July 04,2022

Crash Resistance

Gold declines for fourth week

Gold declined -1.5% to US$1,799/oz, continuing a four-week downtrend as the market absorbs the US Fed's strong stance on continued rate hikes which could mean less negative real yields and a stronger US$, both of which could pressure gold.

A look at the crash resistance of the large TSXV gold stocks

This week we look at the performance of the larger TSXV gold companies, with only three of eighteen up since the correction began in November 2021, six down, but still outperforming the S&P 500 and nine significantly underperforming the S&P 500.

Producers and juniors down as equity markets rebound

The producing and junior miners were both down, with the GDX declining -5.1% and the GDXJ falling -7.1%, with the TSXV-listed larger Canadian junior gold stocks nearly all down as the decline in gold offset a pickup in the overall equity markets this week.

Producers and juniors down as equity markets rebound

Figure 4

Figure 1

Crash Resistance

Gold declined -1.5% for the week to US$1,799/oz, continuing a four-week downtrend and marking its first close below US$1,800/oz since the end of January 2022. The market continues to absorb the US Fed's clearly aggressive stance towards inflation, and the upcoming series of rate hikes that this is likely to generate. These higher rates, given that US inflation seems to have flattened over the past few months, are likely to mean that US real yields could become less heavily negative, and that the US$ could strengthen as higher relative US rates draw fund flows seeking higher yields. Both of these are factors that could pressure the gold price, as higher bond yields can draw investment away from yieldless gold and the gold price tends to move inversely to the US$. Meanwhile, the Fed is also looking at reducing its balance sheet, which implies a reduction in the money supply, and the gold price tends to track expansions of the money supply over longer periods, and vice versa.

In recent weeks there likely have been other drivers offsetting these monetary factors, and supporting the gold price, including the rising specific geopolitical risk in regards to Russia and Ukraine, while broader global economic and other risks were also rising, and gold is considered an overall risk hedge. However, in recent weeks, the geopolitical and general risks, while still high, could be seen as not markedly increasing. So as the market becomes more focussed on the rate hikes and their effects, and possibly less on these other risks, we are starting to see the gold price edge down. We note, however, that in this volatile environment that there are many potential factors that could suddenly drive up the risk premium in gold once again, whether they be further geopolitical disturbances or a worse than expected economic performance. Also, while the Fed is clearly not backing down on rate hikes currently, even with the equity markets already collapsing and expectations rising of a global economic recession on the horizon, we expect that they may well be forced to pull back on their rate hikes and ease as early as 2023, as the fallout in the economy and markets gets to a point where it is politically untenable.

Considering the crash resistance so far of the large TSXV gold companies

While there has been a brief respite this week from the equity market crash, we view this as just another bear market rally, and this week look the performance of the larger TSXV gold companies to see which are proving to be the most crash resistant in the downturn. Overall few are holding up well, although about half have been able to outperform the S&P 500, which we use are our general market proxy. After its huge rebound off March 16, 2020 lows of 2,305, the S&P 500 began to lose steam by November 2021, and reached its final peak at 4,766 on December 27, 2021, up over 107%. It has trended down hard since and had three rallies, in early February 2022, late March, and in early June before going on to set new lows, a typical feature of bear markets, and it is now down nearly twenty percent off its peak, which is the definition of a bear market.

While the pressure on the S&P 500 has been intense, the decline in US small caps, as measured by the Russell 2000 Index, has been far worse, at -26.1% (Figure 4). Gold stocks, while certainly not avoiding the market decline, have outperformed their respective indices, with the GDX, a proxy for large cap producing gold stocks, outperforming the S&P 500 by 4.6% since November 2021 and the GDX, a proxy for junior gold stocks, outperforming the Russell 2000 by 3.0%. This outperformance has in part been driven by gold's resilience versus most other asset classes in the crash, with it nearly flat, declining just -0.2%. For the performances of the large cap TSXV gold stocks, we use the S&P 500 as our first benchmark; any of the junior miners beating this could be considered to be doing well, given their comparable risk versus the well-established large caps comprising this index. The second benchmark would be the Russell 2000, with any stocks below this level underperforming even after factoring the risk from their smaller size.

Considering the crash resistance so far of the large TSXV gold companies

Figure 4

A falling tide lowers most boats

For the large cap TSXV gold companies shown in Figure 5, only three out the 18 have seen gains, six have declined, but still outperformed the S&P 500 index, one has fallen in between the GDXJ and Russell 2000 performance and eight have underperformed the Russell 2000 index with losses of over 30% or more or more. While through late 2019 and into 2020 a rising tide lifted most boats for the larger TSXV gold stocks, with the gold price jump driving the sector, the performance through 2021 became more differentiated on company specific factors as gold flattened. In 2022 we have shifted to a case of a falling tide lowering most boats, with only a few stocks with outstanding company specific factors still thriving under the downward pressure in the overall equity markets, along with a broadly flat gold price.

A falling tide lowers most boats

Laurion, Lion One and Rupert buck the downtrend

The number one stand out for the larger TSXV gold stocks by far is Laurion Mineral Exploration, exploring the past producing Ishkoday project in Ontario, Canada, up 68.3% since November 2021. With geological and geophysical modeling completed in 2021, four sets of drill results reported so far in 2022 with high gold grades, but also especially high zinc grades, sent the stock up strongly (Figure 6). Lion One Metals, exploring the fully permitted Tuvatu project in Fiji, is up 23.6%, with most of the gains made after the June 6 2022 news of a major new gold feeder beneath the current resource, after it had held relatively flat over most of the past year. Rupert Resources has just edged out a gain, up 4.0% with an 80,000 meter drilling program for 2022 ongoing at its Rupert Lapland Project. An initial resource estimate for the Ikkari zone of the project was released in September, 2021, with Inferred Resources of 3.95mn oz, which may be helping support the price compared to some other preresource estimate gold explorers in this group that also saw very impressive drill results over the past two years.

Minera Alamos supported by Santana production, Arizona by Kay drill results

Six companies have had more moderate share price declines and still outperformed the S&P 500. Minera Alamos is down just -5.8%, with its share price supported by the advanced stage of its three projects, including Santana, which saw first gold production in November 2021 and is generating cash flow. This cash will support the development of its two other projects, Cerro de Oro, with an Initial Resource Estimate already released and permit application to be submitted in 2022, and La Fortuna, with a PEA and permits in place for a construction decision. Arizona Metals, exploring the copper-gold-zinc-silver Kay Mine, which has a historic resource from 1982, is down -9.2%, with the price supported by drill results this year showing high grades of gold, copper and zinc.

Artemis in pre-construction, Gabriel near ruling, Probe and Eskay drilling strong

Artemis Gold is down -12.3%, supported by the very large resource and advanced stage of its Blackwater project which is financed and set to begin construction in by end-2022 with production targeted by 2024. Gabriel Resources is down -12.5%, as there has been some light at the end of the tunnel in a long arbitration in Romania over its Rosia Montana project, which was on a newly designated World Heritage Site, preventing development of the project. There is expected to be a ruling on the case as early as this year, with a potential 'arbitration award' going to Gabriel. Probe Metals is down -17.3%, with a PEA released in October 2021 and continued high grade drilling results this year helping support the share price. Eskay Mining, drilling at the Eskay VMS project, is down -18.2%, with only two drill results released this year, but both quite high grade.

Artemis in pre-construction, Gabriel near ruling, Probe and Eskay drilling strong

Mako in production but carrying debt, Lumina drill results mixed

The rest of the companies have considerably underperformed the S&P 500, with most down over 30%, underperforming both the GDXJ ETF, a proxy for the junior mining sector, and the Russell 2000 small cap index. Mako Mining was down -27.6%, with the company already producing at the San Albino project and exploring the resourcestage Los Conchitas and the earlier stage Poterillos and La Segoviana. While the share price has likely been supported by the production which generated operating cash flow of $6.7mn over Q1/22 from San Albino, the company also still had $16.0mn in debt which the market may see as a risk (Figure 7). Lumina Gold is down -33.3%, with the company drilling this year to support its Pre-Feasibility Study for the Cangrejos project. While the company did see its highest ever intercept for the project on May 9, 2022, at 19.3 g/t Au over 10 m, its other major drill results this year have had only moderate grades, at 0.84 g/t Au on March 15 and 0.82 g/t Au on May 31 which have not been strong enough to bolster Lumina's share price.

Chesapeake, Amex and Tudor remain under pressure

Chesapeake Gold is down -36.3%, and while it has a potentially huge gold-silver project in Metates, it will need to either bring down its costs or increase the grade to make the economics of the project more attractive to the market. The company spent most of last year investigating methods to decrease its costs and this year has been drilling to increase its grade, but neither have been successful enough to offset the pressure from the overall decline in equity markets. Amex Exploration is down -37.5%, and while the company has reported decent gold grades from continued drilling at its Perron project, and is well financed to continue exploration, it still has no initial resource estimate, which could remain a concern to the market. Tudor Gold, exploring the Treaty Creek project, is down -39.3%, and while a mineral resource estimate has been released, the grade is low versus other large TSXV gold plays at just 0.74 g/t for the M&I resources and 0.79 g/t for Inferred Resources. It has also reported just one drill result so far this year, although a drill program with eight drills was started in March 2022 and this could drive an increase in drill results in H2/22.

New Found, Bluestone, Osisko Development and Prime see biggest declines

New Found Gold, drilling at the Queensway project, has declined -41.3%, even as it has continued to report some of the highest drill results of the larger TSXV gold companies. The company has yet to release an initial mineral resource estimate, which may be viewed as a risk by the market and from its August 2020 listing it was up 13x at its June 2021 peak, and has likely seen profit taking from long-term holders, and is still up 3x from its listing now. Bluestone Resources, developing the Feasibility Study-stage Cerro Blanco project, is down -47.5%, as it advances some early works on project construction, but is still awaiting its environmental permit approval, expected for the project by end-2022, with financing options still being considered and most contingent on the environmental permit being received.

Osisko Development is down -59.0%, with production from the small Bonanza Ledge II project in British Columbia ongoing since Q2/21, and a focus on advancing the PEA-stage Cariboo project, also in B.C., which is relatively small with a higher cost than the projects of several of the other large TSXV gold companies. It also plans to process the stockpile from the pre-Resource Estimate San Antonio project in Mexico and recently acquired the Tintic project in Utah, which holds the producing Trixie Mine. Prime Mining, down by far the most of the group at -64.3%, has seen some very impressive drill results from its Los Reyes project and is well funded to continue a major ongoing drill program. However, the share price had risen nearly twenty times from $0.26/share in early 2020 to a peak of $5.05 in on November 1, 2021, with many long-term investors likely looking to lock in profits, and it has no Initial Resource Estimate yet, which could lead to it being viewed as higher risk by the market.

Market holding onto junior miners with more tangible evidence of advancement

We can make a few generalizations from the performance of the group, with the market having clearly moved into risk aversion mode and seeming to require more tangible evidence of progress in their junior mining investments. These would include clear advancement of a project to a point where cash flow generation is on the horizon, or for earlier stage companies, very high-grade results and preferably an initial resource estimate. This seems to be a significant transition from the attitude during the upswing of the gold bull market in 2019 and 2020, when the market was more than content to heavily back a story of based mainly on drilling results alone even at only moderate grades. The market seems to have shifted strongly away from earlystage stories based more on 'hope', which was fine in 2020 and 2021 with either a surging gold price or a stock market to support them, and towards stories rooted more in 'reality' with clearer evidence of their value proposition in 2022, with neither gold nor the equity market rising.

With the Fed on the inflation warpath, equity plunge could well continue

With many of this group having plunged over 40%, it may be tempting to think that some sort of a bottom has been reached, but as we have warned since the start of 2022 we believe that it is still a time for caution. With the Fed clearly on the warpath against inflation and not only not backing down on rates hakes, but doubling down with a higher-than expected 75 bps rate hike in June 2022 and more rate hikes clearly to come, we anticipate that the equity markets are likely to continue to take a beating. We believe that while there will be more bear market rallies to come, and we may be in one currently with the rebound in the equity markets over the past week, we still remain in a risky short-term traders' market. We expect that the rerating downwards of the junior mining sector overall will continue, and some pretty significant bargains are still to come in for the TSXV junior gold miners late in 2022 and into 2023.

With the Fed on the inflation warpath, equity plunge could well continue

Producing miners all down on drop in gold

The producing gold miners were all down on the gold drop even as equity markets gained (Figure 8). Barrick reported that it has paid $337mn into the Mali economy from its Loulo-Gountoko complex and was on track to meet production guidance and replace reserve depletion at the project this year. Alamos reported results from its Phase 2 Expansion Study for Island Gold Mine including a 22% increase in annual production from the previous study, similar cash costs and 43% increase in Resources to 4.6 mn oz Au. Novagold reported Q2/22 results, including the completion of 70% of a 34,000 metre drill program at Donlin, a $142mn cash balance and an additional $25mn due from Newmont in July 2023 (Figure 10). SSR reported that it was awaiting formal communication from the relevant Turkish authorities after the media and a government agency reported on a minor cyanide leak at its Copler mine on June 21.

Canadian juniors nearly all decline as gold falls

The Canadian juniors were nearly all down as gold fell, even with equity markets rebounding (Figure 9). For the Canadian juniors operating mainly domestically, Osisko Development reported an update on its recently acquired Tintic project, including the reopening of the Trixie mine in June 2022 and announced a Mineral Resource Estimate for its San Antonio project (Figure 11). For the Canadian juniors operating mainly internationally, Arizona Metals reported that permit approval was received for two new drill pads located about 500 m west of the Kay Mine deposit, and Prime Mining reported results from the Phase 2 step-out and infill drilling at the Tahonitas zone of Los Reyes (Figure 12).

Canadian juniors nearly all decline as gold falls

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Disclaimer: This report is for informational use only and should not be used an alternative to the financial and legal advice of a qualified professional in business planning and investment. We do not represent that forecasts in this report will lead to a specific outcome or result, and are not liable in the event of any business action taken in whole or in part as a result of the contents of this report.

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