Due to higher-than-expected U.S. inflation, investors are warming to the prospects of mining stocks.
U.S. inflation for August came in at 8.3 per cent YoY, down for the second straight month from 9.1 per cent in June, but comfortably above the 8.1-per-cent consensus. Core inflation, which strips out volatile food and energy prices, rose to 6.3 per cent from 5.9 per cent in July.
The data prompted the S&P 500 to shed more than 4 per cent on Tuesday as investors piled into bonds and cash, resigned to wait on the sidelines for calmer waters.
The TSX, for its part, fell just under 2 per cent, unsurprisingly mirroring the benchmark index of its most important trade partner.
The U.S. inflation data has increased the probability that Statistics Canada’s next consumer price index report, scheduled for September 20, will show similar resiliency and cause a rise in risk-off sentiment among Canadian investors.
The thesis here, that inflation will remain higher for longer, has enhanced the appeal of mineral exploration and development companies due to their ability to make inflation work in their favour.
They achieve this by their very nature since the metals and minerals they’re exposed to tend to trend upward amid a higher cost of living, contingent on supply. Select issuers will also stand out among the herd by further optimizing this effect through efficient capital structures, enforced by eagled-eyed management, that place more profits in shareholders’ hands.
In the interest of making the most of this state of affairs, let us delve into some key vectors in the mining investing landscape before introducing three resource-centric stories on our investor community’s radar this week.
Value preservation: Given silver and gold’s millennia of history as sources of value, it’s common for investors to increase their allocations to them in times of market crises to protect their portfolios. These metals act as safe havens when risk assets waver because human psychology evolved to view them in this way. The dynamic is so entrenched and dependable that holding gold and silver over the long term – in risk-appropriate quantities – is widely considered a sound investment strategy.
While owning the metals themselves has its benefits, returns can be multiplied through explorers with prospective resources and minimal to no dilution or producers set up to cash in on wide spreads between their extracts and the going price per ounce.
Growth by electrification: Over the past few years, the global transition from fossil fuels to electricity has experienced considerable momentum, so much so that it is now table stakes to offer an environmental mission statement, almost regardless of the nature of your operations. It is then only logical that more attention is being paid to the metals powering mass electrification.
Lithium, a key component of electric vehicle (EV) batteries, is in short supply due to rising EV demand. While drivers purchased 6.6 million EVs in 2021 – doubling from 2020 – global lithium production sufficed to manufacture only 11.4 million EV batteries through year-end. With Q1 2022 sales coming in at over 2 million vehicles and lithium mines’ 4-to-7-year timeframe to become operational, the metal is primed to soar in price above and beyond its 5x rise over the past 18 months.
Copper, another metal essential to electrification, is a key input for solar panels, wind turbines, and wires for electrical grids, as well as EVs and their charging stations. According to S&P Global Market Intelligence, global annual copper production will have to double from 25 to 50 million metric tonnes by 2035 to have any hope of reaching net-zero emissions by 2050. Given how unlikely it is that major governments will rally to coordinate their mining industries, lacking sufficient incentives, it is reasonable to expect a long runway of persistent price inflation.
Nickel – which comprises approximately 80 per cent of the cathode in a lithium-ion battery – is also heading toward a supply crunch as EVs inch toward market dominance and new mine projects become entangled in governmental red tape. This will only be exacerbated by some of the metal’s more widespread uses – namely, preventing steel from rusting and enabling higher energy density and greater storage capacity in laptop and cellular phone batteries – placing a premium on clear paths toward securing reliable sources.
The upshot is that energy metals, which also include cadmium, cobalt, uranium and rare earth elements, are positioned to benefit from a generational tailwind that makes their explorers and producers prime targets for your portfolio.
Hidden gems: One of the most value-accretive as well as underappreciated qualities of mineral explorers is their tendency to not have any cash flow until locating a resource and ramping it up to production.
These issuers, having no other recourse, often dilute their shareholders or take on debt to determine if their projects will prove economical in the long run. This can make for a scary lake to fish in for inexperienced investors hoping to match worthwhile allocations with conventional metrics indicative of a good business, such as price/earnings, price/book and price/cash flow.
For other, more astute investors, the opportunity set can become rather enticing if they possess a special set of skills, including but not limited to:
- A deep comfort with assessing the likelihood of a mineral resource finding its way out of the ground
- The ability to withstand long bouts of undervaluation without losing solvency or conviction as mines navigate years of permitting and construction
- A firm understanding of the macro commodity cycle to tactically sidestep slowdowns and capitalize on bullish runs
Now that we’ve established a general sense of how to find your footing in the mining space, let’s introduce three related stories that made the rounds through our investor community over the past week.
Baselode (TSXV:FIND) reports uranium mineralization from ACKIO discovery
Baselode Energy has unveiled geochemical assay results from 28 drill holes from the ACKIO discovery.
Results include 17 drill holes with uranium mineralization, 10 of which are graded above 0.5 per cent U3O8.
A total of 44 drill holes at ACKIO have intersected elevated radioactivity.
CEO James Sykes spoke with Daniella Atkinson about this latest round of results.
Baselode Energy (FIND) is beating the TSX over the past year and is up almost 500 per cent over the past five years (data as of September 15, 2022).
Green River Gold (CSE:CCR) confirms magnesium and nickel values
Green River Gold released the latest round of assay results from its Quesnel Nickel Project in B.C.
Assays confirm 20.30 per cent magnesium along with 0.188 per cent nickel and 0.144 per cent chromium.
Assay results for nickel and chromium are relatively consistent with the X-ray fluorescence results reported previously.
CEO Perry Little sat down with Sabrina Cuthbert to discuss the results.
Green River Gold (CCR) is down by 85 per cent since inception but up by 25 per cent over the past year, setting the stage for a potential turnaround story (data as of September 15, 2022).
Heritage Mining (CSE:HML) provides field program update and completes airborne geophysical survey at the Drayton-Black Lake Project
Heritage Mining has reported preliminary results from its ongoing exploration program at its flagship Drayton-Black Lake Project in Ontario.
Management believes the results are encouraging and demonstrate the project’s extensive high-grade gold mineralization.
President and CEO Peter Schloo joined Sabrina Cuthbert to discuss the program.
Heritage Mining (HML) went public on the CSE this past August and is down by 25 per cent since inception, in spite of its flagship project’s high-grade gold tenor (data as of September 15, 2022).
Join us next Friday afternoon for a survey of the week’s market moving stocks on The Market Herald Canada.
