Gold picks up from a weak month

Gold picks up again after holding flat for two weeks

The gold price rose 1.6% this week to US$1,804/oz, picking up after holding flat for two weeks, as there are substantial indicators that inflation continues rise, but the market is still weighing whether the Fed will really be able to keep in under control.

A look at gold company consensus target prices

This week we look at the market's target prices for gold companies, recent changes in these figures, the factors that go into generating these targets and how accurate they may be as indicators of where gold stock prices are headed.

Producers and juniors decline even as gold rises

The producers and juniors declined this week, with the GDX down -0.8% and GDXJ down -2.5% and the Canadian juniors were mostly down, as the rise in gold did not boost stocks as investors saw stronger short-term opportunities in other sectors.

1) Base metals continue to lead market

Gold picks up off a weak month
Gold picked up 1.6% this week to US$1,804/oz, making a strong increase for the first time in a month, although this was not enough to move stock prices, with producers and juniors both mainly declining as investors viewed other sectors as providing more lucrative opportunities for short-term gains. There was limited major economic news coming out of the US or announcements from Fed officials, which have in recent weeks put some pressure on gold. Gold had dipped four weeks ago on after the Fed had indicated that rising inflation might drive a sooner-than-expected taper or rate hikes. Before this, gold had held at an average of near US$1,900/oz for a month, before dipping below US$1,800/oz over the past month, with a wave of economic news pointing to significant inflation in the US economy. However, given a quiet week in terms of inflation related news, gold saw some of the recent pressure ease up.

Base metals tin and iron ore still leading the gains this year

Base metals continue to lead the metals market this year, although there are some signs that the major gains in 2021 for this segment may be slowing. Tin has been the best performer, up 53.8%, and while it continues to make new highs, the pace of gains has been slowing over the past two months (Figure 4). The main ramp occurred from January 2021 to April 2021, when it rose 40.7%, but it is up just 9.3% since May 2021. Tin demand has been driven especially by its use in a rapidly growing electronics sector, while supply has been constrained by a lack of shipping containers, and a drop in the tin exports from Indonesia on shutdowns driven by the global health crisis.

Iron Ore, while up a strong 26.5% year to date, is still well off its highs, when it reached a gain of 38.0% in mid-May 2021. There are some headwinds facing iron ore, as China, one of the leading sources of global demand for the product, especially for use in steel, is looking to pull back on its steel output this year to avoid oversupply locally in this industry. Other major base metals have not seen major surges in their prices this year, like lead, up 12.9% and zinc, up 5.2%, with these markets not seeing the demand and supply imbalances that the tin and iron ore markets have.

Is Dr. Copper suggesting a slowdown of the 'big rebound'?

While copper is up 18.5% year to date, similar to iron ore, it peaked in May 2021, and has declined since. This metal is often referred to as 'Dr. Copper', implying that it has a Ph. D. in economics, as movements in the metal are often seen as predicting shifts in the economy, as it has a strong correlation to GDP growth in the largest global economies and world trade and oil price movements. This is because of it is used broadly across industry, with over half of its usage being electrical, another quarter industrial and the rest in transportation and other sectors. This mix makes it a strong leading indicator for overall industrial expansion, and if copper prices are declining, it tends to suggest that broader global demand may also be under pressure.

While Dr. Copper is not a perfect indicator, the gradual decline over the past two months, coupled with the decline in iron ore, and a reduced pace of gains for tin, both also broader indicators for industrial demand, suggest that the steepest part of the global-health-crisis recovery over the past year may have passed. This could be in keeping with the Fed's thesis that inflation, which reached 5.0% in the US in May 2021, will subside in the second half of 2021.

The Fed is targeting just 3.4% inflation for 2021 as they suggest that the first half jump in inflation was driven mainly by global supply chains getting back up to capacity and the low base effect from 2021. While we agree that this is part of the inflation story, the other side is the massive monetary expansion over the past year, which we believe could continue to drive inflation, even as supply chains get back to normal, and low-base effect subsides especially as we head into the fourth quarter.

Precious metals continue to lag

Precious metals have certainly been the laggards in 2021, although we must consider that this is in the context of huge gains from 2019 to 2020 for this group. In this context, a bit of consolidation could be expected, and the marginal 0.3% gain in platinum, -5.0% decline in silver and -7.5% decline in gold actually do not look that concerning. We expect that inflation will continue to pick up above expectations, and while the Fed may talk about tightening measures, their implementation is still at least a half year or more away. This should support especially the monetary metals in our view, and they could even outpace the base metals in the second half of the year.

Platinum has held up while the silver and gold has declined likely because of its use in reducing emissions in vehicles, with a shift towards production of less polluting vehicles expected to continue. Silver has outperformed gold, as in addition to being driven by monetary factors, like gold, it is also driven by industrial factors, similar to the base metals. It has therefore seen support from the continued economic rebound even though it has seen pressure from the 'rate-hikes-will-drive-investors-out-ofyieldless-precious-metals' thesis that has been prevalent this year. This thesis has been the main pressure on gold this year, although we believe the idea is far overblown, and the chase for yield in many asset classes is increasingly dangerous.

2) Considering gold sector consensus target prices

The market is still very bullish on the gold sector
With gold price facing some pressure this year, and the price particularly weak over the past month since the Fed's taper and rate hikes threats, this week we check with the market to see where analysts are with their targets for gold price stocks. Figure 6 shows the upside to consensus analysts' target prices, which is an average of the target prices from the major analysts from investment banks and brokerages. The idea behind the consensus is that it controls for outliers, either analysts that are very positive on a stock, or analysts that are very negative on a stock, with the average a general idea of where the market overall is seeing a fair value for the stock. This can be either above the current share price, which suggests that the market is expecting the stock to rise, or below the share price, suggesting that the market is expecting the stock to decline.

We can see that even with the gold price under pressure, analysts remain overall very upbeat on gold stocks. Of the fifteen largest producers, the market targets upside for thirteen, all of which have 10% or more upside, and most 20% or more upside. There is downside only for two, with one of them, Centerra, currently in a major arbitration over its mines in Kyrgyzstan, which is a particularly negative company specific issue. The market is even more bullish on the juniors, with well over half expected to have over 50% upside. These much higher percentage gains are possible in the junior sector because these stocks are coming off much lower bases in terms of market caps. The potential upside for these stocks is usually quite unclear, with many in the early stages of drilling, and the extent of any potential deposit not well defined.

In contrast, the economics of the producers are much clearer, with output and costs reasonably accurately known over many years. For the producers, the upside likely tends to be mainly driven by expected increases in the gold price, with some company specific factors accounting for the rest of the difference in upside targets. For juniors, we would suggest that it is the other way around, with a much wider range of upsides between the stocks because of markets expectations of different company specific developments, and the gold price gains being priced in as a secondary factor.

In addition to looking at the current upside or downside to market target prices, we can also consider the changes in these targets to gauge if the market is becoming more or less bullish over time. In Figure 7, we show the changes in analyst expectations from May 2021 to the present. For the producers, we have seen them become a bit more bearish in general. One major factor for this will likely be because the analysts may have reduced their gold target prices for the year that feed into these forecasts. We were seeing forecasts from many analysts for US$2,000/oz or over for 2021, but with gold averaging just around US$1,800/oz this year, many of these analysts have probably been cutting these estimates, and therefore bringing down target prices.

For the junior explorers, however, we see much less movement in these share price targets. This is because there are far more analysts covering these large stocks, and therefore the chance that a few analysts have changed their target prices in the past few months is relatively high. In contrast the explorers are much smaller and have far fewer analysts covering the stocks, and therefore there could be extended periods where we see no changes to analyst targets for many companies. Overall, there have been only marginal changes in the target prices for both the producers and the explorers over the past three months, with analysts becoming just a bit less bullish in their outlook for the sector.

Producers most down as a gold picks up

The major gold producers were mostly down as gold picked up (Figure 8). News flows included Barrick's update on Twiga Minerals, its JV for its mines in Tanzania, with North Mara and Bulyanhulu now profitable, and the Tanzanian government receiving more than $370mn in cash from the JV. Kirkland Lake reported new high-grade intersections at Macassa Mine and Centerra announced that it had filed additional claims against the Kyrgyz Republic Government in arbitration over the alleged wrongful expropriation of the Kumtor Mine (Figure 10).

Canadian juniors mostly decline even with gold's rise

The Canadian juniors were mainly down this week even as gold picked up (Figure 9). For the Canadian juniors operating domestically, New Found Gold reported on exploration along the Appleton Fault Zone, including the Keats, Lotto and Golden Joint zones, with numerous new targets recently drilled and additional targets expected from an ongoing 200k mn drilling program (Figure 11). For the Canadian juniors operating mainly internationally, Rupert reported drilling results from the Heina South prospect, 1 k.m. northwest of Ikarri, Lion One reported drilling results from Tuvatu, and Gabriel reported repayment its $90.86mn convertible unsecured notes, exercising its Common Share Repayment Right and issuing shares (Figure 12).