Warren Buffett

One upcoming catalyst for bank stocks is a second round of stress tests. Usually only one round per year is needed, but with continued uncertainty, further scenarios will be examined. After the second round, the Federal Reserve plans to publish firm-specific results, a deviation from standard policy where only aggregate performance is released, proving to be an interesting catalyst for the bank stocks.

June 2020 release

Recall the Federal Reserve released the results from the first round of stress tests in June 2020. The results indicated all banks had sufficient capital to withstand the scenarios considered at that time.

However, the possibility of large losses could not be overlooked and the Federal Reserve felt it was prudent to take actions to preserve capital. As a result, share repurchases were disallowed and bank dividends were capped at the current level. The prohibitions were put in place through the third quarter, though I expect them to be extended until the second round of stress tests is completed.

Second stress test scenarios

Two hypothetical scenarios will be considered in the upcoming round of stress tests. The first scenario is shorter, but harsher, as by the end of 2021 unemployment has jumped to 12.5%. A partial improvement comes sooner as unemployment falls to 7.5% in 2023. The GDP decline is roughly 3% through 2021. This is the “severely adverse” scenario.

In the “alternative adverse” scenario, the economic metrics do not worsen as much but stay lower for longer. Unemployment rises to 11% by the end of 2020 and then only declines to 9% in 2023. The GDP decline is lower at 2.5%. In the chart below, the unemployment rate for each scenario is shown.

Source: Federal Reserve

For comparison purposes, note the most