TSXV Mining's Larger Cap Standouts

Gold price gains even with Fed rate-cut pushback

Gold rose 1.7% to US$2,046/oz this week, even as Fed officials talked down the need for rate cuts soon and large cap US equities gained on Nvidia’s blow out earnings, as a cautious market is apparently hedging the recent tech stock euphoria.

Large cap bright spots for struggling TSXV Mining

This week we continue our analysis of US Big Tech versus Big Mining, focusing on the YTD performance, and also examine the long-term and 12-month performance of the TSXV Mining Index, with signs of larger cap strength in the wider downturn.

Gold stocks dip even as metal gains

The gold stocks were down even as the metal gained, with the GDX off -0.7% and GDXJ falling -0.3% as larger cap equity gains remained concentrated in tech and the markets sold off smaller caps, including TSXV larger gold, which mostly dropped.

TSXV Mining's Larger Cap Standouts

The gold price rose 1.7% this week to US$2,046/oz, its biggest gain since late December 2023. This came even as Fed officials talked down the need for rate cuts anytime soon, which drove down the probability the base rate would drop at the March 2024 Fed meeting to just 2.5%. The market is also seeing limited scope for a May 2024 cut, with a 19.5% probability, and expectations of a cut at the June 2024 meeting are just 55.9%. While blow out results from Nvidia, which was up 6.5% for the week, drove a mid-week jump in equity markets, the S&P 500 rose only 1.2%, the Nasdaq was up just 0.5% and the Russell 2000 small cap index fell -1.6%.

The gain in gold even on a hawkish Fed and the muted rise in equities show that the market is becoming increasingly wary that the recent bout of tech-stock euphoria will be sustained. The parabolic move in Nvidia this week looks extreme even in the context of the stock’s major rise since January 2024, and while both Meta and Amazon have jumped, gains for other tech stocks have slowed (Figure 4). The prices of Microsoft, Apple and Alphabet have been subdued in February 2023, with moves of 1.9%, 1.8%, -1.3%, respectively (Figure 5). This was driven by Q4/23 results, with all three beating expectations, but with the 2024 outlooks disappointing markets.

The weakness in Microsoft and Apple especially is a concern for a continued tech boom, as they are the two largest stocks in the sector, comprising 19.9% and 18.4% of the total market cap of the Top 15 tech stocks, with Nvidia at just 12.8% (Figure 6). With results season now over, but interest rates still high, and a limited chance of rate cuts for three months, is it unclear what catalysts will keep the boom going, which could explain the market hedging their bets this week and moving into gold.

While the slowdown in the tech boom may have prompted a move into gold, it hasn’t driven a rotation into the biggest global miners yet (Figure 7). These stocks have declined since the start of year as metals prices have generally struggled (Figure 8), and the Q4/23 results season did not lead to any gains in February 2024 (Figure 9). Of the big four global miners, the market was disappointed by the results of BHP and Rio Tinto, leading to declines of -5.8% and -6.3% over the past month, and more neutral on Southern Copper and Vale, which were near flat, down -0.8% and -1.5%, respectively, with Newmont taking the biggest hit on its results, down -13.3%.

Tech valuations divorced from global markets, mining multiples inline

While mining certainly lacks the euphoria of the tech sector, it is hardly alone in this, with tech valuations having become completely divorced from almost every other major global market. The price to book multiple (P/B) of US Tech has surged to 8.9x, while mining sector valuations, at 1.7x, are far more inline with US small caps and European, Emerging and Asian markets, with P/Bs of 2,0x, 1.9x, 1.8x and 1.5x respectively. Overall, therefore, it is not that the outlook for mining is particularly bearish, but rather that expectations for tech appear extreme to the upside.

While global markets overall seem more balanced in pricing in some risk for most stocks, tech valuations increasingly appear to be looking for ‘perfection.’ The problems with this are already being seen in the market’s reaction to Microsoft, Apple and Alphabet results this month, with even a beat for Q4/23 earnings not propelling the stocks much. This could be setting up a situation of continued earnings disappointment by Big US Tech and upward surprises, not just from Big Mining, but the rest of global markets, where expectations seem much more subdued.

TSXV Mining sector far from historical bubble territory

Shifting now from the biggest global mining stocks to some of smallest, this week we look at both the long-term and short-term performance of the TSXV mining sector, including a deep dive into the 12-month price change in the majority of the stocks on the index. While the S&P/TSXV Mining sector index has dropped from a July 2020 peak at 3,653 to 2,661 as of February 2024, it remains in an overall uptrend from lows of 1,255 in September 2015. The July 2020 peak also was still far short of the December 2010 high of 4,664, and moderately above the previous February 2008 apex of 3,815, suggesting that the index remains far out of historical bubble territory.

The TSXV Mining Index has very roughly tracked the MSCI Metals and Mining Index and All Metals Index since 2023. However, there have been periods of divergence, including currently, with TSXV Mining down -12.5% versus -4.5% and -2.2% declines for the All Metals and MSCI Mining (Figure 11). The weakness in TSXV Mining can attributed to the market’s caution on small caps in general, but also a decline in the key metals underlying the index. The sector has obviously massively lagged the techdriven Nasdaq, up 47.3%, and MSCI World, up 28.6%, although the latter also has a high US equity weighting and is therefore also skewed up by tech.

There is a similar divergence longer-term, with the Nasdaq soaring 466% since 2012 and MSCI World up 178% versus a 3% gain for the MSCI Mining and -14% decline for the TSXV Mining (Figure 12). Both mining indices are well below the 32% All Metals gain, even though these stocks could be expected to see leveraged gains on such a rise. This indicates how pervasive the bearish sentiment has become for the sector, especially in contrast to the over decade-long hyper-bullishness on big tech.

Gains in at least two of gold, lithium and copper needed to drive TSXV

The big drivers of the TSXV Mining Index in terms of metals prices are gold, lithium and copper, with stocks in these sectors comprising most of the market cap of the TSXV. The crash in the lithium price over the past year has offset a resilient gold price, while copper has declined moderately. In addition to metals prices, market sentiment on small caps in general can have a large effect on TSXV Mining, and markets have become more cautious on smaller, riskier assets over the past two years.

As for the outlook for the TSXV Index in 2024, the gold price could continue to surprise to the upside which could give it some support. Lithium prices have also gotten so low that the chance for an upside surprise is likely rising, although major institutions remain bearish overall on the price for 2024. Copper remains a wild card, depending largely on whether global economic growth remains robust, or shows signs of a faltering. Overall, we expect that significant gains in at least two of these three major metals will be needed to drive the index up, with little help likely to come from a change in cautious market sentiment over small caps in general.

Large cap bright spots for TSXV Mining in a difficult year

The global market’s shift away from riskier assets is particularly evident in the performance of the TSXV mining stocks over the past year. While there are over 900 stocks on the TSXV, we find 615 that have at least a 12-month price history and readily available data, which provides a good look ‘under the hood’ of the development of the index over the past year. While the data shows it has been a difficult year for the index, it has certainly not been one entirely without hope, especially in light of weakening metals prices, apart from gold, and the pressure on small caps overall.

The Top 100 market cap stocks on the TSXV have performed the best, rising an average 23% over the past year, although this was skewed up by a few huge gainers, with the median stock down -13% (Figure 13). There were 101 gainers, or 16% of the total, with 38 rising more than 75%, 60 stocks adding above 25%, and 41 rising between 0%-24% (Figure 14). Figure 15 shows the market cap versus the 12-month price performance of the Top 100, with most of the big gainers being stocks with larger market caps above US$500mn, with the decliners concentrated below the US$250mn market level.

The rest of the groupings show that on average as the market cap gets smaller, the performance worsens, with an average loss of -15% for the highest 101-300 market cap stocks, -30% for 301-500 and -43% for stocks below the top 500. This shows the market’s current bias towards smaller, riskier stocks, and contrasts with the 2020 bull market, when these companies were more in vogue. Figure 16 shows that there are still a substantial number of high gainers in the top 101-300 market cap stocks, but this declines in the 301-500 and over >500 groups, and for both of these lower market cap groups, there is a far higher concentration of decliners (Figures 17, 18).

Gold producers mostly rise, TSXV large gold mainly down

While the large gold producers mostly rose on the gain in the gold price, the larger TSXV gold stocks mainly declined (Figures 19, 20). For the TSXV gold companies operating domestically, Artemis Gold released results from its Blackwater expansion study and Snowline Gold, New Found Gold and Osisko Development reported drill results from the Aurelius target of Rogue, the Keats West and Cokes Zones of Queensway, and Tintic, respectively. Tudor Gold reported an upward revision of its Mineral Resource for Treaty Creek, Amex Exploration released drill results from the Western Extension Gratien Zone of Perron and Laurion Mineral Exploration provided detail on its 2024 Ishkoday exploration program (Figure 21).

For the TSXV gold companies operating internationally, Osino received an acquisition offer higher than from Dundee Precious Metals, Montage Gold announced new management appointments and a C$35mn private placement with participation from the Lundin Group and Minera Alamos reported its 2024 operational outlook for the Santana gold project (Figure 22).