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Daniel Greenspan, CIBC, senior equity analyst, metals and mining.
In terms of the outlook for gold, when I look around the world, I still see a lot of macro risks and a lot of economic factors that remain constructive for gold in the medium to longer term. So right now there are continuing pandemic risks in major regions, U.S.-China trade risk is rising, and there’s social unrest in the U.S.
Over the medium term, there’s U.S. election risks. And, longer term, we see negative real interest rates, unlimited quantitative easing, and new government stimulus being proposed. And we think these are all factors that remain supportive for the gold price outlook.
When we think about what the path forward is from here for gold, we look at the global macro outlook, and we think that both the bull and the bear case can be supportive for the gold price in the coming quarters and years.
When we think about the macro bull case, we think that it’s a faster-than-expected reopening of the global economy and things getting back to normal. Under that scenario, we think there’s pent-up consumer demand that leads to inflation, which in a low interest rate environment drives negative real rates, which should be supportive for gold.
When we think about the bear case, that’s if the global economy is slower to recover, and that implies indefinite QE [quantitative easing] and continued lower interest rates for longer and higher macro risks, which also could be supportive for gold.
When we look at gold now, we can’t help but look back to 2008 and the global financial crisis as a guide for today. So far, gold is behaving very similarly to how it did during the 2008 crisis. At that time, 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. This year, gold bottomed at $1,485 in mid-March and has pushed to $1,750 since then. So, with the history of the GFC in mind, I still think the setup for gold remains constructive in the coming quarters and years.
If there are near-term potential headwinds, we could see some central banks selling to shore up currency reserves. If there’s a risk-on sentiment that takes over in global markets, gold could pull back. Certainly, jewelry demand remains weak. And the biggest risk is if we see ETF outflows for gold.
But we do think risk is to the upside for the gold price from here.
When we look at base metal and bulk commodity price outlooks, and here we’re talking about copper, zinc, nickel, iron ore and met[allurgical] coal, we spend a lot of time looking at and analyzing data out of China, as China is effectively the marginal buyer of every incremental ton of base metals and bulk commodities produced globally.
One observation we note through several cycles is that when the rest of the world slows, China tends to be a buyer of these commodities, and this time it’s no different. As of now, it appears that China is in the midst of a V-shaped recovery, and it’s stimulating its economy with infrastructure spending that’s positive for base metals in bulk, and is helping hold commodity prices up. We’re seeing inventories for key metals draw down in China, both for copper and iron ore, which implies good demand, which is supportive for prices.
For copper, specifically, we saw support for the price at the top of the cost curve, which we think is around $2.25 a pound. We’re at $2.65 a pound now as China’s come back pretty strongly as it recovers from the pandemic. At the same time, supply risks in copper are starting to emerge as the virus is picking up steam in key copper supply countries like Chile and Peru.
Iron ore has also been really strong of late, and that reflects good seasonal demand from China as the spring and early summer are big construction seasons. At the same time, there’s also significant supply risks out of Brazil, a key exporting country.
Looking a bit further out, we really like the outlook for copper over the medium to long term. A big part of our thesis here is that a shift to a lower carbon-intensive energy sector will have a material positive impact on demand for a wide range of commodities, and copper will be a critical component to green energy production. For example, there’s high copper intensity in electric vehicles, with wind power and in solar power. At the same time, the electric grid and the infrastructure required to deliver that green energy is very copper intensive as well. So with that in mind, we think 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. In our view, that means a plus $3 copper price, and maybe even $4 is needed to make the economics of the next generations of mines work.
In terms of the equities and the stocks that we like, in the gold space, Kirkland Lake we like in the senior gold cap space. We view Kirkland as a high-quality gold producer with low geographic risk and a strong balance sheet. This company operates mines in Australia and in Canada. We like the acquisition of Detour Gold that they made earlier this year and see potential for optimization of that asset. We like the exploration upside across the portfolio at Fosterville in Australia and at Macassa and Detour in Ontario. We think completion of the new shaft in Macassa and optimization at Detour Lake can be value drivers for Kirkland Lake over the medium term. We also think the valuation for the company looks good as well.
Second, we like Newmont. Newmont is a top-tier gold operator. They have a conservative, incredible management team, a good balance sheet and comfortable geographic exposure. We were counter-consensus on the Goldcorp deal. We liked the transaction because we thought those assets were underutilized previously and would do well in stronger hands, which we think Newmont is. We view Newmont as a relatively high-quality gold producer with consistent operations and a credible pipeline of growth projects that we think can sustain their production profile over the medium term. We expect to see multiple expansion with the integration of the Goldcorp assets into the portfolio and the execution of their full potential program at those assets.
In the mid-cap space, we like SSR Mining. This is a company that’s in the process of completing their merger of equals with a company called Alacer Gold. Here’s an example of two management teams and boards that were not entrenched and were able to come together to find a deal that could add value for both sets of shareholders over time. Again, here, we think this is a solid management team with a strong balance sheet who’ve been consistent operators and disciplined capital allocators over time. Looking forward, we expect to see free cash flow generation and further balance sheet strength to help the company outperform. We view SSR as a high-quality mid-cap company.
Turning to the base metals, we like First Quantum. We recognize that this is definitely a higher-risk, potentially a higher-reward situation. Our First Quantum thesis is based around the company just now reaching a free cash flow inflection point after spending a bunch of money over the past couple of years building a big new copper mine in Panama. We think 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. We see value in the stock over the medium term that we expect to be realized as the company enters into a period of free cash flow generation and de-leveraging. We recognize this stock gives investors outsized torque to copper.
And then, finally, in small-cap base metals, our top pick is a company called Champion Iron. Champion is operating the Bloom Lake iron ore mine in Northern Quebec. We view Champion as an underappreciated iron ore producer. We think the acquisition of Bloom Lake was a shrewd transaction and believe that the demonstration of consistent positive cash flow will drive a re-rating in the share price. We think the market underappreciates the value to Champion shareholders of the capital sunk into Bloom Lake by previous owners that will now benefit existing shareholders. Champion produces high-quality iron ore, and we expect the quality premium to remain wider than the historical average, which further supports production from Bloom Lake. We see further upside with execution of their phase two expansion at the mine when it gets approved by the board.