Gold Holding Up Strong So Far in 2022

Gold down this week, but holding up strong in 2022

Gold declined -1.1% to US$1,809/oz this week but has continued to hold up strong so far in 2022, averaging US$1,816/oz since the start of the year, as the market remains concerned about high inflation even as the Fed talks tougher on intervention.

Most large TSXV gold juniors share prices hit in early 2022

The relatively strong gold price has not been able to prevent a decline so far in 2022 for most of the TSXV junior gold miners, as equity markets have seen major declines, with riskier sectors seeing the biggest sell offs and putting pressure on the juniors.

Producers flat and juniors only edge down

Although gold declined, the producing miners remained flat this week, with the GDX changing 0.0%, and the juniors only edged down, with the GDXJ sliding -0.4% as the market may be reconsidering the potential for gold stocks if high inflation persists.

Gold Holding Up Strong So Far in 2022

Gold fell -1.1% to US$1,809/oz this week, but has been holding up strong so far in 2022, averaging US$1,816/oz, compared to US$1,978/oz on average for 2021. The market seems to be pricing in higher inflation into the gold price than it was on average last year, which is understandable given that the US CPI numbers only really started to spike into the second half of 2021. While the Fed has become much more aggressive in its talk in recent weeks of a rate hike as early as March 2022, earlier than a previously expected 2023, it is certainly playing catch up in terms of inflation. We question whether the likely 0.25% rate hike that could come in March 2022 will be enough to curb inflation much, and even if it is followed by another three rate hikes this year, it would only bring the Fed funds rate from 0.25% to 1.25%. If inflation continues to rage, this may still not be enough to truly bring it under control.

However, we do expect that such a series of rate hikes would be enough to spook the markets and cause a major market correction, and possibly cause a dip in economic growth, leading to a period of stagflation. Such an outcome would likely be quite supportive of gold. The only thing that could really hit gold, in our view, is a huge, abrupt, rate hike, which smashes inflation, similar to the actions of the Volckerled Fed of the early 1980s, when the base rate spiked to 19.0%. Given the current precarious economic recovery and very high stock market valuations, we doubt that such a move would be either politically feasible or economically prudent. So, barring the current Fed Chairman Powell suddenly erupting into Volcker Part Deux, gold should remain relatively safe this year.

Most larger TSXV gold miners take a hit so far in 2022

While gold has continued to hold up so far in 2022, the TSXV-listed junior metals miners have mostly declined. They have been under pressure from an across-theboard sell-off in equities, with risker sectors of the market, like the juniors, being sold off the most aggressively. While we did see some support for junior miners through most of January with the GDXJ ETF, a proxy for the juniors, down only a few percent until the third week of the month, over the past week or so they also saw succumbed to aggressive selling pressure as the gold price pulled back from recent highs nearing US$1,850/oz. Figure 4 shows the largest TSXV listed gold miners by market cap, and Figure 5 their share price performances since the start of 2022.

If we were to characterize any overall trend in these share price moves so far this year, it would be that the developers have held up a bit better than the explorers, although explorers Eskay Mining and Rupert Resources, are exceptions to this, as is developer Artemis Gold. This could be expected as juniors often have of a chance to get ahead of themselves in terms of realistic valuations as the market becomes excited on the prospect 'the next big find'. In contrast, developers have at least released a PEA for their project, which much more clearly lays out the economics of the project and will tend to bring their valuations back down to earth.

The market has been backing Eskay Mining the most so far this year, which is up 4.3%, given the ongoing strong drilling results from its still early-stage exploration project VMS in British Columbia. This is even though the company already trades on a very high P/B versus the group, at 23.3x (Figure 6), mainly because of its low equity, with its cash balance low versus the group (Figure 7).

The second-best performer Orezone, up just 1.7%, is towards the opposite end of the spectrum, with its Tuvatu project at an advanced stage with a PEA released in 2020 and a financing package completed in October 2021. It also trades at a relatively moderate P/B of 6.2x and has a larger asset base with a large component of mining and exploration assets and a reasonably high cash balance, making a safer bet in a risk-off environment.

The next best performer is Osisko Development, which is mainly because its valuation is by far the lowest of the group, at just 0.7x P/B with an asset base larger than its market cap and a high cash balance. This suggests that its downside could be truncated, with the market certainly not over exuberant on the stock currently, although it has continued to release drilling results for its Cariboo project throughout the past year and is moving toward a Feasibility Study.

The worst performer so far this year has been New Found Gold, down -17.8%, with the company continuing to deliver strong drilling results from the Queensway project, but the market possibly viewing the valuation as having gotten a bit ahead of itself after being one of the stonger performers of the larger gold companies on the TSXV in 2021. However, its P/B valuation, at 13.9x, while relatively high for the group, is still below other comparable explorers like Rupert Resources, with a P/B at 15.1x, and with a share price decline of just -4.3% this year. Rupert is also seeing very strong results from its Lapland Project, although it is farther along in its development than New Found Gold, having released its initial mineral resource estimate in October 2021 last year.

Developer Artemis Gold is the second worst performer, down -14.6%, with the company at an advanced stage for its Blackwater Project in British Columbia, with financing secured in H1/21 and a Feasibility Study released in H2/21. The most recent news from the company was on the termination of an engineering contract because of an expiry of an agreed period to begin construction. However, the company still expects to begin early works on Blackwater by the first or second quarter of this year. Its valuation is also at quite inexpensive levels on a P/B basis, at just 2.2x.

Tudor Gold is down -8.1% so far in 2022, and although it has continued to release decent results from its Treaty Creek project, they haven’t been as strong as the results from Rupert or New Found Gold. Therefore, its valuation has remained at below half the level of these two companies, at a P/B of 6.4x, although its project is relatively large and has already reached the initial resource estimate stage. While its asset base as of its latest reported quarterly results was almost all capitalized exploration expenses with very low cash, the company raised $15.0mn in a private placement, with participation by Eric Sprott, in October 2021, which will keep it well funded to continue exploration through 2022.

Bluestone Resources is down -9.1% since the start of the year, with news flow limited since the company announced an upgraded mineral resource for its PEA-stage Cerro Blanco project and with investors possibly shifting their attention towards other names with a more recent flow of press releases. The company trades toward the lower end of the group, similar to several of the other developers, on a P/B of 4.3x, and has a quite a high cash balance to support advancement of the project through the next year.

The remaining two names are new to the TSXV in 2021, Prime Mining, down -9.9%, and Arizona Metals, down -10.5%. These stocks are both early-stage explorers that saw outstanding drilling results from their projects last year which propelled them into the group of the largest TSXV-listed gold stocks. However, the valuation of Arizona has jumped to the top of the group, at 25.2x, and its cash balance is reasonably low versus the other large explorers, leaving it looking relatively risky compared to the other very well cashed up explorers. While Prime Mining’s multiple is lower at 9.7x, this is still quite high versus the group, and while it has a higher cash balance than Arizona, it is well below the level of a Rupert or a New Found Gold.

While the share prices of many of these companies have been hit quite hard this year, they are all still seeing strong operational progress, and most are reasonably well cashed up to continue exploration and development throughout 2022, and many well into 2023. This will reduce the share price risk for this group compared to smaller juniors that are less visible to capital markets and are at very early stages of exploration which could make it very difficult for them to raise cash in the coming years if capital markets become much more risk averse.

However, that is not to say that continued pressure on equity markets won’t also see many of these larger juniors also decline further this year, however good their operational situation is and even with gold holding up. This is because if interest rates are hiked, however moderately, then the discount rates used in valuations will increase, and this will fundamentally reduce equity valuations across the board. Therefore, while we could conceivably see this reasonably strong group of juniors outperform the overall small cap equities markets, meaning that they could decline less, than, for example, the Russell 2000 index, this still could mean a considerable further decline in absolute terms. In other words, these juniors could go down by less than other small caps, but that still could mean a considerable loss. We suggest that investors remain quite cautious in the current period and spend time investigating junior miners with an eye on a better buy in point sometime later on this year or next.

Producers mixed as gold edges down

The producing gold miners were mixed as gold edged down (Figure 8). Newmont announced an agreement in the Yukon to relinquish quartz mining claims to support the government’s efforts to maintain environmentally sensitive areas. The sector’s largest ongoing mergers neared completion, with Agnico-Eagle and Kirkland Lake receiving approval from Australia’s Investment Review Board for their merger, and Pretium receiving the final order from B.C.’s Supreme Court for the acquisition by Newcrest. B2Gold’s subsidiary in Mali was granted a new exploration permit the same perimeter as the Menankoto permit and announced an increase in the resource for the Cardinal FMZ deposit. SSR Mining reported Q4/21 production and three-year guidance and Iamgold reported on negotiations with RCF Management, a 5.2% shareholder, over proposed changes to its Board of Directors (Figure 10).

Canadian juniors mixed as gold drops

The Canadian juniors were mixed even as gold dropped (Figure 9). For the Canadian juniors operating mainly domestically, Great Bear reported that both Institutional Shareholder Services and Glass Lewis had recommended that its shareholders vote for the acquisition by Kinross (Figure 11). Osisko Development reported that it had received expressions of interest for a non-brokered private placement of up to US$10mn, Tudor Gold submitted the draft information circular and listing application related to its proposed spin-off of Crown Property to its subsidiary Goldstorm Metals and Pure Gold announced a bought deal private placement of US$9.0mn and concurrent private placement of C$16.0mn. For the Canadian juniors operating mainly internationally, Rupert reported infill drill results from Rupert Lapland and Mako reported results from expansion drilling at San Albino (Figure 12).