Think positive (earnings)

Commodity traders and miners benefit from a weakening US dollar. Nearly all commodities are bought and sold in dollars. This means that more dollars are required to buy goods if the currency’s value has fallen. Further, given that commodities are traded worldwide, a weaker dollar means commodities are less expensive in other currencies – this increases demand.


Think positive (earnings)

Most commodity prices showed a breath of life over the last month or so (up to Dec. 13), which happened in concert with a U.S. dollar weakening (on more tempered language from central banks about the future pace of rate hikes as data emerges indicating areas of economic slowdown and job market shuffling). Still the economic numbers are mixed, and uncertainty abounds as to when rate hikes will cease.

That being said, mining-related indexes have buoyed and await the next leg in commodity price action. However, exploration companies are the bastions of value creation in times when markets pay for little, but it doesn’t come without risk and in this context we look for a combination of management and project portfolio to mitigate externalities, and highlight potential differential outcomes.

Ripe time for producers to start spending

Indeed, now is a ripe time for producers to unfetter their wallets to secure discovery and growth potential given the relative strength of their balance sheets and low-tide sentiment for much of the junior exploration sector.

Our fourth (and final) Junior Exploration Report for 2022 ventures forth with the sense of change afoot, and precious metals having gained momentum into year’s end. With the VanEck Junior Gold Miners ETF (NYSE-Arca—GDXJ) down about 13.4 per cent year-to-date (as of mid-December), somewhat in contrast with the broader indexes, the producer and explorer pricing divide has ever widened. But opportunities await on an idiosyncratic basis.

The gold market has responded favourably to signals by U.S. Federal Reserve officials that the Fed is now preparing to slow the pace of rate hikes at their December meeting. Fed officials suggest they could lower rate hikes to 50 basis points, which marks a 25-basis point drop from the 75-basis point rate hike at each of their last four meetings.

In addition, the U.S. Dollar Index (DXY) has continued its slide over the last month, dropping seven per cent from about 112.92 when gold bottomed on Nov. 3 to less than 105 from Dec. 13 onward. A slowing of rate hikes in conjunction with a weakening dollar clearly bode well for the yellow metal, and as gold moves higher, the equities should also respond.

We continue to believe that gold remains in a longer-term secular bullish uptrend, and with mining equities trading at multi-year lows relative to both gold and the broader equities overall, they present an attractive investment opportunity. We also believe consolidation will continue as larger companies look to take advantage of acquisition opportunities to replace and grow both their production and reserves/resources.

Geordie Mark, Kerry Smith, Pierre Vaillancourt, and Colin Healey form Haywood Securities’ mining research team.

This is an edited version of an article that was originally published for subscribers in the January 2, 2023, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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