Outlook positive for precious and base metals

Gold rewarded investors seeking safety during the volatile first half of 2020, and some experts continue to make a case for the safe-haven asset.

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Macro risks support gold in the medium to longer term, said Daniel Greenspan, a senior equities analyst at CIBC Asset Management, in a June 25 interview. In addition to the pandemic, he cited U.S.-China trade and U.S. social unrest as risks.

In fact, both the macro bull and bear cases support gold’s price in the coming quarters and years, said Greenspan, who manages the CIBC Precious Metals Fund.

The macro bull case is characterized by a global economy that reopens faster than expected, with pent-up consumer demand driving inflation. In a low interest rate environment, the increase in inflation would drive negative real rates, which would be supportive for gold, Greenspan said.

In the bear case, the global economy is slower to recover, which means ongoing quantitative easing, continued low interest rates and greater macro risks — also supportive of gold.

Greenspan also pointed to gold’s performance after the 2008 financial crisis.

“Gold initially sold off and bottomed at the end of October of 2008 at $720 an ounce, before appreciating materially from 2009 to 2011, and reaching a peak of $1,900 in September 2011,” he said.

Since the pandemic, gold bottomed at about $1,467 per ounce in mid-March and has risen to over $1,770.

With the possibility of a prolonged recovery, “the setup for gold remains constructive in the coming quarters and years,” Greenspan said.

At the same time, he acknowledged that potential macro headwinds in the near term could result in central banks selling their gold holdings to shore up currency reserves.

Or, gold’s price could pull back if global markets take on risk.

“The biggest risk is if we see ETF outflows for gold,” Greenspan said.

According to the World Gold Council, the first half of the year saw a record US$40 billion of global net inflows into gold ETFs.

As it stands, however, “we do think risk is to the upside for the gold price from here,” he said.

In its latest commodities price report, TD Bank forecasts the price of gold to reach $1,825 per ounce in the fourth quarter.

Golden stock picks

Among senior producers, Greenspan likes Toronto-based Kirkland Lake Gold. The company operates mines in Canada and Australia, and completed its $4.1-billion acquisition of Detour Gold Corporation earlier this year.

Since Greenspan was interviewed, a proposed class action was filed in U.S. District Court in New York alleging Kirkland Lake made false and misleading statements — related to risks, reserve grade and all-in sustaining costs — that inflated its share price ahead of the Detour purchase.

On Tuesday, Kirkland Lake reported that, year-to-date, its production was 48% higher relative to the first half of 2019.

“We view Kirkland as a high-quality gold producer with low geographic risk and a strong balance sheet,” Greenspan said last month. He added that the stock’s valuation “looks good.”

Another name he likes is Colorado-based Newmont Corp., the result of last year’s merger of Newmont Mining and Vancouver-based Goldcorp.

“We liked the transaction because we thought [Goldcorp] assets were underutilized previously and would do well in stronger hands,” he said. “We expect to see multiple expansion with the integration of the Goldcorp assets into the portfolio.”

Greenspan described Newmont as a “top-tier gold operator,” with a conservative management team, a good balance sheet and “comfortable” geographic exposure.

Newmont shares rose well over 40% in the first half of 2020.

In the mid-cap space, Greenspan cited Vancouver-based SSR Mining, which is in the process of completing its merger of equals with Denver, Colo.–based Alacer Gold — a deal that could add value for both sets of shareholders over time, he said.

The high-quality company has a strong balance sheet and solid management, he said.

Betting on base metals

To develop an outlook for base metals, Greenspan said he analyzes data from China.

“China is effectively the marginal buyer of every incremental ton of base metals and bulk commodities produced globally,” he said.

China appears to be exhibiting a V-shaped recovery following its Covid-19 outbreak. The country is “stimulating its economy with infrastructure spending that’s positive for base metals in bulk, and is helping hold commodity prices up,” Greenspan said.

Inventories for copper and iron ore are being drawn down in China, which implies good demand that’s supportive for prices, he said.

At the same time, supply risks are a consideration as the pandemic spreads to key copper supply countries such as Chile and Peru, he said.

Regardless, his outlook for copper over the medium to long term is positive, in large part because copper is critical to green energy production.

“The electric grid and infrastructure required to deliver green energy is copper intensive,” he said.

“A significantly higher copper price will be required over the medium to longer term, because the existing supply base won’t be able to meet demand, and new mines will have to be built to meet the shortfall.”

Copper’s price would need to surpass $3 to $4 (per pound) to make the next generation of mines work, he said.

A name he likes is Vancouver-based First Quantum Minerals, which he described as higher risk/higher reward. For example, the company incurred significant costs over the last couple of years to build a new copper mine in Panama but recently reached a free cash flow inflection point.

“The market has overestimated the ramp-up risks at their new mine and has mispriced some of the recent political risks that the company has faced,” Greenspan said.

He sees value in the stock over the medium term as the company enters a period of free cash flow generation and de-leveraging.

Within small-cap base metals, Greenspan’s top pick is Montreal-based Champion Iron, which operates the Bloom Lake iron ore mine in Northern Quebec. The company acquired Bloom Lake from a bankruptcy protection in April 2016 and recommissioned it.

“The acquisition of Bloom Lake was a shrewd transaction, and the demonstration of consistent positive cash flow will drive a re-rating in the share price,” Greenspan said.

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