Year in Review 2022 and Outlook for 2023

Surging inflation, interest rates and geopolitical risks

This year the post-global health crisis boom was brought to an end by a surge in inflation to forty-year highs, a major rise in global interest rates in an attempt to curb the rising prices and surging geopolitical risk after Russia's invasion of Ukraine. While precious metals held up reasonably well as markets turned to them as a risk hedge, by Q2/22 the higher interest rates put an end to the surge in base metals prices that had lasted since 2021 on growing concerns that a recession would curb demand, while global health-crisis driven supply constraints started to ease (Figure 1).

Shift to 'risk-off' in equity markets hits junior miners

The junior miners had a difficult year, with a shift to 'risk-off' in equity markets in contrast to a bullish 2021. The producing miners eked out gains with the Global Mining Index up 5% and Base Metals Index up 1%, but the Gold Stock Index was down -3% (Figure 2). Smaller stocks especially saw pressure, and the market caps of many juniors, especially those in early exploration, saw substantial declines, with the TSXV Metals and Mining Index down -33% compared to a -20% decline in the S&P 500. However, even many juniors at the Resource Estimate stage or beyond took hits, although their more concrete evidence of progress often cushioned the blow.

Outstanding operational progress remains key

However, there were still many gainers among the large cap TSXV junior miners, mainly on outstanding operational stories of either extremely high grades for earlier stage explorers or substantial development progress for later stage companies. With support from strong metals prices or booming equity markets having abated, and likely to remain low in 2023, company specific drivers could become even more critical for the share prices of the TSXV juniors than they were in 2022.

The first time in forty years that inflation really got out of hand

The big macro story this year for the metals and markets overall was the spike in inflation globally, the first time in forty years that prices had truly gotten out of hand. The US led the charge, with inflation peaking in June 2022 at 9.0%, but this was soon surpassed by the EU, which peaked at 10.6% in September 2022, and even Japan, which has been on the verge of deflation for decades, saw inflation reach 3.0% in April 2022 (Figure 3). While inflation has eased since and will likely continue to decline given the concerted spike in interest rates by global central banks to curb prices, it is still high and will likely continue to remain so through 2023.

Major economies yields' spike, but still lag far behind inflation

Historically interest rates have needed to reach or exceed inflation to really bring down prices, and perhaps more importantly, inflation expectations. However, even after big jumps in rates, the US and EU 10-year bond yields are nowhere near the level of inflation, suggesting rate hikes may need to continue. While US yields nearly doubled this year from 1.8% in January 2022 to 3.5% in December 2022, this still leaves them at around half the current level of inflation around 7.0% (Figure 4). While German 10-year yields have jumped from zero to 2.2%, UK yields nearly tripled from 1.3% to 3.3% and France's yields spiked from 0.4% to 2.7%, Europe is still far behind in playing catch up with inflation. Japan so far has only boosted rates from 0.17% and 0.25% and China was the only big economy that started the year with relatively high rates, already at 2.7%, and has increased them to just 2.9%.

Gold driver of negative real rates eases, offset by falling US$

All of the inflation and rate action this year has seen an easing of one key driver of gold since 2021, real interest rates. A decline in real rates tends to support the gold price, as the opportunity cost of holding gold, which has no yield, declines. In a period of negative real interest rates, where holding bonds to maturity actually results in a loss of purchasing power, gold becomes particularly interesting, and US real interest rates became increasingly negative through 2021 into Q1/22 (Figure 5).

However, with nominal yields rising and inflation easing, real rates have become less negative, and if this trend continues, and real bond yields head into positive territory, it would not be supportive of the gold price. Offsetting this to some degree has been a decline in US$ in recent months, with gold tending to move inversely to the dollar (Figure 6). The US$ had surged through most of 2022 as the US hiked rates more quickly than other countries, drawing in capital chasing the higher yields. However, other central banks are starting to gradually catch up, which has led to funds flows away from the US$ and towards these other currencies, driving up their relative value.

More macro fallout and potentially rising geopolitical risk in 2023

Macro risks remain high and will probably rise heading into 2023, with the effects of global interest rate ramp ups still yet to be fully realized, and an economic slowdown this year widely expected. We expect that this will especially be an issue for the base metals as demand declines may drive a fall in their prices, with some base metals still elevated from the still lingering effects of the global health crisis. For the precious metals, we expect that gold could continue to hold up, as it has for past three years, as both a hedge against a return to monetary expansion and a jump in geopolitical risk, while we see the outlook being more mixed for silver, platinum and palladium, which have strong monetary, but also potentially offsetting and industrial drivers.

Precious metals all gain for the year except for palladium

The precious metals have held up well this year overall, with only palladium down, in contrast to the substantial decline for most of the major base metals (Figure 7). Palladium was certainly the most volatile for the year, at one point up nearly 60% after the invasion by Russia, which is one of the world's largest suppliers of the metal. However, with supply concerns as well as demand expectations abating over the year, the price ended the year down -8.0%. While the platinum price trended down through most of the middle of H1/21, it has picked up in Q4/22, ending the year with the strongest performance of the precious metals, up 13%.

Auto industry demand more a driver for palladium than platinum

This divergence between palladium and platinum has been driven partly by their differing demand composition, with over 85% of palladium consumption from its use in catalytic convertors to reduce emissions in automobiles. For platinum only 30% of demand is from the auto sector, with jewelry, petroleum and petrochemicals and investment also large sources of demand. This major use in autos saw both metals under pressure given the shift towards electric vehicles this year, which do not use catalytic convertors, while a microchip shortage also saw automakers pull back on production, lowering immediate demand for the two metals. The split has additionally been driven by a tighter supply situation expected for platinum next year compared to palladium.

The outlook for the gas-powered auto market looks mixed for 2023, with demand to be potentially hit by an economic recession, although there was likely some backlog developing from the pullback in production from the lack of microchips last year, which could help offset some recessionary effects. With palladium appearing to be relatively well supplied, the auto sector demand will likely be its main driver. For platinum, in addition to the auto industry driver, if there is a recession, jewelry sales and investment demand could rise as people seek out a store of value, although petroleum and petrochemical demand could decline.

Gold once again reverts to an average near US$1,800/oz

While gold had quite a volatile year, in the end, it wound up nearly right back where it started, around US$1,800/oz, which is also around the average of the past two years, with the market overall seeming to have converged towards this value (Figure 8). However, this strong pull towards US$1,800/oz did not prevent the gold bulls from driving the price up to US$2,040/oz in early 2022 on a jump in geopolitical risk after Russia's invasion. It also did not prevent gold bears from driving it down as low as US$1,627/oz in H2/22 as some became convinced that a falling stock market and slowing economy would see the Fed pull back on its rate hikes, or at less offer slightly less aggressive language in its releases or talks, which it did not.

In the end neither the gold bulls or bears won out, and our expectation at the start of year that 'gold would hold up' turned out to be spot on. While gold could once again hold to this average around US$1,800/oz in 2023, there seems to be more potential for upside gains this year compared to 2022, as global central banks could start to ease rates by late 2023 and geopolitical risks could spike again.

Silver price has strong year-end run as inventory declines

Silver's price movement in 2022 looks similar to gold, with a spike in Q1/22, a decline through to Q3/22 and then substantial pickup into Q4/22 (Figure 9). While this has partly been because the two are both driven by monetary factors, silver also has a large industrial component to its demand which only has a small impact on gold. While we might have expected industrial drivers to be negative for silver, as they have been for the base metals, silver supply has been tight compared to many other metals, with LMBA data showing available silver inventory plunging over H2/22, much faster than any pullback in demand for the metal. This has sent the gold to silver ratio to near its lows for the year, and well below the average of 82 for the year, suggesting that we could see a rebalancing in the ratio either by a continued pickup in gold, or by silver easing as the recession cools demand to levels more balanced with supply.

A move to risk-off stance shifts composition of TSXV Top 10 Gold

For most of the largest TSXV gold stocks it was a difficult year, with six of the top ten seeing market cap declines of -15% or more, and three declining by over -45% (Figure 10). With gold on average near flat, this was mostly because of the major decline in stock markets overall, with small caps especially hit hard as the strong riskon sentiment in 2021 went strongly into reverse. We can see this risk-off sentiment in the shift in composition of the TSXV Top 10 Gold. Three companies have at least some level of production, while at the end of 2021, none of the Top 10 were companies in or near production. These include Osisko Development, with three test mines having some output, Robex Resources, in commercial production, and Minera Alamos, in pre-commercial production at one project, with only Robex seeing a rise in its market cap. Two companies, Artemis and G Mining are at very advanced stages on their respective projects, significantly lowering their risk, with Artemis' market cap still down, but outperforming the group, and G Mining seeing substantial gains.

While impressive early-stage drill results had often been enough to propel share prices in 2019 and 2020, this was not the case in 2022, with pre-resource estimate New Found Gold and Prime Mining showing strong grades this year, but still falling substantially, and Tudor Gold, with moderate grades and at the resource estimate stage, also declining. However, these declines were partly from investors locking in gains from strong runs in these stocks in previous years. Some strong new early-stage exploration stories still saw gains even in these difficult markets, including Reunion Gold, new to the large cap end of the market, on outstanding drill results. The remaining stock, Gabriel, is a special case, rising from progress on its UN-led arbitration over its project in Romania at a newly designated World Heritage Site which had prevented development, with a resolution and award expected soon.

Big TSXV silver stocks mixed, PGM stocks newly listed

The performance of the large TSXV silver stocks was mixed, with only moderate gains in the underlying metals leaving operational progress as the main driver (Figure 11). Downward pressure from the overall equity market slide drove a decline in the market caps of Discovery, Vizsla and Andean, down -22%, -43% and -31%, respectively, even as they continued to advance their projects. Two companies, Eloro and Arbrasilver saw muted gains of 5% and 11%, and only Dolly Varden saw a considerable rise in its market cap, partly driven by continued strong drill results at its Resource Estimate stage project, but also because of capital raising near the end of the year. For the platinum group metals (PGM) stocks which also includes palladium, both of the major TSXV stocks were new listings this year, Canadian North Resources and Bravo Mining. This did not allow for market cap comparisons versus the start of 2022, although both have seen substantial gains since their listing, with most of the gains coming just since December 2022.

Major base metals prices are down considerably for the year

For first quarter of 2022 most base metals markets were still booming, driven by an economic rebound that had started to develop in late 2020 and picked up pace through 2021, as well supply chains constraints caused by the global health crisis. However with major interest rate hikes starting in the US and then going global, and supply chain issues easing, by mid-2022 the boom was clearly over, as shown by the prices of the three largest metals, aluminum, copper and iron ore, which collapsed off their highs into H2/22 and have recovered only moderately in recent months, ending the year down -17%, -13% and -12%, respectively (Figures 12, 13).

These three metals together offer a broad picture of global economic demand, with aluminum viewed as the broadest indicator, copper seen as being more weighted toward developed economies, and iron ore reflective especially of the situation in China. With global economic demand widely expected to slow this year and the global health crisis-induced supply side issues continuing to ease, we expect that pressure on these large base metals markets could continue into 2023.

The performance of the mid-sized metals markets was more mixed than the larger metals, but zinc and manganese followed a similar pattern to the big three based on the same economic issues, reaching their peak in early 2022 and then trending down into H2/22 and ending the year down -7% and -6%, respectively (Figure 14). Like palladium, a surge in nickel prices at the start of the year was driven by the 'Russia effect,' with the country one of the major global suppliers of the metal, and led to a suspension of nickel trading on the LME in March 2022. While its price declined as more 'rational' trading resumed, it again surged in Q4/22, ending the year up 58%. This was driven by low trading liquidity, with many traders still hesitant to take on large positions after being hit in the March short-squeeze, and a moderate rise in demand. Lead saw the most stable performances of the metals, declining over H1/22 and then picking up in H2/22, but only moderately in both, ending the year flat.

The smaller base metals markets had even more of a split in price performance, with molybdenum the largest gainer. In contrast to most of the other base metals which reached their highs in H1/22, molybdenum ended the years at its highs, up 61%, with demand from the steel industry, which comprises over 70% of molybdenum consumption, picking up and supply relatively tight (Figure 15). Uranium peaked in April 2022, as part of the overall economic rebound, but also because of a new investment trust purchasing large amounts of physical uranium, driving up the price.

Uranium pulled back off its highs into H2/22 along with other metals and with the investment trust pulling back on purchases, but picked up in Q4/22, gaining 14% for the year. Cobalt and tin followed the more typical base metals pattern of a rise in early 2022 and then a collapse into H2/22, however, in contrast to several of the metals, neither saw a pickup in Q4/22, and ended the year down -26% and -38%, the worst two performers of the major metals.

Large TSXV base metals stocks mostly shake off weak prices

While we might have expected to see a big hit to the TSXV base metals stocks given these weak metals prices, overall the group performed reasonably well (Figure 16). Even with the severe plunge in the tin price, Alphamin, one of the world's largest tin producers, operating in the Democratic Republic of Congo, was only down -2% as investors seemed to have already been pricing in the likely unsustainability of the big spike in tin prices in 2021 and early 2022. There seems to have been a similar situation at cobalt producer Jervois, which saw its market cap flat even as underlying cobalt prices declined substantially.

The market cap of the three of the four copper producers, Foran, Los Andes and NGex gained 33%, 68% and 58%, respectively, as operational progress at their reasonably advanced projects offset the decline in the copper price. Of the copper focussed TSXV juniors only Oroco took a hit, with its market cap down -54%, in part because it is still at the drilling phase, and earlier stage companies have tended to see more selling pressure given the risk-off stance by market this year. A strong rise in underlying metals prices was also not enough this year to support a given junior miners' stock price, with nickel ending the year almost back at its Q1/22 highs, but Canada Nickel's market cap still down -32% for the year, even though its project is at the reasonably advanced PEA stage.

Lithium sees by far the strongest gains from 2021-2022

We had not included lithium with the metals' prices above as it literally goes off the chart, with an 809% gain since 2021 dwarfing the 20% rise in aluminum and 4% rise in copper over the period (Figure 17). This has been driven by a huge rise in electric car purchases, especially from China, sending demand for electric batteries, and the lithium that goes into them, soaring. This sudden jump in demand far outstripped the capacity to produce lithium, and suppliers have struggled to expand enough to keep up. However, there are signs that the lithium price may have peaked, with an expected economic slowdown and rising electric car prices expected to curb demand and a substantial expansion of lithium supply forecast by mid-2023.

However, the surge in the lithium price has not been a universal boon for the large TSXV junior lithium miners (Figure 18). Only two stocks have seen outstanding gains, Sigma, up 246%, and Patriot Battery Metals, up 1337%, although both were driven mainly by operational progress rather than the lithium price, with the latter a very early-stage company at the start of 2022, shifting from microcap to small cap territory. Frontier and Critical, at the more advanced PEA and Feasibility Study stages, rose 17% and 71%, but again these increases were clearly not tracking the huge rise in the lithium price. Two stocks actually saw a substantial decline in their market caps, with Standard down -64% and American down -26%, showing further evidence of the disconnect between the market cap shifts of the larger TSXV junior miners and moves in the metals' prices underlying their projects over the past year.

Uranium sees a special driver from SPUT purchases

Movements in the uranium price are a special case versus the rest of the major metals, with the market far less liquid and flat prices sometimes reported over extended periods. This meant that the introduction of the Sprott Physical Uranium Trust (SPUT) in late 2021 was quite a significant development for the industry, offering access to a relatively liquid and convenient vehicle to trade uranium the first time. The SPUT also is believed to have driven much of the surge in the uranium price in early 2022, given its aggressive purchases of physical uranium after it raised large amounts of capital since its original listing in mid-2021.

This led to both the uranium price and the SPUT price surging to a high in April 2022, also supported by the broader metals boom that was still ongoing in Q1/22 (Figure 19). However, SPUT eased off on its purchases by April 2022 and the price of the trust declined and the uranium price also fell. The uranium price then oscillated around an average US$50/lb from May 2022 to December 2022, and ended the year up 14%. The major TSXV Uranium companies, Isoenergy and enCore, ended the year with a -21% and -10% decline in their market caps, respectively, with only moderate gains in the uranium price and their continued operational progress not offsetting pressure from the broader decline in equity markets (Figure 20).

Widely expected global economic slowdown could hit base metals

While global inflation has eased off its highs in recent months, this has come at the cost of high and rising interest rates, and 2023 looks to be a year of difficult transition, with interest rates to remain high, and inflation to trend down, but still remain quite elevated compared to the past four decades. The effects even of the rate hikes already made may only really start to bite in mid-2023, and this is before taking into account upcoming hikes for H1/23, making a global economic slowdown this year widely expected. For the base metals overall, such a slowdown is likely to mean more pressure on their prices this year, although there may some smaller sized metals markets that buck this trend because of the micro dynamics in their sectors.

Gold may have the largest chance of an upside surprise

We expect that the most likely outcome for gold is that it continues to hold up around its average of the past two years, as investors continue to hold it as risk hedge, offset by increasingly less negative real interest rates making bonds more attractive and potentially preventing a breakout. However, compared to the base metals, we see a much greater chance of an upside surprise for gold. We could see the central banks pull back on aggressive tightening earlier than expected if a global economic downturn becomes too severe and politically untenable, and geopolitical risks could certainly surge, both of which would give a lift to the gold price. While the other precious metals could also see a boost from the monetary and broader risks drivers that benefit gold, this could be offset by their industrial drivers, which we see as weighted to the downside for this year, similar to the base metals.

TSXV junior miners likely to remain under pressure

We expect that continued high interest rates will see the overall equity markets under pressure, and that a risk-off stance will continue into 2023, hitting small caps similarly to 2022, especially junior miners in the early stages of exploration. While the gold price could surprise to the upside, supporting gold juniors, this could be offset by the downward pressure from weak equity markets, so the sector may still be fighting an uphill battle in our view. As we see less of a probability for upside surprises for base metal prices, the TSXV base metals stocks could need to show particularly impressive operational progress to see gains. Nonetheless, we expect that nearing the end of 2023 the equity markets could well be bottoming, and valuations could have contracted to extremely reasonable levels for many of the stronger TSXV junior miners, offering some substantially attractive investing opportunities.