Metals Bear Market

Gold rebounds for third week but most metals in bear market

Gold rose 0.6% to US$1,773/oz this week as the market continues to digest the Fed's slightly more dovish tone, and is down -11% off its 2022 peak, but most other major metals have entered, or are on the verge of, a bear market over the past few months.

Big Gold's Q2/22 results season nearly complete

The rest of Big Gold except for Barrick reported their Q2/22 results this week, including B2Gold, Iamgold, SSR Mining, Eldorado Gold and Equinox Gold, with production and revenue growth mixed but rising costs driving declines in net income.

Producers flat, while juniors edge up with risk-on sentiment

The producers were flat, with the GDX unchanged, and the juniors edged up, with the GDX rising 0.4%, and most of the TSXV larger juniors up as the equity markets have shifted to a more risk-on stance for past two weeks with a return to small caps.

Metals Bear Market

Gold continued to rise for the third consecutive week, up 0.6% to US$1,773/oz, as the market seems to have viewed the brief dip below US$1,700/oz about a month ago as not warranted by the fundamentals. The gold price is now heading back towards its average since 2020 of US$1,798/oz, but still remains below its average since 2022 of US$1,852/oz. Both of the significant moves above these averages have been driven by major surges in risk, first during the peak of the global health-crisis driven fears in mid-2020, and then during the initial shock from Russia's invasion of Ukraine, in both cases with gold rising above US$2,000/oz.

We had earlier been concerned that a very aggressive Fed, seemingly not dissuaded by an equity bear market or US recession, could hit gold as its rate hikes continued to make bonds increasingly attractive versus gold and drive up the dollar, which tends to move inversely to gold. However, after the latest rate hike there was a slightly more dovish tone from the Fed Chairman, stating that shifts in the economic data would be considered closely when determining the degree and pace of upcoming rate hikes. This seemed to tacitly acknowledge recent weakness in the US economy and was greeted by relief in rebounding equity and gold markets. However, we still would not overestimate any lighter touch upcoming from the Fed, with inflation still very high, and rate hikes still to come likely through to 2023, even if at a reduced level or pace.

A metals bear market has started

The metals markets have clearly felt the bite from the Fed's rate hikes, being hit by macro weakness, with the US in recession and a slowdown in the Chinese economy, taking out two major global drivers of growth, while growth in both Europe and Japan remains anemic. Nearly all of the major metals are either in, or on the verge, of a bear market, as measured by a 20% decline from their peak.

Big four metals, gold, aluminum, copper and iron ore down -26% on average

In Figure 4 we show the size of the major metals markets, which fit reasonably well into four groups of four. We look first at the top four largest metals markets, which combined are worth over three times the next twelve, comprising gold, aluminum and copper and iron ore, and could be considered as a proxy for the overall direction of the metals market (Figure 5). With the exception of gold, which is down only -11% from its 2022 peak, the other three in this group have entered clear bear markets, down well over 20% from their highs. Copper is down -28%, iron ore has fallen -32% and aluminum has declined -37%, and the average, weighted by the size of the markets, is down -26%, with support only from outperforming gold's high weighting.

Second tier metals zinc, manganese, lead and nickel down -18% on average

Of the next largest four metals, only lead has not seen substantial decline, down just -5%, as it did not have a price run up as high as the other three metals since 2022 (Figure 6). While not officially in bear markets yet, two metals, zinc and manganese, are on the verge of one, down -17% and -18%, respectively. Nickel collapsed -31% from its 2022 peak, although this is somewhat artificial, given a meteoric and unsustainable surge on Russia's military action, the country being a major global source of nickel, driving the brief spike on acute fears of supply disruption. The average, down -18%, highlights this group's overall story of being not quite in a bear market yet, but close.

Cobalt and precious metals silver, palladium and platinum down -27%

The next group of four metals has also clearly entered a bear market, with even its strongest performer, platinum, down -17% from its 2022 peak, silver down -24%, palladium, -29%, cobalt -40%, with the average down -27% (Figure 7). Cobalt has a similar story to the industrial base metals in the above groups, with a major run up, mostly uninterrupted from early 2020 lows, and then a peak around early Q2/22 before an abrupt decline over the past few months. The performance of the three precious metals has been a bit different, with silver's post-global health crisis run topping out early, in August 2020 and platinum peaking in February 2021. Only palladium has peaked along with the other industrial metals, hitting a high in late February 2021 given Russia's large contribution to global output and supply fears after its invasion of Ukraine.

Lithium dramatically outperforms, but other small metals decline substantially

Of all these metals, not just the smallest four in Figure 8, lithium is by far the standout performer, as evidenced by the change in our chart scale from a maximum of 300 to 1,050 to account for its massive gains, and it has hardly lost any ground in the metals bear market, down only -4.0%. The rise has been driven by lithium's use in batteries especially for electric vehicles for which demand is already surging and expected to continue to do so, given the global 'green' political push away from the use of fossil fuels. For the rest of the group, the story is more inline with the rest of the industrial metals, with a peak in early 2022 and a substantial decline since, with molybdenum down -16%, uranium down -24% and tin, which had been the best performer of the group since 2020, down -49%, and the average down -28%.

Could be further declines to come for metals prices and junior miners

We expect that the risk remains weighted to the downside for metals prices, and therefore for the junior miners, with these prices their main fundamental driver. With the US already in recession, growth in China faltering, and slow growth in Europe and Japan, the kind of pick up in global end demand that would warrant a rebound in metals prices seems unlikely this year. Meanwhile the Fed will likely continue with its rate hikes, which will not encourage a major increase in investment from the business sector, and households facing higher rates and inflation at four-decade highs may be compelled to pull back on consumption. We believe therefore that global economic growth is more likely to continue to slide rather than improve through the second half of 2022, and that this will likely continue to drag down metals prices. This would in turn further reduce the valuations of junior miners, and given that many companies in the sector are already viewed by the market as inexpensive, it suggests some good bargains could develop in the sector heading into 2023.

Q2/22 results of Big Gold nearly all with only Barrick left to report

The Q2/22 results are all in for Big Gold except for Barrick, the second largest player in the industry, with B2Gold, Iamgold, SSR Mining, Eldorado Gold and Equinox Gold reporting this week. Gold production for the group was mixed, with B2Gold up 6%, Iamgold up 9%, and Eldorado and Equinox both down -2%, but showing an improvement in the growth rate qoq (Figure 9). Only SSR saw a significant decline, down -21% yoy, coming off extremely strong gains in Q2/21 because of its merger with Alacer Gold. The average realized gold price for most of the group was up yearon-year, but down quarter-on-quarter, at around US$1,850/oz or above, except for Iamgold, with a realized gold price at least US$50/oz below the group in Q1/22, and near flat yoy (Figure 10). However, Iamgold's improving production rate offset the flat realized gold price, with its revenue up the most of the group, at 26% for the quarter, with B2Gold following at 5% and Equinox near flat at -1%. Eldorado's revenue was down -8% yoy and SSR was down -15% as a rise in their realized gold prices was not enough to offset the decline in their production (Figure 11).

Costs have picked up considerably for the group year-on-year, ranging from around US$100/oz-US$200/oz, which is much higher than for the group reporting last week including Agnico-Eagle and Yamana, which had relatively flat costs, although Newmont saw increases of around US$150/oz and Alamos of about US$30/oz. Both Iamgold and Equinox have the highest cost bases, at US$300/oz to US$400/oz above the others in this group, which has weighed on their share prices, with Iamgold having an especially low market cap given its relatively high level of gold production.

Net income has trended down over the last few quarters for the group as the surge in costs have offset gains at the revenue line. The figures for net income growth are not particularly meaningful for many of the recent quarters with many companies jumping around with several hundred percent changes, with prior periods often affected by exceptional items. Overall for the group, while production and revenue growth have been mixed, surging costs are having a negative effect on profitability especially for the past two quarters, and with high inflation having continued in Q3/22, costs could continue to rise for these companies in the next reporting season.

Producers and larger TSXV juniors mixed

The producing gold miners (Figure 14) and the larger TSXV junior gold miners (Figure 15) were mixed as gold and equity markets rose. The Q2/22 results season continued for the producers, with B2Gold, Eldorado, Equinox, SSR and Iamgold all reporting, and Lundin Gold provided an update on regional exploration at the Suarez basin (Figure 16). For the Canadian juniors operating mainly domestically, New Found Gold reported drill results from Keats North and Tudor Gold announced a $7.0mn private placement (Figure 17). For the Canadian juniors operating mainly internationally, Rupert Resources announced its Q2/22 results to May 2022 and Novo Resources began drilling at Purdy's North (Figure 19).