Gold rises as market mulls taper probability

Gold continues to pick up for third week

The gold price rose 0.9% this week to US$1,795/oz, its third consecutive weekly gain, as the market continued to mull the probability of a taper, and is apparently weighing in a less-than-aggressive Fed, continued inflation and therefore a higher gold price.

Strong H2/21 baked into gold and silver price forecasts

While the sliding prices of some base metals seem to indicate that supply constraint driven gains may be easing, the market's forecasts for gold and silver price imply a very strong H2/21 and may prove more achievable in 2022 than 2021.

Producers and juniors gain, three big TSXV copper players In Focus

The producers and juniors both rose, with the GDX up 1.7%, GDXJ up 3.4% and the Canadian juniors mostly rising. With copper outpacing precious metals, this week three big TSXV copper players are In Focus, Atico, Oroco and Arizona Metals.

Gold and silver price estimates imply strong H2/21

Gold was up 0.9% this week to US$1,795/oz, as the market continues to weigh whether the Fed will taper its monetary stimulus sooner (with some expecting as early as September) or later, and to what to degree, and this appears to have been a key driver of gold over the past few months. We expect that the Fed realizes that it is a bit too dangerous currently to pull back aggressively on its stimulus, with the recovery heavily built on monetary expansion. Given many underlying economic issues still persistent in the global economy, it is unclear the degree of disruption that might erupt without this monetary backing, and the continued rise of a stock market, valued at all-time highs on some metrics like market cap to GDP, could also be endangered. We therefore believe that any Fed moves are likely to be light, and this could give inflation plenty of room to remain high, and should support gold, in our view.

The Fed's thesis is that the current inflation is a temporary phenomenon mainly caused by global supply chains disruptions, and that this will subside as some of these issues have diminished in recent months. While we believe that this is certainly a contributor to inflation, we view the massive monetary expansion as more of the core driver, and expect that even as the supply chain issues abate inflation will remain stubbornly high. We are seeing some support to the idea that inflation due to supply chain disruptions might be easing in recent moves in base metals' prices, many of which surged due to a decline in supply caused by the global health crisis. Copper, which is considered one of the best barometers of overall economic activity because of wide use in many industries, is up 18.4% year-to-date, but peaked in May 2021, and is down -2.9% from its peak (Figure 4). Tin had seen the strongest surge of all the base metals this year, and is up 58.9%, but is also down -7.0% off its peak over the past month (Figure 5).

Iron Ore has seen a quite abrupt drop, and is now down -6.5% for the year after being up 38.0% at its May 2021 peak. This was because of both; 1) falling demand from China, which is seeing a decline in property and infrastructure demand for iron ore and high iron ore stocks, and 2) an increase in supply from Brazil, suggesting that some excess demand caused by supply limits during the crisis has been alleviated. While the gains for lead have been more muted at 12.8%, it has also eased off its highs set August 2021, while zinc has gained 7.9% this year with quite low volatility.

While Platinum has seen some support, driven by the long-term electric car and electronics demand story, it is still down -9.0% for the year. Silver, which had been outpacing gold for most of 2021, has slipped below it, and is down -13.8% for the year. Given that silver tends to be driven by industrial, as much as monetary factors, this could further support the idea that easing supply constraints are curbing the price boom for some industrial metals. Gold, which we view as driven mainly by monetary factors, has declined -7.8% for the year, off lows down -13.7% in March 2021, when it was by far the worst performer of these three precious metals, but so far this year has now beaten out both silver and platinum.

The major forecasts from the market for gold and silver for 2021 point to considerable upside overall in H2/21 (Figure 6). With gold at averaging US$1,802/oz so far this year, the average forecast for US$1,915/oz implies that the last four months of the year would have to see quite an upward move. The situation is the same for silver, with an average price year-to-date of US$26.1oz, and full year 2021 forecast of US$29.0/oz. For copper, the average price at $4.2/oz this year is inline with the full-year forecast of $4.2 for 2021. While we believe that especially gold and silver have strong inflationdriven moves to come, we do not necessarily expect this within the next few months. Therefore, while the gold and silver forecasts may prove to be a bit aggressive for this year, they could certainly be achieved in 2022, especially given our expectation for no heavy-handed action by the Fed over the next year.

Producers mostly rise on pickup in gold

The producing gold miners were mainly up on the rise in gold (Figure 7). There was limited news as the industry has just completed its quarterly results over the past few weeks. Yamana Gold reported a repurchase of 3.321mn shares for C$18mn, or 0.3% of its total shares, under its normal course issuer bid for share repurchases up to 5%, with no set formula or price ranges, with the company intending to make selective purchases when it views its share price as undervalued (Figure 9).

Canadian juniors mostly up as gold rises

The Canadian juniors mostly gained as gold rose (Figure 8). For the Canadian juniors operating mainly domestically, Great Bear Resources reporting drill results from underexplored areas of the LP Fault, Artemis Gold made its final $50mn payment to New Gold for the acquisition of the Blackwater Gold Project and New Found Gold announced the closing of its previously-announced bought deal financing of 5.05mn flow-through shares at $11.39/share for gross proceeds of $57.5mn (Figure 10). For the Canadian juniors operating mainly internationally, K92 reported its maiden Judd 1265 level development results, with mineralization similar to Kora and the first stope expected to be mined by Q4/21 (Figure 11).

Producing copper-gold mine El Roble in Columbia

The company has two projects in South America, with the 90%-owned, coppersilver-gold producing El Roble mine in Columbia its flagship. El Roble produced 20.6m lbs of copper in 2020, up 22% yoy, and 10.8k oz of gold, up 4% yoy, at a cost of $1.18/lb. The company has P&P Reserves of 1,002k tonnes at 3.81% CuEq, with 3.02% Cu and 1.76 g/t Au, for an LoM of 3.5 years, with M&I Resources of 1,174k tonnes at 4.30% CuEq and Inferred Resources of 17k tonnes at 2.03% CuEq. Atico Mining sees potential to expand the resource given a 6,355 h.a. property, 21 prospective drill targets and a planned drill program of 18,000 m for 2021.

Development project La Plata in Ecuador

Its second project is a 100%-owned (with 40% of the project acquired in August 2021), gold-copper-zinc-silver La Plata development project in Ecuador, a 2,300 h.a. land package, with an Inferred Resource released in March 2019 of AuEq of 763k oz. The company has nine current exploration targets, with drill highlights from 2021 including; 1) 3.32% Cu, 5.91 g/t Au, 74.51 g/t Ag and 4.70% Zn over 9.60m on July 2021, 2) 3.70% Cu, 2.80 g/t Au, 40.63 g/t Ag and 4.53% Zn over 3.94 m on May 6, 2021 and 3) and 11% Cu, 34.1 g/t Au and 112 g/t Ag over 3.0 m on January 26, 2021.

Big gains in net income over H1/21, strong net cash position

The company saw a huge jump in its operational income over H1/21 to US$8.99mn, up nearly 20x from just US$0.46mn over H1/20, on a 60.5% jump in revenue to US$32.74mn in H1/21 from US$20.39mn on H1/20 mainly driven by the rise in the copper price. However, even with the operational gains, the shares are down -5.5% over the past twelve months, and while it was up 16.3% at its peak over the past year, it has declined -27.8% over the past three months as the copper price has started to pull back. The market is still bullish on the stock, with a consensus target price of $1.03/share indicating 98.1% upside.

Oroco's flagship project is copper porphyry Santo Tomas in Mexico

Oroco's flagship and the current focus of exploration is the copper porphyry deposit Santo Tomas, of which it holds 73.2% of the main concession covering 1,172.9 h.a. and 77.5% of a 7,807.9 h.a. adjacent concession. Santo Tomas saw previous exploration from 1968 to 1994, with 30,000 m drilled over 100 diamond and reverse circulation drill holes, with a prefeasibility study completed by a prior firm in 1994. It also owns 100% of Xochipala, which was acquired in 2007, and has not seen major activity by the company over the past few years.

Oroco's major first drill program at Santo Tomas began in August

The company originally acquired the Santo Tomas concession in early 2018, began technical work at the project in October 2018, announced early 3D IP results in November 2019, and final 3D IP results in June 2021. The company announced that it had received approval for drilling at Santo Tomas in June 2021 and its first diamond core drill program at the project began at the end of July 2021, with two drills operating as of early-August and a third drill in transit. For the remainder of 2021 and into 2022 the company targets an environmental baseline study, EIA, water strategy, permitting studies and agreements with local communities.

Strong price gains on 3D IP progress, drilling results now in focus

The shares have gained a strong 221.8% both from the progress on the 3D IP surveys and the rise in the copper price, although it has eased off -23.2% over the past three months as the copper price has pulled back. The next major drivers will be the results from the drill program that was started at the end of July 2021. The company had $21.7mn in cash as of the most recently released February 2021 quarterly results, which should leave it fully funded for its exploration program for over a year. The company has a $10.58/share consensus target price, up 325% from the current price of $2.51/price, although this is based on a single analyst's estimate.

Operates two Arizona projects, with gold-copper Kay Mine flagship

Arizona Metals operates two projects, its flagship gold-copper Kay Mine which has been the focus of exploration activity this year, and the Sugarloaf gold project, which saw its most recent drilling results in November 2020. The company's exploration at the Kay Mine is intended to develop and expand on a historic resource reported in 1982 by Exxon outlining 5.8 Mt at 2.8 g/t Au, 2.2% Cu, 3.03% Zn and 55 g/t Ag. Drilling by the company has hit wide intervals of similar grade mineralization to this historic resource, and its Phase 2 drill expansion program of 75,000 m is ongoing.

Recent Kay Mine drilling results, Sugarloaf results from 2020

There have been two drill results from Kay this year; 1) 1.9% Cu, 2.9 g/t Au, 5.0% Zn and 29 g/t Ag over 54 m and 1.3% Cu, 1.6 g/t Au, 3.2% Zn and 32 gt/ Ag over 97 m on July 26, 2021, and 2) 4.0% Cu, 6.1 g/t Au, 3.3% Zn and 18 g/t Ag over 9.0m, within 0.8% Cu, 1.6 g/t Au, 4.2% Zn and 33 g/t Ag over 76.0 m on June 20, 2021. Results from Kay in 2020 included 3.4% CuEq over 39.9 m on Sept 24, 2020, 3.9% CuEq over 43.1 m on Aug 5, 2020, 6.2% CuEq over 4.9 m on June 29, 2020, 4.2 g/t Au and 8.0% Zn on April 28, 2020 and 6.9% CuEq over 4.6 m on April 15, 2020.

Kay Mine drill results drive surge in the share price

The company's share price surged 365.9% over the past twelve months on the drill results from the Kay Mine and the rise in the copper price, but have declined -16.6% over the past three months on the recent decline in copper price. The company had $10.6mn in cash as of Q1/21, and expenses of $5.25mn, suggesting that at the Q1/21 rate of expenditure, the company will need to raise capital soon. The market is targeting 106% upside to the $8.17 consensus target price.