As supply chain constraints linger across the globe, prospective commodity allocations are front and centre.
Canadian inflation was 7.6 per cent in July, down from 8.1 per cent in June, planting the notion that prices may have peaked, signaling the beginning of the end of the post-pandemic surge in demand.
Gasoline – responsible for one-fifth of inflation in recent months – declined from an average of C$2.07 per litre in June to $1.88 in July with a further decrease expected in August.
Preliminary figures from Statistics Canada suggest retail sales fell by 2 per cent in July after increasing 1.1 per cent in June.
Shipping costs, housing prices and key commodities such as wheat and copper have also eased, pointing to an encouraging deflationary trend.
Though Canadians are breathing a little easier for the moment, price pressure relief will likely take years to be fully realized due to the Russia-Ukraine war, a stalemate on the fate of Iran’s oil supply, volatile industrial activity due to COVID protocols, and diminished but undeterred consumer demand still far outweighing global economic output.
In the interim, Canadian businesses have to raise prices to quell demand, which has resulted in over half of CPI’s goods and services rising faster than five per cent. As the Bank of Canada deliberates its next interest rate decision on September 7th, active investors should consider whether to take advantage of supply-demand dislocations through exposure to commodities.
While equities and commodities have been positively correlated over the past decade, primarily due to generationally low interest rates, changes in monetary policy have historically led to greater equity volatility in comparison.
This brings us to the first role commodities can play in a portfolio, namely as a hedge against inflation. When prices rise, tangible assets like metals, oil, lumber and finished products show this increase. Gold, for example, has remained near all-time highs throughout the pandemic, hovering between US$1,700 and US$2,000 per ounce.
Conversely, equities tend to suffer under rising costs because they represent a present picture of companies’ future expected cash flows. If an investor is allocated to a diversified sleeve of commodities producers, with capital structures poised to take profit as the Bank of Canada works toward its 2-per-cent inflation target, any pain from equities will likely be less impactful.
Our second potential role for commodity investments is exposure to the enablers of industry. Companies in the mining, materials and energy sectors are foundational for economic flourishing because they supply the resources that make innovation possible. They allow human intelligence to find form in the real world by transforming fuel, metals and consumables into the building blocks of the future. This is perhaps the longest and most reliable secular trend in the markets today, regardless of inflationary conditions, meriting proper due diligence from any investor fortifying their core holdings.
If your core holdings are all accounted for, then cyclical plays, our final vertical for commodities theses, may have something to offer you. Cyclical allocations are short-term investments based on the fundamentals and macro outlook for specific commodities.
Wheat, for example, has been up almost 100 per cent over the past three years, including a recent jolt from Russia’s invasion of Ukraine, a world-leading producer. This opens the commodity to considerable volatility depending on how the war develops, which could mean gains on both the short and long sides for the correct forecast.
Natural gas, up over 300 per cent over the past three years, posits a similar scenario, where Russia, the world’s second-largest producer, may further weaponize its supply to satisfy its geopolitical objectives. As winter approaches, numerous European countries are reeling from the Soviet nation cutting off shipments of the commodity, setting the stage for wild swings in market sentiment over the short term.
Now that we have a working framework in place for adding natural resources to a portfolio, let’s delve into stories from three miners making the rounds across our investor community over the past week:
Midnight Sun Mining (TSXV:MMA) begins drilling at Solwezi
Midnight Sun announced that drilling has commenced on its Solwezi Licences in Zambia.
The company is planning up to 4,500 m of diamond drilling in up to 29 drill holes on the prospective copper property.
The drill program is based on data generated by Rio Tinto Mining and Exploration Limited.
President and CEO Al Fabbro sat down with Daniella Atkinson to discuss the exploration program.
Midnight Sun Mining (MMA) closed down by 5.71 per cent over the past week trading at $0.16 per share.
Giga Metals (TSXV:GIGA) and Mitsubishi form JV to develop Turnagain Nickel Project
Giga Metals and Mitsubishi will establish a joint venture company, Hard Creek Nickel, to develop the Turnagain Nickel Project in northern B.C.
Mitsubishi will acquire a 15-per-cent equity interest in Hard Creek for a cash payment of $8 million. Giga will receive the remaining 85 per cent interest for contributing all related assets for the project.
Giga will operate the joint venture and work toward completing a pre-feasibility study for Turnagain by the first half of 2023.
CEO Mark Jarvis spoke with Daniella Atkinson about the partnership.
Giga Metals (GIGA) closed up by 8.11 per cent over the past week trading at $0.40 per share.
Mountain Boy (TSXV:MTB) advances field work at Telegraph in B.C.’s Golden Triangle
Mountain Boy Minerals’ exploration program at its Telegraph Copper-Gold Project continues to indicate the presence of extensive mineralization.
As a result of the 2022 field program, the company has expanded the property to include the northeast extension of the prospective Strata Gossan.
Ongoing field work will include further mapping, sampling and ground truthing the preliminary geophysical data.
CEO Lawrence Roulston joined Daniella Atkinson to discuss the program’s highly encouraging initial results.
Mountain Boy Minerals (MTB) closed down by 8.7 per cent over the past week trading at $0.10 per share.
Tune in next Friday afternoon for a look into The Market Herald Canada’s Weekly Market Movers.
