Happy Easter everyone. The long weekend was a much needed break in what has felt like an endless flurry of activity since gold started to move in January. In the last little bit the yellow metal has taken a breather, something I reflect on later in this note.
The weekend wasn't all holiday - I sent out a new recommendation to subscribers on Sunday, in advance of a buying opportunity that unfolded on Monday, and continue to prepare for the Metals Investor Forum that is coming up on May 14th. The company roster is coming together nicely and ticket signups are flooding in. Click here to secure yours.
And now, this week's snippet from the Maven Letter. A comment on challenges for miners in Chile, a look at short list of independent brokerages left after last week's PI-Wolverton-Global Securities merger, and my latest perspective on gold and positioning.
In The News…
Chile churns out almost a third of the world’s copper. It is hard to overstate the country’s significance when it comes to the red metal. That is why I highlighted Chile’s mining risks as potential black swans in my copper outlook in February, saying that water or labour issues had could derail production and kick-start a copper price move.
This week we got news of new water and labour issues in Chile.
It’s Kinross facing a water issue. Chilean regulators have issued a shutdown notice for Kinross’ Maricunga heap-leach gold mine, saying the mine’s water walls are causing “irreparable environmental damage”.
Maricunga is in the Atacama Desert, commonly cited as the driest place on earth. It is a gold mine but it is surrounded by massive copper mines. All these mines need water to function. The older operations generally have wells while newer mines have needed desalination plants and often hundreds of kilometers of pipeline to bring the treated ocean water to site.
Maricunga has been operating since 1998 and relies on well water. In its shutdown order, La Superintendencia del Medio Ambiente (SMA) said the mine has drained “at least 70 hectares of wetlands located in the Black Lagoon Francisco and Santa Rosa Laguana lake complex”. The agency reportedly relied on field samples and satellite images over a 30-year period in making its decision.
Kinross, however, says any change in groundwater levels is due to a prolonged drought across the region.
The case is interesting for its precedent, even if not really for its details. Maricunga is one of Kinross’ highest-cost operations, with all-in sustaining costs averaging US$1,010 per oz. last year. Several analysts have pointed out the mine could well be closed in the near term as Kinross is looking at another large pre-strip to access a new ore area, something that might not be profitable unless gold continues to strengthen.
However, miners around Maricunga are undoubtedly watching this water conflict with great interest. The environmental agency issued the notice but it does not take effect until regulators in Santiago officially uphold it. If they do, this quick and unexpected hit against an established mine would mark an escalation in the fight over water rights in the most important copper region in the world.
At the same time, a key union of Chilean copper mines is calling for strike action. The Confederation of Copper Workers called for its members to strike on March 22, to protest government moves designed to limit the ability of unions to go on strike. It does not appear that workers heeded the call, but tension between miners, operators, and government in Chile’s copper region is always important.
The List Shrinks Again
News a few days ago that PI Financial is acquiring Wolverton Securities and Global Securities. In other words, three of the few remaining independent Vancouver-based dealers are becoming one, shortening what in the last few years has become a short list of small, resource-focused brokerage shops.
Declining commodity prices did not only hurt miners and explorers: the small banks that advised their transactions, led their financings, and told their stories also took a beating. Salman Partners wound itself up late last year. Dundee Securities left the retail brokerage business, selling its unit to Euro Pacific. Octagon Capital and Jacob Securities went bust amidst compliance violations. Byron Capital, EdgeCrest Capital, and Fraser MacKenzie all went out of business.
In fact, the Investment Industry Association of Canada says 50 small houses, representing a quarter of the banks in the business, have either folded or been acquired in the last three years.
The bigger boys haven’t fared much better. GMP Capital, one of Canada’s largest independent brokerages, announced a major restructuring in January, laying off a quarter of its work force and erasing its dividend. Canaccord Genuity has also laid off staff while seeing its share price crater.
The commodity bear market is one major cause. Technological and regulatory changes are another.
Big banks pushing into the investment banking scene for small and mid-cap companies made a bad situation worse for small houses, who could not tag cheap loans into a finance package the way a big bank can.
As a result, I would say there are now only perhaps eight brokerages left in the junior mining game: PI (with the absorbed Wolverton and Global), Haywood, Leede Jones Gable, Mackie (which already took over Jordan Capital), Sprott, Richardson GMP, Euro Pacific, and Dundee Capital Markets. The bigger houses also play a role – Macquarie, Canaccord, Raymond James, and the big banks – but for reasons ranging from regulatory compliance to risk adversity they are doing less and less on the junior end of the spectrum.
The change matters. For one, with fewer houses competing for business the terms sheets offered companies looking for a financing lead will not be as good. Secondly, the advent of online trading has eroded the importance of the broker-client relationship, cutting off one key transmission route for stock tips and thus limiting the potential for strong share price moves.
Then there’s the simple fact that, without brokers talking up the deals they like, retail just doesn’t hear about mining stocks. Without retail our business cannot succeed, so we need to figure out an answer. Part of that answer is that full service brokers can be very valuable, providing their clients with access to quality deals, research, and financings.
Instead of that, however, many investors are doing their own research and trading through online accounts. That works, but only to a point, for both investors and companies.
On The Macro
Everything is relative…and so it should be.
Gold had a bad week.
Compared to recent years it was fine, but it was weak relative to the last three months:
It’s just fine to see gold as underperforming of late, because it has. However, what really matters is the big picture.
Today, for example, gold is down several percent. US stocks are too, a correlation some find concerning, while the US dollar is up.
Is the golden safe haven trade dead? It was only last week that Yellen shied away from a rate raise. Shouldn’t gold have gained more and for longer? Shouldn’t the greenback have hurt more?
No, because the market’s fixation on interest rates means the decision was factored in very quickly and traders immediately moved on to the next question: what will the Fed do next?
To answer that, we need to weave together economic realities, how the Federal Reserve makes decisions, and market performance, and then add in a sprinkle of politics.
I continue to see abundant weakness in the global economy. Global growth just keeps slowing, hindered by both developed markets like Japan and emerging economies like Brazil. World trade is shrinking. The US is on tenuous footing, with corporate earnings declining, energy sector defaults imminent, and manufacturing in recession.
All of this matter to the Federal Reserve…at bit. The Fed is very focused on unemployment, inflation, and GDP growth. On the first front, unemployment is low (if you cast aside important details about underemployment and part-time work). Lots of people working supposedly means inflation is coming. It was to get ahead of that coming curve that Yellen raised rates in December.
Unemployment is still low…so why didn’t Yellen raise again last week? Because reality caught up. Markets tanked in January, on the expectation that the Fed would continue tightening. The markets like easy money, not tightening. The crash was enough to change the Fed’s course – because even though market performance is not actually a Fed mandate, market performance is seen as a Fed goal because markets reflect economic performance.
Even though markets had mostly healed before March 16th, Yellen could not tighten against a market that had recovered because it no longer expected tightening. It would have undone the upswing.
Now the question is: what will happen in June? The Fed will be looking at those ‘good’ unemployment numbers. It also desperately wants to raise to create a cushion of possible cuts should the US economy stutter. And it cannot raise in September, because a rate move so close to the presidential election would spark endless controversy.
So a raise in June looks likely to me.
I think it looks likely to others too.
That means the market is starting to price that expectation in. Higher US rates means a stronger dollar, weaker gold, and downside for US equities.
June 15th is still a ways off. And not everyone thinks the way I do, not by a long shot. But the framework nevertheless explains (1) some weakness in gold, (2) concurrent weakness in US stocks, and (3) dollar strength. These trends will wax and wane while the decision is still months off, but the theme is there.
What it means for gold investors: I think we have a window, between now and June, to get our bids in.
Gold will rise and fall during this window, which means some days will be better than others. But if my playbook is correct, as we approach June 15th and expectations of a rate hike rise, gold will start an upswing that could well continue through summer. As I’ve pointed out before, gold loses ground every summer except when a new bull market is getting underway.
In her letter, Resource Maven explains what she is buying and selling, and why. Maven has bought into several of the markets best - performing stocks well ahead of the curve. She regularly identifies exciting new exploration opportunities and manages the inherent risk by selling some into speculative gains. And the mine builder and operator stocks that form the basis of the portfolio give strong, ongoing leverage to the rising prices of gold and silver. She has your precious metal bases covered.
Besides your far superior record, your format is the best I’ve seen in PM newsletters. It’s so easy to go back for older info on companies when appraising my portfolio. This compliment is from someone who has hired about a dozen letter writers so it has perspective. Keep up the good work.
BTW - I really enjoy reading your newsletter - very comprehensive and you do an excellent job of integrating a macro perspective into your analysis.