The gold sector attempts to reverse the PDAC curse
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Earlier this week, I attended the annual Prospectors & Developers Association of Canada (PDAC) conference in Toronto. It is the premier destination for mining companies to mingle with suppliers, customers, potential investors, consultants, and analysts.
Not only is this a must-attend event for professional mining investors such as myself, PDAC can also be a very good gauge of sentiment in the gold space. After speaking with many of the best minds in the sector, I can usually paint a much clearer picture about how to craft my investment strategy into Q2.
The companies in attendance usually make sure to send out press releases during the week leading into PDAC, so they have a recent topic of discussion while trying to lure investors into making an investment in their stock. This flurry of news releases into and around the convention leads to an inevitable news drought following it. When combined with seasonal weakness that is common in the gold sector in Q2, we get what has been regularly referred to as the “PDAC Curse”.
This year, with the mining sector mired in what has become a 32-month consolidation of outsized 2020 gains, the curse appeared to come a bit early. On Tuesday, Federal Reserve Chairman Jerome Powell jawboned the gold price $35 lower with threats of “higher-for-longer” interest rates, shifting investors into the U.S. dollar.
But as I type, a second consecutive much better than expected U.S. Non-Farms Payrolls (NFP) report is having a reverse affect on the gold price this morning. Although U.S. Non-Farm Payrolls rose by 311,000 in February, according to the Bureau of Labor Statistics, the strong January number saw a slight revision down, and the February unemployment rate climbed from 3.4% to 3.6%.
With the later recession fearing statistic surprising market consensus, which expected the rate to remain the same, Gold Futures have reclaimed the earlier $35 loss on Friday morning after clearing initial resistance at $1850. The consumer and producer price indexes set to be released next week will also have a major impact on the gold price.
While the upside momentum has recently waned, it will take a move back through $1875 to neutralize the downward trend and, ultimately, a weekly close above $1900 to get the bulls back on track. And as the inversion between the 2- and 10-year U.S. Treasuries this week hit the deepest since 1981, growing recession fears continue to move the Gold/S&P500 ratio bullishly higher.
Gold is also receiving a tailwind as the selloff in the banking sector spread across the globe on Friday after regulators announced that they have seized Silicon Valley Bank in the largest bank failure since the Great Recession. The news came on the heels of Credit Suisse reporting a sharp acceleration in withdrawals in the fourth quarter earlier this week, with outflows of more than 110 billion Swiss francs.
During Fed Chairman Jerome Powell's address to the Senate Banking, Housing, and Urban Affairs Committee on Tuesday, discussions of a soft landing for the U.S. economy no longer seem feasible to investors. Powell made it clear that he sees higher interest rates ahead in his battle against inflation and the Fed's unrealistic 2% target.
Powell plainly said that interest rates will rise higher than the central bank initially expected, while the road ahead will be “bumpy.” As the Fed will likely hike until things break, it is only a matter of time until the world’s largest central bank creates a recession. Historically, it has taken up to 12 months for the economy to feel the effects of rate hikes, which would target an economic slowdown to begin by early summer.
Meanwhile, PDAC drew nearly 24,000 attendees this year, more than a third higher than last year’s abbreviated June event when the largest global mining conference returned to in-person programming after a pandemic related pause. While speaking with many of my acquaintances in the mining space, the frustration of last year has been replaced with a feeling of being hesitant to commit more capital until they see some clarity in the sector.
On the deal side, many junior developer and exploration CEO’s I spoke with informed me that although critical metals continue to garner the most attention, general investor funds have begun to recognize opportunities in the deeply depressed precious metals space.
One of the highlights from the conference was the Canadian government aiming to cut four to five years off the time it takes for mining project approval. Natural Resources Minister Jonathan Wilkinson said he was open to trimming the review process by a third during an interview with The Northern Miner as PDAC wound down on Wednesday.
With Canadian mines taking 12 to 15 years on average from discovery to commissioning, this is very good news for a sector in dire need of more consolidation. As global miners and mid-tier producers have recently become more open to acquire deeply depressed juniors looking to permit mine construction, a faster track to production being recognized in juniors takeover targets would likely speed up the process.
In fact, M&A has already returned to the beaten down junior space recently, there have been several prospective deals publicized already this year. The most recent being announced on the last day of PDAC on Wednesday, when growth-oriented gold producer Cerrado Gold (CERT.V) entered into a definitive agreement to acquire Voyager Metals Inc. (VONE.V) in an all-stock deal, valued at C$14.8M.
Voyager is a PEA-stage developer focused on the 100%-owned Mont Sorcier iron-vanadium project near Chibougamau, Quebec. With both companies sharing offices with overlapping management teams, Cerrado is very familiar with the Mont Sorcier project. And with Cerrado having access to capital, the combined entity presents more options to obtain financing for project development. Cerrado will also retain the option to vend out Mont Sorcier at a later date.
After industry leader Barrick recently announced annual production in January that came in at a 22 year low, the cry for replacement of ounces will only get louder. And with the average value Explorer/Development juniors trading at an in-ground gold resource average of under $40 per ounce, I expect the deal-flow to continue.
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Full disclosure: I own shares in Cerrado Gold (CERT.V) and have recommended the stock to Junior Miner Junky subscribers. Please do your own due diligence before considering the purchase of any junior resource stock.