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Gold SWOT: Shareholders reap the rewards after high commodity prices boost mining profits

Commentaries & Views

Strengths

  • The best performing precious metal for the week was silver, up 3.90%, likely on the stronger inflation data reported this week, which of course silver loves. Technically, $26.00 continues to act as major resistance to a price breakout. Purchases of gold exchange-traded products (ETPs) hit a record in March, while investors pulled record amounts from domestically-listed European equity funds as the fallout from Russia’s invasion of Ukraine ripped through markets. Global net inflows into gold ETPs rose five-fold month-on-month to $11.3 billion in March, according to data from BlackRock, eclipsing the previous peak of $9.4 billion in July 2020. The surge in buying helped push the gold price to within a whisker of its all-time high in early March, although it has since eased back, reports the Financial Times.

  • Nomad Royalty reported strong first quarter 2022 preliminary results with attributable revenue of approximately $12.7 million from 6,604 attributable ounces sold. Ounces came in sequentially higher this quarter, and now represent 26% of full year guidance at midpoint, according to the company.

  • Perseus Mining reported ongoing infill and extension drilling on the CMA structure at Yaouré gold mine in Côte d’Ivoire. Managing Director Jeff Quartermaine noted they were working towards a resource upgrade to complete a Pre-Feasibility Study. The Bank of Ghana has set aside 180 million Cedis for gold purchases. Ghana is Africa’s top gold producer and has bought over 600 kilos since it started its purchase program back in June.

Weaknesses

  • The worst performing precious metal for the week was palladium, off 2.83%. The London Platinum & Palladium Market (LPPM) followed the London Bullion Market Association (LBMA) in suspending the accreditation of Russian refineries. More specifically, the LPPM suspended the government owned Krastsvetmet refinery and the Piroshky Plant of Non-Ferrous Metals from its Good Delivery and Sponge Accreditation lists. Relative to the suspensions in gold and silver, this action from the LPPM could have far more serious price implications. These two refineries process Russia’s 3 million ounces of annual palladium production and 700,000 ounces of annual platinum production.

  • New Gold reported Q1 gold equivalent production that was 21.4% lower than the prior quarter. Production was down at both their mines, with New Afton’s production off 32.3% while Rainy River’s slide 15.0%. New Gold is rated an underperform by BofA Securities.

  • Galiano Gold still struggles to regain investor confidence. This week Raj Ray downgraded Galiano Gold from a Market Perform to an Underperform. In late February, Galiano Gold noticed in February that the grade of gold going to its tailing waste contained 0.40 g/t, far exceeding the expected grade of 0.10%. Ray noted in his report that the new Measured and Indicated grade were about 20% lower than the previous report which management explained as an update to the geologic model. Go figure.

Opportunities

  • South Africa was last ranked 75th out of 84 jurisdictions as surveyed by the Fraser Institute Annual Survey of Mining Companies 2021. This underscores how unattractive the region has been to new mining investments due to electricity shortages, frequent strikes and community unrest. This week South African Department of Minerals and Energy unveiled its exploration strategy which aims to attract $900 million of annual investment in exploration in its substantial mineral wealth by removing bottlenecks, improving resource-mapping and diversifying its focus beyond gold. With South Africa’s declining gold resources, the department stressed their focus is on the minerals of the future. Just in 2019, South Africa was ranked 40th out of 76 in the Fraser survey.

  • Shares of Asian and South African companies tied to platinum group metals rose after the London market suspended two state-owned Russian palladium refiners from its accreditation lists. The move potentially disrupts supplies from the world’s biggest producer of the precious metal; Russia produces 40% of all freshly mined palladium.

  • High commodity prices are boosting mining profits, and companies are opting to give the money back to shareholders rather than invest in new projects, which could slow global production growth. Last year was spectacular for mining groups as they benefited from a post-pandemic recovery in demand. Earnings soared as a result, and much of it went into shareholders' pockets.

Threats

  • Barrick Gold reported preliminary production for gold and copper that were inline with expectations. Gold production dropped versus the prior quarter but was telegraphed earlier. Surprising, though, was the roughly 20% higher costs guidance framed for analysts. Inflation is certainly impacting costs as diesel fuel prices soared in March, likely hitting the open pit miners harder than underground operations.

  • Barrick Gold also reported that it has reengaged with Pakistan’s government on a revised plan to develop the giant Reko Diq copper gold deposit that is close to the border with Iran and Afghanistan. The project is envisioned to be built in two stages with a capital requirement of $7 billion. Barrick recently announced a $1 billion stock buyback. If Jeff Currie is right about being in the early innings of a commodity supercycle, investors will be warried of funding for this project for new production versus demanding a dividend or buyback.

  • Some of Russia’s palladium exports could be redirected to China following the London Platinum and Palladium Market’s suspension of two state-owned refiners, according to UBS Group AG, which could put the brakes on a panicked market. China, which consumes about three million ounces of palladium annually, uses slightly more than what Russia produces, said Giovanni Staunovo, a strategist at the bank’s global wealth management unit.
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