This has been a challenging year for Wall Street and investors. Regardless of whether you're new to the investment world or you've been investing for decades, the volatility we've witnessed in the broad-based indexes has been astounding. We've watched the widely followed S&P 500 lose 34% of its value in a mere 33 calendar days, then gain it all back and hit fresh all-time highs in under five months.
But if there's one constant to be leaned on amid this volatility, it's that every single stock market correction in history has eventually proved to be a buying opportunity. This means Wall Street's current dip represents an opportune time for investors to go shopping.
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This month, my single best investment idea is a company near and dear to my heart. That's because it happens to be my largest investment holding by a substantial amount: SSR Mining (SSRM 3.89%).
As is customary with this monthly endeavor that outlines my favorite buy of the month, I'll first cover the concerns that investors should be aware of, then dig into the details of why SSR Mining could make for a lustrous addition to your portfolio.
The risks investors need to know about
Arguably the biggest knock against SSR Mining would be the company's recently completed merger of equals with Alacer Gold. The all-share deal combined SSR Mining's three producing assets with Alacer's prized Copler mine, which it owns an 80% stake. The issue here is that Alacer's mine is located in Turkey -- a country that is not in the best financial health. The Turkish lira recently hit all-time lows against the U.S. dollar and euro, stoking fears that Turkey could struggle pay its bills, or that inflation could get out of hand. There's also concern about Turkey's depleted currency reserves.
Long story short, while SSR Mining combined forces with a very efficient company (this is something I'll touch on later), it also went from having virtually zero geopolitical concerns to operating a mine in an economically unstable market.
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To build on this point, the merger of equals between SSR Mining and Alacer created a new board of directors and installed Alacer Gold's Rod Antal as President and CEO. The concern here is that SSR Mining investors knew exactly what they were getting with former CEO Paul Benson. This isn't a knock against what Rod Antal has done for Alacer, so much as an introduction of uncertainty that didn't exist before under Benson's tenure as CEO.
Lastly, investors have to come to terms with the fact that not everything is under SSR Mining's control. Although SSR can improve operating efficiency and can tweak production and operating expenses to match prevailing demand, the company, like other gold and silver miners, is held hostage by how well or poorly the underlying metals they produce perform. If gold has a particularly awful couple of quarters, in terms of price performance, SSR and its peers are going to feel it.
A lustrous addition to your portfolio
Now that I've covered some of the biggest concerns, let me go over the numerous catalysts that cover why I'm so jazzed about this company. Let me begin by discussing some of the macroeconomic factors that should send the price of gold significantly higher in the coming quarters.
Right now, global bond yields are pretty anemic. Though many yields have bounced off of the historically low levels seen during the summer of 2019, income-seeking investors would be hard-pressed to find a safe yield that would outpace a possible long-term inflation rate of even 2%. With bond yields so low, and the Federal Reserve expected to keep its federal funds rate at or near a record-tying low for at least the next couple of years, gold will be viewed as the logical store of value.
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Furthermore, the Federal Reserve quickly exhausted traditional monetary policy actions during the first quarter of 2020, leaving it little choice but to lean on unlimited quantitative easing to calm the financial markets. The central bank's willingness to throw unlimited amounts of capital at unprecedented problems has ballooned the money supply and crushed the U.S. dollar. That's good news for gold, because the dollar and gold have an inverse relationship with one another.
The point is, the price of gold has exceptional tailwinds for years to come, which should expand the cash operating margin for gold stocks like SSR Mining.
More specific to SSR Mining, we've been witnessing healthy production expansion and/or improved operating efficiency at all of the company's pre-merger assets. The Marigold mine in Nevada is looking at a potential 30% uptick in annual output between 2018 and 2021, with the mine eventually capable of 265,000 ounces of yearly production. Meanwhile, Seabee in Canada had produced one record year after another, prior to the coronavirus disease 2019 (COVID-19) pandemic halting mining activity for a few months. The silver-focused Puna Operatons in Argentina were also ramping up output and lowering per-ounce operating expenses before COVID-19 forced government-mandated shutdowns. Seabee and Puna have since begun ramping back up.
The addition of Copler is big. Putting aside the concerns above, Copler is capable of producing up to 360,000 ounces annually, with all-in sustaining costs (AISC) in the mid-$700 per-ounce range. To put this into perspective, SSR was capable of perhaps 420,000 ounces of annual output at perhaps $950 to $1,000 AISC per ounce prior to the merger of equals. With Alacer Gold's flagship asset, we're now looking at 780,000 ounces of gold a year and an AISC of closer to $900 an ounce, once we're firmly past the COVIDD-19 disruptions. That's pretty much a $1,000 cash operating margin, based on today's gold price, and it should lead to $450 million in annual free cash flow.
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It's also worth pointing out that SSR Mining has one of the best balance sheets in the entire gold-mining industry. Between 2010 and 2013, gold miners let their spending get way out of hand, with many taking on far too much leverage. When gold prices entered a four-year bear market between 2011 and 2015, many struggled to pare back their spending and pay down their debt. This hasn't been an issue for SSR Mining, which had $703 million in cash and cash equivalents and $475 million in debt, as of Sept. 18. You can count on one hand how many publicly traded major, mid-tier, and junior miners have a net cash position.
To add to this point, with the price of gold hitting a nominal record during the summer, I find it probable that management will initiate a share repurchase program and/or a small quarterly dividend sometime in the near future.
Finally, it's a fundamental value. As someone who's followed the mining sector like a hawk for more than a decade, I've learned/discovered that mining stocks are fairly valued around 10 times their cash flow per share. SSR Mining happens to be valued at just over 5 times Wall Street's cash flow per share consensus for 2021. It looks to be a bargain in every sense of the word, which is why it's my single best investment idea for October.
