Banking Crisis Continues

Gold again breaks through key level on Fed hike, banking crisis

Gold rose 1.4% to US$2,017/oz this week, remaining above the key US$2,000/oz level for four of five sessions, as the market perceived increased risk with the Fed coming through with another rate hike while the US banking crisis resumed.

Thor, Minera Alamos Q4/22 and Collective Mining In Focus

This week In Focus are the Q4/22 results of TSXV producers Thor Explorations and Minera Alamos, and Collective Mining, which is exploring for gold and copper in Colombia with strong gold drill results from its Apollo project driving up its share price.

Market moves into gold stocks even as equity markets decline

The market moved into gold stocks as the price of the underlying metal picked up, offsetting downward pressure from an overall decline in equity markets, with the GDX up 5.4%, the GDXJ gaining 5.2% and the larger TSXV gold stocks mainly up.

Banking Crisis Continues

Gold rose 1.4% to US$2,017/oz, once again breaching the key US$2,000/oz level, and closed as high as US$2,048/oz mid-week, on a renewed flight to safety as the US banking crisis resumed and the Federal Reserve increased interest rates. The US banking crisis, which erupted in early March 2023, with the contagion soon spreading to Europe, had previously appeared to be relatively contained by aggressive government support measures in the sector. The US banks index plummeted -24% from mid-February to late-March 2023 and European banks were down -15%, but they had recovered through most of April 2023 (Figure 4).

However, over the past week, major US bank First Republic has been seized by the government, with the majority of its assets sold to J.P. Morgan while the share price of the mid-tier bank Pacwest Bancorp collapsed at one point this week by -70% and ended the week still down -40%. The realization that the banking crisis was still not over sent the US banks index down below the late-March 2023 lows this week, before a slightly uptick on the last day of trading as the market rose on strong US jobs data and lower unemployment. The EU banks index also came down, but not quite to the level of the late March 2023 lows.

Junior gold substantially outperforming banks and global equity markets

While we see the wind at gold's back this year, with more than enough risks in the pipeline to support it, we had remained more concerned for gold equities, especially juniors. We had anticipated a scenario where gains in gold could be offset by a broader risk-off stance in equity markets, reducing multiples across the board, especially for juniors which would need to continue raising capital in increasingly difficult markets. So far this year, this stance is looking increasingly overcautious.

The GDXJ, a proxy for junior gold miners, is up 16.9% from mid-February 2023, trouncing a near flat MSCI World index of global equities, up just 0.9%, and massively outperforming the European banks index, by 25.5%, and the US banks index by 39.9%. The GDXJ has proved to be a strong leveraged bet over the past three months on the 8.8% rise in the gold price. The gold juniors have also significantly outpaced the 4.7% gain in the S&P/TSXV Metals and Mining Index, which has a large weighting to base metals and lithium, which have been underperforming gold in recent months as fears of an imminent recession have risen.

Market putting premium on gold equities even in risk-off environment

This outperformance of the GDXJ even in a clear 'risk-off' week for equity markets is key because it shows the market pricing in a premium for the potential safety of goldrelated assets, even juniors, far offsetting broader sector risks including a lack of revenue and being in peroidic need of new capital. While we had previously expected gold to well surpass the market consensus for a decline to an average US$1,800/oz, we are also now seeing the potential for a strong year for gold stocks also, including the juniors. This is especially the case with the market less bullish on the star growth sectors of the decade up to 2021, including tech, cyclicals, and certainly financials.

The relentless Fed 'strikes again'... with a long pause now possible

This week saw the relentless US Federal Reserve 'strike again' with another interest rate hike, increasing its Effective Federal Funds Rate to 4.8% (Figure 5). The ECB, which is slightly behind the Fed, even though its inflation is actually higher than the US, with a Deposit Facility Rate of 3.0%, is also expected to hike rates further this month. One difference with this round of hikes is that the market expects that this may be the peak for US interest rates, and that there is a reasonable probability of no further hikes this year. However, there is generally expected to be a long pause at the top of the cycle for US interest rates.

This is because the Fed remains concerned not just about crushing inflation with its rate hikes, but also inflation expectations. It remains focussed on the experience of the 1970s and early 1980s, when interest rates were hiked substantially in 1974, and inflation was brought down by 1975, but only temporarily (Figure 6). This is because inflation was still widely expected, and reignited a wage price spiral by 1978, where workers demand higher wages in expectations of higher prices. Such expectations were only truly obliterated in 1981, when rates were hiked substantially above the level of inflation. As a general rule, we see inflation come down abruptly once the Fed Funds Rate reaches or surpasses the CPI inflation rate.

Historically Fed Rate needs to meet or beat CPI increase to crush inflation

Even with huge rate hikes over the past year, the Fed would still have to hike more to follow this rule, with its 4.5% Effective Rate still below the average 5.8% US CPI inflation this year. The Fed might therefore see the current level as still not enough to curb inflation, and it has been clear that it would maintain its peak rate for a considerable period to prevent a resurgence. As for how long they may pause, it took two years from when inflation was lowered in 1976 before it began to creep up again by 1978. The decision will also depend on the US employment situation, but for now, this remains robust, including a quite hot US jobs report released this week.

For gold and gold stocks, fundamentally we might have expected that the rising rates would be negative. For gold, it means higher yields on bonds versus no-yield gold, which could have driven a relative shift into fixed income and away from the metal. For gold stocks, rising rates could boost discount rates and therefore lower valuations. However, the market is likely seeing through any 'benefit' of the current Fed actions to the likely long-term results, which are most likely to be economic chaos and a return to massive monetary expansion. The fallout is already here to some degree with the banking crisis and the market is already starting to move reasonably aggressively into gold and gold stocks as a risk hedge.

Producers and most larger TSXV gold stocks rise

The gold producers all rose and most of the larger TSXV gold stocks were up even as equity markets declined as the gold price gained (Figures 7, 8). For the Canadian gold juniors operating mainly domestically, Artemis started a gold hedge program for Blackwater and Osisko Development released drill results from the Trixie test mine (Figure 9). For the Canadian gold juniors operating mainly internationally, Thor Explorations reported Q4/22 results, Gold Reserve reported that the US government would not take enforcement action against sellers of PDV Holding and Minera Alamos reported FY/22 results. Lion One Metals announced a C$27.0mn bought deal financing and Chesapeake began legal proceedings against DGM in Mexico after it cancelled the company's San Vincente 3 concession, which is part of its Metates project (Figure 10).

Thor's production remains strong, Minera Alamos pauses output in Q4/22

Two of the TSXV's larger gold companies which have already entered production, Thor Explorations and Minera Alamos, reported FY/22 results this week. Thor Explorations has been in full commercial production at its Segilola mine since Q4/21, with production of 97.9k oz Au in 2022, with especially strong output in the second half, with 26.5k oz Au in Q3/22 and 26.3k oz Au in Q4/22 (Figure 11). Minera Alamos was still in pre-commercial production in 2022, and in contrast to the typical process, it did not release a Mineral Resource Estimate or PEA for its Santana mine, and directly entered small scale production over 2022.

Gold sales from Santana were 9,522 oz Au in 2022 over 9M/22 year, with no gold sales in Q4/21 as operations had not yet begun, and again no sales in Q4/22, as the company undertook a review of the project, although production resumed as of Q1/23 (Figure 12). Thor Exploration's revenue was up 20.1x in 2022 to $165.2mn, as it was only just ramping up to full production at the end of 2021, with Q3/22 its strongest quarter at $55.7mn (Figure 13). While revenue pulled back to $43.3mn in Q4/22 on a weakening gold price, it was the strongest quarter for net income.

For Minera Alamos, revenue and net income for 2022 peaked in Q3/22 at C$9.1mn and C$3.0mn, respectively, with a net loss of C$-2.4mn in Q4/22 arising on a lack of any gold sales for the quarter (Figure 14). Thor has significantly outperformed the large TSXV gold producers since 2022, rising 42%, while Minera Alamos, down -32%, is actually more inline with its peers and benchmark index (Figure 15).

In Focus: Collective Mining

Consistent strong gold drill results from Apollo project
Collective Mining has seen a strong 78.6% rise in its share price over the past year, and especially over the last three months, increasing 123.3%, driven by outstanding drill results catalyzed by the major jump in the gold price (Figure 16). This has made the stock the third largest by market cap of the major TSXV pre-Mineral Resource Estimate explorers, at $387mn, behind New Found Gold and Reunion Gold (Figure 17). While the company focuses on exploration of copper-gold porphyry targets in Colombia, it is the gold drill results from the Apollo project driving the stock gains.

Strong relative performance versus TSXV larger pre-resource explorers

While Collective Mining's share price chart looks relatively flat from May 2022 through to February 2023, this was during a period of considerable decline for many larger TSXV gold stocks, and given this, still represents a considerable outperformance of most of the market. Only New Found Gold, which has reported the most consistent very high grade drill results of the larger TSXV stocks over the past few years, has seen a stronger share price performance since 2022, with Reunion Gold, Prime Mining and Amex Exploration all seeing declines over the period (Figure 18)

Strongest grams thickness results from Apollo reported in March 2023

The highlighted best grams-thickness results (multiplying the g/t Au of the results by the length in metres) from Apollo were already reasonably strong through the second half of 2022, with two reported above 600, including 2.44 g/t Au over 266 m in September, 2022 and 2.88 g/t Au over 238 m in October 2022 (Figure 19). While a third above 600 was reported in January 2023, at 1.51 g/t Au over 426 m, the particularly outstanding drill results that drove the major share price pick up started in February 2023, with a grams-thickness of 842 and 964, comprising 1.40 g/t Au over 602 m and 2.46 g/t Au over 385 m, respectively. The strongest results so far were released in March 2023, with a 1,921 grams-thickness, and in April 2023, with 909, with 3.32 g/t over 359 m and 3.35 g/t Au over 271 m, respectively.