September 12, 2022
Gold ticked up 0.4% this week to US$1,716/oz mainly on an easing US$ with the market forecasting a half percentage point decline in inflation in August 2022 from 8.5% in July 2022 and with expectations increasing for rate hikes from Europe.
This we look at the performance of the major metals segments and major mining company equity indices and rank the gold grades and project sizes of large TSXV-listed gold companies to see if this has been related to market cap shifts this year.
Gold was up 0.4% to US$1,716/oz this week as the US$ eased on market expectations driven by recent economic data that US CPI inflation could decline about half a percentage point in August 2022 from 8.5% in July 2022. Lower inflation could lead the Fed to ease off to some degree on their current aggressive rate hike path, and these lower rates could reduce the relative attractiveness of the US$. There are also expectations that the European Central Bank may also need to substantially boost their interest rates, which are still near zero, even though inflation there is nearing the US level. A hike in rates in Europe could draw away some of the yieldchasing funds flowing into the US and drive up the Euro at the expense of the US$. Nonetheless, even 8.0% inflation is still at forty-year highs, and recent comment from Fed officials on the whole appear to quite hawkish. They seem wary of easing off rate hikes even as inflation starts to fall, seeing a risk of a resurgence in prices, and appear prepared to err on the side of caution and keep rates high for an extended period.
There have been some signs that a rebound in the metals and mining market over the
past two months may be easing in recent weeks, in the context of what appears to
be an overall commodities bear market that started forming around March to May
2022. The Dow Jones Commodities Index is now down -16.3% off its March 2022
peak, although it is up 18.0% over the past year, and while it has recovered from lateJuly 2022 lows, has again seen a downtrend over the past two weeks (Figure 4). The
metals markets have underperformed commodities overall, with the S&P Global
Precious Metals Index down -16.9% off its highs, and declining -6.6% for the year
and the S&P Global Base Metals Index down -28.9% off its highs and down -8.8%
over the past year. The battery metals sector has been a relative bright spot, still up
5.0% over the past year, but it is also down a substantial -15.3% off its 2022 highs.
With mining stocks leveraged to these metals prices, the major producing and junior miner indices have significantly underperformed the metals prices over the past year. The MSCI Global Metals and Mining Producers Index, which comprises the largest global mining companies, is down -21.2% over the past year (Figure 5). Interestingly the S&P/TSXV Metals and Mining Index, which is the benchmark index for the key group of stocks we focus on at CMR, is down only slightly more, falling -22.7% over the past year. We might have expected this index, which comprises smaller, riskier junior miners, to significantly underperform the producing miners, especially given the overall risk-off sentiment this year and pressure specifically on small caps.
However, the S&P/TSXV Metals and Mining Index is heavily weighted towards lithium companies, and the lithium price has remained high this year, and not declined along with the rest of major metals. The strong lithium price is also the main factor behind the outperformance of the battery metals index, with the prices of the two other major components, cobalt and nickel, seeing a substantial decline from their highs this year.
Given the decline in metals prices, we might have also expected that the MSCI producing miner and TSXV junior miner indices would have more substantially underperformed the MSCI World over the past year, which is down -16.9%. However, the performance of metals and mining may only be moderately below the equity markets overall as the problems the two face come from the same root. This is the aggressive rate hikes in the US to fight inflation, as well expectations for rates hikes being likely to follow in other regions. The sector specific operating performance for the producing and junior miners remains quite strong, with the companies well cashed up and generating strong margins, and the macroeconomic issues pressuring their share prices are not falling only this sector, but also on the equity market overall.
In this section we look at the market cap changes of the larger TSXV gold companies in 2022 and compare them to the companies' gold grades and project sizes to see if strength in either of these factors has helped support share prices. Overall, we find that these factors do not seem related to market cap changes in these companies this year and that a high grade or resource size has not been enough to hold back the effects of the broader bear market in equities.
In Figures 6 and 7 we split the large TSXV gold companies between developers and
producers, or companies at the PEA stage or more advanced, and the explorers,
which are all still drilling and only advanced at most to a resource estimate. We might
expect outperformance from the producers/developers, given that their projects have
already been substantially derisked. However, this has not been the case, with the
aggregate market cap of the producers/developers down -42.9%, about 4.0% more
than the explorers, which have declined -39.0%.
We might have also expected that a company demonstrating extremely strong grades, like New Found Gold, with 60.4 g/t Au on average from its main results over the past two years, putting it literally 'off the chart' in Figure 8, would weather the market decline better. However, instead, its market cap down -51% this year, and accounts for nearly half of the market cap decline for the explorers, likely because the project remains at an early stage with no resource estimate (Figure 9), and its price had run up from 2020-2021 on market excitement over the strong grade.
Mako Mining, which is already in production and has the second highest gold grade
of the group at 9.54 g/t Au, has seen its market cap decline -41%, although it only
has a very small total resource of 0.3mn oz Au, which adds to the risk that they can
sustain their current cash flow longer-term. The next two highest grades are from
Eskay Mining and Prime Mining, which are both still in the drilling phase with no
resource estimate, and have seen substantial market cap declines, down -37% and
-55%, respectively. Probe Metals is another company with a high grade but relatively
small resource, with its market cap down -24%.
Amex Exploration and Arizona Metals are still at the drilling stage with reasonably high grades, but no resource estimates, and are down -37% and -20%. Rupert Resources has a decent grade and a moderately sized initial resource estimate, but is down -24%, while pre-resource estimate Laurion Mineral Exploration has seen the largest rise in market cap, up 28%, as a newcomer to the group this year on reasonably high grade drilling results.
Most of the rest of the group all have relatively lower grades, below 1.50x g/t Au, but most have been substantially de-risked, being developers at the PEA-stage or more advanced. There is only producer, Minera Alamos, and although it has a small resource, just under 1.0mn oz Au, this has been enough for some relative support for its market cap, which declined just -14% this year. Although Tudor Gold has the largest resource estimate of the group, at 27.3mn oz Au and a reasonably high grade, its market cap is still down -53%.
G Mining Ventures, with a reasonably large 4.19mn oz Au resource, has seen its market cap rise 5.0% this year, while Osisko Development, with a 1.12mn oz Au resource, has seen the worst market cap decline of the group, down -67%. Gabriel Resources has not been able to advance its large 17.28mn oz Au project as it is on the site of a newly designated World Heritage Site, but expectations of a resolution to arbitration on this issue has boosted its market cap 8.0% this year.
Artemis Gold's resources are large at 19.95mn oz and its flagship Blackwater project in on the verge of construction, but it has the second lowest grade of the group at just 0.66 g/t Au, and its market cap is down -35% for the year. Chesapeake, the company with the lowest grade project of the group, Metates, at just 0.47 g/t Au, also has a very large resource, at 20.44 mn oz Au, but its market cap is down -28% as it continues to investigate methods to lower the high initial capital cost of the project.
Overall, we can conclude that the only things really driving up market caps this year are strong drilling results from companies newly entering the larger cap ranks of the TSXV 50. Most of the companies already at the large cap stage heading into 2022 have seen their market caps decline considerably this year, regardless of high gold grades or a larger or advanced project.
The producing gold miners mainly rose on the gain in gold and equity markets (Figure
10) but the TSXV juniors were mixed (Figure 11). For the producers, El Dorado
arranged financing with Greek banks, Nova Gold announced that Paul Wright would
become interim CEO and Equinox reported a suspension of mining activity at Los
Filos from an illegal blockade (Figure 12).
For the Canadian miners operating mainly domestically, Artemis Gold completed an EPC with Sedgman, Probe reported drilling results from the Monique Zone at Val-d'Or East and Amex Exploration received its UL Ecologo Certification and reported drill results from the copper-rich VMS QF Zone at Perron (Figure 13).
For the Canadian juniors operating mainly internationally, Prime Mining reported infill drill and step-out results from Guadalupe at Los Reyes, Lion One infill drill results from Tuvatu, Mako Mining drill results adjacent to the San Albino West Pit and from the Las Conchitas and Novo Resources reported an exploration update from several areas at Pilbara (Figure 14).
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.