March 21, 2023
You've seen the news...
Silicon Valley's favorite lender is down.
And hard... Silicon Valley Bank has collapsed following a bank run exacerbated by its vulnerable balance sheet.
The bank made some dumb mistakes in terms of its assets and liabilities management...
And with rising interest rates, those poor decisions turned a high-flying tech lender into an institution that begged the US government for help.
But we're not here to talk about that failure.
Instead, we will focus on Canadian mining companies and what lies ahead for them, given the recent news.
Since the beginning of March, both the TSX Venture Index and the TSX Global Mining Index have declined.
TSX-V is down 4.7%, while the TSX Global Mining Index is down about 3.6%.
This is an opportunity.
While the high-flying tech startups were crashing for a reason-one of the key financial players in the industry is going bankrupt-the Canadian mining companies are not exposed to either tech of Silicon Valley Bank.
They have their own lenders and institutional equity investors. And they are doing just fine.
These indexes followed a broad slide in the markets triggered by the SVB saga... but nothing more.
These indexes have also declined in the face of rising gold prices. Since the beginning of March, gold price in US dollars is up over 8%.
So there is a gap growing between the value of the underlying commodity and gold mining companies, for example.
This is why we consider this an opportunity.
Investors will do well looking at their watchlists and considering the Canadian mining companies that slid along with the rest of the market.
The collapse of SVB may have an unexpected consequence... which, in our opinion, could provide a boost to the Canadian markets, including Canadian mining companies.
Earlier in March, the Bank of Canada decided to keep the country's benchmark rate steady.
Before, the Bank was involved in a monetary tightening policy, not unlike that of the Federal Reserve.
But things changed now. Instead of keeping pace with the Fed, the Bank of Canada may actually lower its interest rate.
And interest rates on government bonds have already started to decline. During the SVB turbulence and its aftermath, investors rushed for safety and bought bonds.
That buying activity raised the bonds' prices and, as a consequence, pushed yields lower.
If the Bank of Canada does indeed start lowering interest rates, it will provide a boost to the country's stock market.
Think of it as the reverse of what happened in 2022, when the global central banks essentially tanked stock markets through interest rate hikes.
If this trend reverses, investors will be attracted to Canada's stock markets. The country's potential monetary easing in the form of lower rates could drive capital inflows.
And mining is one of the largest industries in Canada. It could benefit the most from a potential "pivot" from the Bank of Canada, in our view.
Meanwhile, the Federal Reserve is committed to its tightening policy.
Investors expect that the Fed will increase interest rates by 25 basis points during its March meeting.
And here is what many investors miss...
Yes, tighter monetary conditions may tame inflation.
But they also could cause a recession in the United States.
If investors see another bank failure or a similar "red flag," they will move into "safe haven" assets, such as Treasuries and gold.
Canadian mining companies, especially the ones focused on "monetary metals" such as gold and silver, will be the primary beneficiaries of this "flight to safety."
Even though the Silicon Valley Bank saga has kept everybody's attention this month, its implications for the Canadian mining industry are mostly positive.
The mining companies themselves won't have less access to funding as a result of SVB's collapse.
And if interest rates hold steady or start going down in Canada, they could have more access to investor capital.
The Bank of Canada may lower the country's benchmark rates. This could be overwhelmingly positive for Canada's stock markets, including the mining industry.
Finally, any sign of an imminent recession in the United States, where the Federal Reserve seems convinced that further tightening is necessary, could lead to a "flight to safety" and provide an extra boost to Canada-listed gold mining companies.