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SWOT Analysis: Could Junior Miners See Greater Mergers and Acquisitions?

Commentaries & Views

Strengths

  • The best performing metal this week was palladium, down just 0.27 percent on a positive recommendation by Morgan Stanley based on deficit market supply. Gold traders and analysts became bearish this week according to the Bloomberg weekly survey as gold fell to its lowest level so far this year.

  • China’s central bank revised the value of its end-of-May gold reserves to $77.32 billion, up from $73.74 billion, reports Reuters. This is notable since the central bank did not provide an explanation for the changed figure and did not change the total amount of gold held by the bank. According to Bloomberg, the Mauritius International Derivatives and Commodities Exchange expects to trade $6.5 billion of gold annually within the next five years. The move is expected to become a financial gateway from the Indian Ocean island nation to Africa and spur further gold investment.

  • Nighthawk Gold announced positive drilling results of 25.50 meters of 2.68 grams per tonne (gpt) gold plus 9.95 meters of 4.90 gpt gold at its North Inca gold deposit in Canada. Yamana Gold declared commercial production had begun at its Cerro Moro gold and silver mine in Argentina.

Weaknesses

  • The worst performing metal this week was platinum, down 2.78 percent. According to UBS, gold shorts increased by 3 million ounces in the prior week, the largest weekly gain since November 2015. Strategist Joni Teves writes that risks have increased and the risks to the economy are skewed to the downside. “For gold, this means that longs are more resilient and shorts hesitant. We do not expect strong safe haven flows as long as the anticipated impact on growth and inflation remains modest.” Gold has seen its worst week of the year and Jordan Eliseo, chief economist at ABC Bullion, says bullion maybe drop to $1,250, which “will likely prove an attractive entry point, with sentiment incredibly low and futures positioning continuing to unwind.”

  • Investors continue to back away from commodities as commodity ETFs saw a seventh straight week of outflows. Outflows totaled $759 million this week, compared to withdrawals of $256 million in the previous period. Gold ETFs also reached their lowest holdings levels in three months as gold slumped to its lowest in 2018, reports Bloomberg.

  • Gold is set for its biggest monthly drop since November 2016 on the heels of a stronger dollar, which is seeing its third straight month of gains. Gavin Wendt, senior analyst at MineLife, told Bloomberg that “the U.S. dollar has been the biggest beneficiary as investors’ first choice safe haven” and that it has “indirectly led to gold-price weakness.”

Opportunities

  • RBC Capital Markets writes this week that valuations of junior gold companies have compressed this year and now sit at $38 per ounce of resources, compared to the trailing 12-month average of $54 per ounce of resources. This recent pullback could spur greater mergers and acquisitions activity given that junior miners now have more attractive valuations.

  • junior gold company valuations sit at $38 an ounce of sources, below the five-year average takeover multiple of $64 an ounce

  • Suki Cooper, precious metals analyst at Standard Chartered, says that gold could rally after seeing a weak second quarter. “This quarter is generally a seasonally weak period for physical demand, but we’ve also seen a number of macro indicators line up to present quite a weak backdrop for the gold market.” According to Pictet Wealth Management, gold is set to stage a comeback as the dollar’s recent strength is a temporary rebound and should decline further down the road. Currency strategist Luc Luyet said on Monday that he expects bullion to climb to $1,320 an ounce by the end of the year.

  • Inflation is on the rise, as seen in the costs paid by factories for materials, which climbed to a seven-year high in June in Texas. Bloomberg writes that more manufacturers are paying higher input prices and getting more for the final product, able to pass inflation onto consumers as the prices of materials used in U.S. manufacturing have been mounting for months.  Larry Summers, former U.S. Treasury Secretary, told Bloomberg in a phone interview this week that Federal Reserve interest rate hikes, which slow expansion, are a greater risk to the economy than inflation. “The dangers are still much more on the side of too much slowdown than they are of too much inflation.”

  • eyes of inflation are upon you

Threats

  • General Motors (GM) issued a strong warning to the White House that it could shrink its U.S. operations and cut jobs if tariffs are broadly applied to imported  vehicles and auto parts. Because GM’s Silverado pickup is the top imported model from Mexico, this is a significant issue.  In addition, a lot of high-value parts are sourced from Asia. The proposed 25 percent tariff would add thousands of dollars onto their current vehicle prices.

  • Bloomberg reports that gold is now the cheapest relative to crude oil in more than three years as growing concerns over a U.S.-China trade war have failed to revive demand for bullion as a safe-haven asset. High petroleum prices relative to gold can lead to a margin squeeze for large open pit mines that are more energy intensive.

  • The S&P 500 Index has stumbled the last five times the Federal Reserve System Open Market Account has had Treasuries mature, writes Bloomberg. The Fed is allowing bonds to “roll off,” which means pocketing, rather than reinvesting, the proceeds as the bonds mature. This has the effect of reducing liquidities and possibly draining equities. The last five times maturity dates came and went, the S&P 500 Index fell a minimum of 68 basis points. July 1 is next maturity roll off date.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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