January 14, 2022
Gold rose 2.0% to US$1,822/oz this week, as the market refocused on inflation concerns, and although the bond yields have picked up, the US real 10-year yield is below -5.0%, which makes holding yieldless gold look attractive.
This week we look at TSXV copper juniors with smaller market capitalizations, from just above US$180mn to just below US$90mn, with only two major gainers over the past year, Meridian Mining and Kutcho, and most of the rest flat to down.
Gold jumped 1.9% to US$1,822/oz this week as the market apparently has shifted its focus back towards high and rising inflation. Even with the Fed beginning to taper its massive monetary stimulus and nominal bond yields rising above 1.70%, the market seems unconvinced that the US Central Bank's moves will be aggressive enough to bring inflation under control in the short to medium term (Figure 4). While usually we would expect such a spike in yields to put some pressure on the gold price, we must consider that real yields have turned heavily negative. In November 2021, the US 10-year yield was 1.4%, but with inflation at 6.9%, the real yield was -5.4% (Figure 5). While if inflation were near zero, a yield near 2.0% in bonds would make holding yieldless gold a relatively expensive position, with real rates strongly negative, there is a considerably higher cost to holding bonds than gold currently. When we add to this that the high general perceived risk of the past two years continues, albeit at a lower level certainly than 2020, but still much higher than prior to the global health crisis, the propensity to hold a safe haven like gold rises further. As we don't expect inflation or broader economic risks to subside, or the Fed to aggressively hike rates, anytime soon, real yields could well remain quite negative, potentially boosting gold.
This week we take a look at the TSXV smaller cap copper companies with market caps ranging from $188mn to $85mn. With the copper price tending be strongly correlated with economic growth, and given our expectation that the global economy may slow in 2022, especially after the dramatic rebound in 2021, we could also see some pressure on the copper price short-term. However, over the medium to longterm copper demand is expected to significantly outstrip supply and should support the copper price, even if there is some relative weakness this year. We also expect to see continued pressure on equity markets in general this year which could hit many stocks, with the junior miners particularly susceptible to getting hit in market downturns. All these factors combined means that a greater focus on company specific fundamentals has become even more critical in 2022 compared to 2021, when the rise in the copper price proved a strong driver across much of the sector.
The largest market cap of the group is Meridian Mining, at $188mn, operating the
Cabacal project in Brazil, with a historic resource and production in the late 1980s to
the early 1990s (Figure 6). It has seen by far the biggest gains of the group, up 495%
over the past year on strong drilling results (Figure 7). The company had the highest
P/B of the group as of end-2020, at 7.4x, but its P/B turned negative in Q3/21 on
negative equity, although a private placement of $10.5mn in October 2021 should
reverse this. The new cash allowed the company to expand its landbank at Cabacal
in January 2022 and it will continue exploration this year, with the market seeing 80%
upside to its consensus target price (Figure 11).
Copper Fox Metals has the second largest market cap of the group, at $152mn, and the largest resource of the group at 15.0 lbs Cu M&I&I, and trades at the lowest EV/Resource, at just CAD$1.0 cents/lb (Figure 8). The company operates two projects at the PEA Stage, and three other exploration projects, with its Schaft Creek project with an after-tax NPV of $842mn and its Van Dyke project with an NPV of $645mn (Figure 9). Copper Fox is down -26% for the year, the weakest of the group, has a moderate P/B of 2.1x and has no consensus target price.
The third largest market cap of the group is Adventus, at $130mn, with its Curipamba
project in Ecuador, with a Resource of 0.7mn lbs Cu and a Feasibility Study outlining
at 10-year initial underground mine with an NPV of $259mn and an additional fiveyear open pit mine with an NPV of $49mn. The company trades at a high EV/Resource
of CAD16.6 cents/lb Cu, and the market values the NPV of the combined two phases
of Curipamba Resources at 42.4% of its market cap, just below Copper Fox, with the
NPV of its two main projects at 41.7% of its market cap, and well above Kutcho, with
its market cap at 18.5% of its after-tax project NPV. Adventus trades a relatively low
P/B of 2.0x, up from 1.4x at the end of 2020, and the market sees 66% upside to its
target, the lowest of the group for which target prices are available.
The fourth largest is Northwest Copper, at $107mn, operating three exploration projects, with Kwanika/Stardust the most advanced, with a 0.4bn lb Cu resource. The company was down -14% over the past year as the stock declined from mid-2021 through to October 2021, when it rebounded on strong drilling results. It trades at the highest EV/Resource of the group, at CAD22.3 cents/lb Cu, and a low P/B of just 1.0x, declining from 4.5x at the end of 2020, after it raised $13.0mn in private placement in March 2021, and the market targets 113% upside to its consensus target.
The fifth largest company is C3 Metals, at $89mn, operating exploration projects in
Peru and Jamaica, and the company has declined -6% over the past year, as drilling
results at the Jasperoide project in Peru were only enough to keep the stock relatively
flat over the year. The company trades at a relatively high P/B versus the group at
3.1x, up from 1.9x as of the end of 2020, and it has no target consensus price.
The second of the group is Kutcho, with a market cap of $85mn, which rose 156% over the past year, the second highest of the group, as it advanced a Feasibility Study over 2021, releasing it in December 2021. The company has a resource of 1.6 bn Cu lbs, and trades at a moderate EV/Resource of CAD7.3 cents/lb Cu, but a high P/B of 5.2x, up from 2.9x as of end-2020, with 101% upside to its target consensus.
The smallest market cap of the group is Regulus, operating the Antakori project in Peru, with the second highest resource at 8.0bn lbs CuEq, including a large gold and silver resource. The company is up 11% over the past year, the second-best performance of the group, with a pickup in Q4/21, although there were no press releases over this period. The company trades at a low EV/Resource of CAD1.2 cents/lb Cu, a moderate P/B of 2.0x and has 114% upside to its consensus target.
The producing gold miners were nearly all up as gold rose as concerns over inflation seem to have risen (Figure 12). Pretium announced that both Institutional Shareholder Services and Glass Lewis & Co. have recommended that its shareholders vote in favor of the proposed acquisition by Newcrest. Companies began reporting their preliminary Q4/20 production including Yamana, Equinox, Lundin and Iamgold, and SSR announced that it will sell the Pitarrilla project to Endeavour Silver (Figure 14).
The Canadian juniors nearly all rose as gold picked up as the market seemed to refocus on inflation concerns (Figure 13). For the Canadian juniors operating mainly domestically, New Found Gold, Osisko Development, Tudor Gold and Amex Exploration all reported drilling results (Figure 15). For the Canadian juniors operating mainly internationally, Prime Mining released drill results, Novo Resources and Bluestone Resources reported 2021 operational summaries, and Mako Mining reported results from the first twelve benches of material mined at the San Albino project (Figure 16).
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.