March 25,2022

Gold Holds in New Higher Trading Range

Gold holds in new trading range from late February 2022

Gold rose -1.5% to US$1,937/oz this week and held above US$1,900/oz for the fifth consecutive week, as it appears to have shifted into a new trading range after holding between roughly US$1,700/oz-US$1,900/oz through 2021 and into early 2022.

Most of the larger TSXV silver juniors seeing decent gains

This week we look at the performance of the larger TSXV silver junior miners, with most of the group seeing reasonably strong gains over the past year, even as the silver price has remained relatively subdued over the period.

Producers and juniors rise on continued high gold

The producing and junior miners both rose, with the GDX gaining 4.6% and the GDXJ up 4.8% and Canadian juniors were mixed as the gold price continued to remain high on a combination of high inflation and rising geopolitical risks.

Producers and juniors rise on continued high gold

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Gold holds in new higher trading range

Gold rose 1.5% this week to US$1,937/oz, which marked its fifth week over US$1,900/oz and it appears to have entered a new higher trading range after holding between around US$1,700/oz and US$1,900/oz through 2021 and into early 2022. Gold has continued to find drivers in high inflation, heavily negative real bond yields, sliding economic growth and rising geopolitical risks. While the US Fed announced that rate hikes would begin this month, they are still playing a game of catch up, with inflation already getting out of control and heading for 10.0% in the US. Even with the six planned rate hikes this year, if they remain at 0.25% each, the base rate will reach only 2.00% by the end of this year which we believe is unlikely to be enough to really bring inflation under control or drive up real yields strongly into positive territory. We therefore expect gold to at least hold up in the current range through 2022 and it could move much higher if inflation or geopolitical risks surprise to the upside.

Some base metals seeing a pull back, distortion in the nickel market

The rising inflation has been seen in the metals market since 2021, with tin up 100.0% since the start of last year, and aluminum up 80.5%, although both have seen a pullback from peaks set in early March 2022. Lead has been comparably flat, up just 16.1% over the period and iron ore is down -7.4%, having recovered from a considerable decline through most of the second half of 2021, driven mainly by declining demand from China, the largest global source of iron ore demand (Figure 4). The nickel market has seen major distortions recently, nearly doubling between the end of February 2022 through to mid-March 2022, and then reversing most of this gain since (Figure 5). This was driven by concerns over supply from Russia, one of the world's major nickel producers, with the surge leading to a halt in nickel trading for several days, and although once trading resumed the price declined, it is still considerably above its February 2022 level, and is up 86.2% since January 2021.

Some base metals seeing a pull back, distortion in the nickel market

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The recent movement in copper and zinc appears quite subdued in the context of the move in nickel, although they are up 48.5% and 33.0%, respectively, from January 2021. Copper peaked in early March 2022 and while it dipped through mid-March, it has recovered most of this slide since, and there was a similar dip and recovery in zinc in March 2022. Overall, however, the base metals' performance remains strong this year, although with inflation surging, we suspect that much of these gains continue to be driven by monetary factors. Some sources of real GDP figures have pointed to a slowdown in the US real economy over Q1/22 even as many global prices are being driven up by a continued flood of liquidity.

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Palladium seeing the biggest move of the precious metals

Of the precious metals, palladium has seen the biggest recent move, rising 38% since the start of the year, although it is up only 5.4% since January 2021, as the price declined considerably through H2/21 (Figure 6). The gain so far in 2022 was on concerns over supply from Russia, which is the leading global producer of palladium by far, accounting for 44.2% of the total in 2020. Gold has been near flat since 2021, down just -0.2%, having held in a reasonably tight range over the past year or so and only really starting to show convincing signs of breaking out of this range over the past month. The platinum price is down -4.5% since 2021, with South Africa by far the largest supplier of the metal and Russia a distant second, and thus not having the outsized effect it has on the palladium market. Silver has seen the weakest performance of the precious metals since 2021, down -7.9%, although it was near flat as of early mid-March 2022 and has seen a pullback in just the past two weeks.

Palladium seeing the biggest move of the precious metals

Looking at the gold to silver ratio as an indicator of the relative pricing between the two metals points to a reasonably fair value at least in the short-term, with the current value at 78.7x just below the average since January 2020 at 80.8x and not seeming to indicate any major mispricing. However, the long-term average of the ratio between the two metals, at 52.6x from 1915 to 2020, suggests that silver may have become considerably undervalued versus gold over the past decade, with the ratio rising from its most recent lows of 45.4x in 2010. Given that we expect most of the short to medium term drivers for gold point to it at least being maintained at its current levels, and that it could even see substantial gains, this would indicate that silver would still have to rise considerably to bring the gold to silver ratio down towards its longerterm average.

Many larger TSXV silver stocks seeing gains even as metal price subdued

The relatively subdued silver price has not held down many of the largest TSXV silver stocks over the past year, with five out of seven seeing substantial gains, and the losses of the other two relatively moderate in the context of the typical junior miner's volatility. The largest of the group, Discovery Silver, is down -13% over the past year, as there has been limited news after the share price was given a lift by an updated Resource estimate in October 2021, and an updated PEA in November 2021 for its Cordero project in Mexico. The company has the second highest upside to its target price of the group at 114%, and a Price/Book of 5.8x, near the middle of group (Figures 8, 9, 10).

Vizsla Silver has seen the strongest performance of the group, up 96%, on strong drilling results from its Panuco project in Western Mexico throughout 2021 and into 2022 and it has 67% upside to its target, and a low Price/Book versus the group at 2.8x. Eloro Resources is up 50% over the past year, on a series of strong drilling results from April 2021 to the present from its Iska polymetallic project in Bolivia, focusing on silver and zinc. The company has the highest upside to its consensus target of the group, at 191%, and the second highest Price/Book multiple at 9.3x.

Many larger TSXV silver stocks seeing gains even as metal price subdued

Andean is down -16%, the only company in the group already in production, with its silver-tin San Bartolome project producing 5.8 mn oz AgEq over FY/21. The company has no consensus target, and the lowest Price/Book of the group at 1.9x, with producers tending to have lower P/B ratios than explorers. Blackrock is up 67% on continued strong drilling results from the West zone of Tonopah in Nevada, and a new drilling program at the North zone of Tonopah started in January 2022. The company has the lowest upside of the group to its target, at 40%, and the highest valuation of the group with a Price/Book ratio of 18.0x. Abrasilver is down -25% over the past year, as its updated Resource Estimate in October 2021, PEA in November 2021 and drilling results over the year for its Diablillos project did not drive up the share price. The company has 84% upside to its target and trades at a moderate 4.7x Price/Book. Dolly Varden is up 25% on drill results from its Dolly Varden project, and the company has 85% upside to its target and a moderately high 7.2x Price/Book.

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Producers nearly all up on pickup in gold

The producing gold miners were nearly all up as the gold price rose (Figure 11). Newmont reported that a recommendation that the Coffee Gold Project in the Yukon would be allowed to proceed had been accepted by the related governments and groups. Barrick reported that the government of Pakistan and its Balochistan province had agreed on a framework to reconstitute the copper-gold Reko Diq project. Alamos announced that a Closure Plan Amendment of the Island Gold Mine was filed by the Ontario government, Centerra temporarily suspended gold dore production at the Oskut Mine because of mercury detection in a recovery plant, and Lundin appointed a new Vice President of Exploration, Mr. Andre Oliveira (Figure 13).

Canadian juniors mixed even as gold rises

The Canadian juniors were mixed even as gold picked up (Figure 12). For the Canadian juniors operating mainly domestically, New Found Gold reported drilling results, Eskay reported new targets in three areas at its VMS project and Tudor terminated net smelter return royalties on mineral claims in the Skeena District. Pure Gold closed its previously announced C$14.0mn bought deal private placement and concurrent C$17.2mn non-brokered private placement, and Probe Metals appointed Patrick Langlois as CFO and VP of Corporate Development (Figure 14). For the Canadian juniors operating mainly internationally, Rupert Resources reported drilling results from Ikkari and Heina South and Bluestone Resources issued options to officer and employees of the company. Mako reported channel samples from La Segoviana, including La Reforma, acquired surface rights for La Reforma and reported drilling results from Las Conchitas South, and Lumina Gold reported drill results from Cangrejos (Figure 15).

Canadian juniors mixed even as gold rises

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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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