Gold SWOT: Silver Down 6.40% Last Week..

Strengths

• The best performing precious metal for the week was palladium, up 4.62%, as the U.K. sanctioned Nornickel’s major shareholder, oligarch Vladimir Potanin. Nornickel is the worlds’s top producer of palladium, supplying about 40% of world demand. Iraq’s central bank increased its gold reserves by 35% to reach 130.4 tons, with total new purchases of 34 tons, the bank said in a statement posted on its website. The statement included that “gold is one of the most important assets that central banks and international financial institutions maintain.” Ethiopia’s central bank raised its premium by six percentage points to 35% above global prices to buy gold produced by local artisanal miners which source about 65% of Ethiopia’s gold production. Gold has been under pressure for the last quarter as the Federal Reserve began raising interest rates but remains resistant to closing under $1,800.

• Gold remains above $1,800 as U.S. consumer confidence dropped to a 16-month low in June as Americans grew more downbeat on the economy. Bank of America reported its customers transacting in crypto has shrunk by 50% with the bear market in Bitcoin. Bloomberg reported there are almost $4 billion in loans to crypto miners secured against the mining rigs as collateral. With the plunge in Bitcoin, the value of the mining rigs has fallen such that the loans could be called to liquidate the hardware. Wilfred Daye, CEO of Securitize Capital, noted for some miners that borrowed heavy could lead to a shakeout as these leveraged players need Bitcoin prices greater than $20,000 to cover infrastructure and interest rates.
• The Botswana government and Anglo American PLC’s unit De Beers Group have extended their agreement for the sale of rough diamond production from its join venture Debswana by a year to June 2023, reports Reuters. The traditional arrangement has been a 10-year contract; however, negotiations for a new agreement were deferred due to Covid (but are now extended for 12 months again). The De Beers structure in Botswana is unique in that it is a JV with the government (Debswana). De Beers receives 19.2% of profits but is not taxed. It then sells Debswana goods and shares in a mark-up for these, which accrues to its Trading division. Debswana volumes account for the majority of its trading profits.

Weaknesses

• The worst performing precious metal for the week was silver, down 6.40%. The Indian government raised the import tax on gold from 7.5% to 12.5% in a bid to curb imports as the rupee has sunk to a record low. In 2021, India imported the most in a decade.
• Evolution Mining fell by over 30% over the course of the week as it lowered its full-year gold output and trimmed expectations for the following two years. Investors had been expecting Evolution to return to production growth, considering recent acquisitions. Investors are paying more attention to reserve and production growth. Specifically, there is more pressure for miners with declining reserves and production to invest more in growth (preferably organic growth).
• Argonaut Gold completed a C$195 million equity raise with a concurrent US$250 million credit facility to construct the Magino Project. Argonaut’s share price fell 20% for the week and is down over 80% year-to-date. Victoria Gold fell almost 18% this past week as Coeur Mining sold half of their position in Victoria for corporate purposes.

Opportunities

• Stifel’s recent commentary on the global metals and mining industry highlights miners are poised to deliver outsized capital returns to shareholders through dividends and share buybacks over the coming years. While the phase of deleveraging following significant investment in growth over a decade ago is nearing completion, investing in new growth has been a challenge and continues to face obstacles. As a result, dividends and buybacks have become an attractive destination for excess cash sitting idle on the balance sheet. Therefore, Stifel believes that while the larger miners in its analysis are already paying an attractive average dividend yield of 5%, room for higher returns exist in the coming years as buoyant commodity prices and a lack of sizable growth opportunities create an ideal scenario for heightened shareholder returns.
• Junior explorer Dolly Varden Silver has started its 30,000-meter, 99-hole drilling campaign in the Kitsault Valley in northwest British Columbia’s Golden Triangle. As reported by Streetwise Reports, the company is utilizing three diamond drill rigs to upgrade and expand resources at the trend made up of multiple deposits and historic mines. In addition, Dolly Varden is looking to discover new silver and gold mineralization. “When we go to infill, the goal here is to move half of those ounces into the measured indicated category,” President and CEO Shawn Khunkhun said. “And I think what will happen is, we'll also understand the controls of the system, which will enable us to guide the other 50% of the exploration program, which is the really exciting part of the program where we can really move the needle.”
• JPMorgan is cautious on near-term downside to gold equities ahead of concerns around weaker June quarterlies but remain positive on the macro backdrop maintaining its “overweight” call on the sector. Key takeaways from the bank’s market review include: 1) expectations of another set of weak quarterlies across its coverage, but belief that Newcrest may disappoint the most, versus current market expectations, and 2) recession or stagflation is looking increasingly likely on a one to two-year view, supportive of medium-term real yields and the gold price.

Threats

• Sibanye Stillwater provided an update on the impact of the regional flooding at its U.S. PGM operations. The company reported that floods had restricted access to its Stillwater mine. It also confirmed that several bridges in the vicinity of the mine have been damaged while the primary road from Nye to Stillwater has been severely eroded. This means the access to the mine remains restricted requiring the rerouting of water, tailings, and other piping. Remediation works have started but it is expected that production at Stillwater will remain suspended for approximately four to six more weeks.   
• SSR Mining management states that it is aware of the reports and a social media post from the Ministry of the Environment indicating a potential temporary halt of operations at Copler and is seeking a formal response from the government. In the interim, operations are unaffected, and the company does not plan to suspend operations unless ordered to do so by the government. Copler accounts for 45% of operating NAV for SSR Mining.
• According to Morgan Stanley, the PGM miners have historically kept underground mining operations running as usual and dialed back power to the smelters to manage electricity demand during bouts of load shedding. The miners have then subsequently been able to process the backlog given spare smelter/precious metal refining capacity in the industry. However, as the intensity and duration of load shedding steps up, this may no longer be a valid assumption into the future, with all three major producers highlighting the risk to their ability to process metal.

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