Monday, April 6, 2020
Minerals Industry Report
Metals & Mining: 2020-1Q Review and Outlook
Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.
Listen To The Analyst
Refer to end of report for Analyst Certification & Disclosures
- Mining stocks underperformed. During the first quarter of 2020, mining companies (as measured by the XME) fell 44.9% compared to 20.0% for the broader market as measured by the S&P 500 index. The VanEck Vectors Gold Miners (GDX) and Junior Gold Miners (GDXJ) ETFs were down 21.3% and 33.5%, respectively.
- Favorable precious metals outlook. In our view, a combination of fiscal and monetary stimulus, rising U.S. government deficits, debt and lower-for-longer interest rates are supportive of gold prices. While silver is increasingly viewed as an industrial metal, we think its wide discount to gold as a monetary metal will narrow.
- Base metals story improves longer term. Due to the outlook for slower economic growth both in the United States and globally, the short-term outlook for base metals is uninspiring. Longer-term, we think the outlook is more favorable, particularly for copper, which should benefit from growing demand related to electric vehicle and other industrial applications.
- Mining stocks offer diversification benefits. In our view, mining stocks are an attractive way to gain exposure to metals given their leverage to strengthening metals prices. Precious metals equities may provide a hedge against volatility in the equity markets and diversification benefits.
Metals & Mining: 2020-1Q Review and Outlook
During the first quarter of 2020, mining companies (as measured by the XME) fell 44.9% compared to 20.0% for the broader market as measured by the S&P 500 index. The VanEck Vectors Gold Miners (GDX) and Junior Gold Miners (GDXJ) ETFs were down 21.3% and 33.5%, respectively. During the first quarter, gold futures prices increased 4.4%, while silver futures prices declined 21.1%. With respect to base metals, copper, lead and zinc futures prices were down 20.9%, 9.0% and 16.2%, respectively. Concerns about economic growth, compounded by the impact of the coronavirus, negatively impacted the demand and price outlook for base metals. The broad market sell-off in March also weighed on gold, normally perceived as a safe haven, as investors sold positions to raise cash, deleverage and/or offset other losses.
In our view, a combination of fiscal and monetary stimulus, rising U.S. government deficits, debt and lower-for-longer interest rates are supportive of gold prices. Investors typically buy gold as a store of value and with interest rates expected to remain low for the foreseeable future and negative-yielding debt in some countries, investors may increase their exposure to precious metals. Additionally, while stimulus is required to mitigate the coronavirus’ negative impact on global economies, it could lead to inflationary pressures down the road. Increasing government deficits and debt could act as a drag on economic growth, support lower interest rates and eventually weaken the U.S. dollar.
Growing silver demand for use in solar panels, electronics and medical applications gives silver versatility as both a monetary and industrial metal. Silver's role as an industrial metal may explain why the historical gold-to-silver price ratio has widened during the past few years. However, we expect investment demand for silver to increase as investors consider the wide discount between the two metals and silver's upside potential. Silver generally lags gold during periods of rising demand for precious metals. Silver prices could also benefit from tighter supplies. A significant source of silver production is as a by-product of base metals production. If demand for base metals slows and production declines, the supply of silver could be negatively impacted. Additionally, current silver prices provide producers with little incentive to expand production capacity.
Due to the outlook for slower economic growth both in the United States and globally, the short-term outlook for base metals is uninspiring. Longer-term, we think the outlook is favorable, particularly for copper, which should benefit from growing demand related to electric vehicle and other industrial applications. We note that for copper, the International Copper Study Group (ICSG) recently released preliminary data for December 2019. The data indicates that world mine production declined by 0.7% in 2019. World refined production was down 0.6%, while the world refined copper balance for 2019 indicated a deficit of 340,000 tonnes. Investor interest in base metals-oriented companies could grow as the market begins to assess longer-term supply/demand and pricing trends for metals such as copper.
Metals & Mining | Apr 06, 2020
All statements or opinions contained herein that include the words "we", "us", or "our" are solely the responsibility of Noble Capital Markets, Inc.("Noble") and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.
This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any security mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not indicative of future results. Noble accepts no liability for loss arising from the use of the material in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to Noble. This report is not to be relied upon as a substitute for the exercising of independent judgement. Noble may have published, and may in the future publish, other research reports that are inconsistent with, and reach different conclusions from, the information provided in this report. Noble is under no obligation to bring to the attention of any recipient of this report, any past or future reports. Investors should only consider this report as single factor in making an investment decision.
This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or discussed to another party, without the written consent of Noble Capital Markets, Inc. ("Noble"). Noble seeks to update its research as appropriate, but may be unable to do so based upon various regulatory constraints. Research reports are not published at regular intervals; publication times and dates are based upon the analyst's judgement. Noble professionals including traders, salespeople and investment bankers may provide written or oral market commentary, or discuss trading strategies to Noble clients and the Noble proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research report.
The majority of companies that Noble follows are emerging growth companies. Securities in these companies involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in Noble research reports may not be suitable for some investors and as such, investors must take extra care and make their own determination of the appropriateness of an investment based upon risk tolerance, investment objectives and financial status.
Company Specific Disclosures
The following disclosures relate to relationships between Noble and the company (the "Company") covered by the Noble Research Division and referred to in this research report.
Noble is not a market maker in any of the companies mentioned in this report. Noble intends to seek compensation for investment banking services and non-investment banking services (securities and non-securities related) with any or all of the companies mentioned in this report within the next 3 months
ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE
Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ 'Best on the Street' Analyst and Forbes/StarMine's "Best Brokerage Analyst.”
FINRA licenses 7, 24, 63, 87
This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for any recipient particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess, or seek advice from their advisors, on whether any relevant part of this report is appropriate to their individual circumstances. If a recipient was referred to Noble Capital Markets, Inc. by an investment advisor, that advisor may receive a benefit in respect of
transactions effected on the recipients behalf, details of which will be available on request in regard to a transaction that involves a personalized securities recommendation. Additional risks associated with the security mentioned in this report that might impede achievement of the target can be found in its initial report issued by Noble Capital Markets, Inc. This report may not be reproduced, distributed or published for any purpose unless authorized by Noble Capital Markets, Inc.
RESEARCH ANALYST CERTIFICATION
Independence Of View
All views expressed in this report accurately reflect my personal views about the subject securities or issuers.
Receipt of Compensation
No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public appearance and/or research report.
Ownership and Material Conflicts of Interest
Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.
|NOBLE RATINGS DEFINITIONS
||% OF SECURITIES COVERED
||% IB CLIENTS
|Outperform: potential return is >15% above the current price
|Market Perform: potential return is -15% to 15% of the current price
|Underperform: potential return is >15% below the current price
NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from "Buy" to "Outperform", from "Hold" to "Market Perform" and from "Sell" to "Underperform." The percentage relationships, as compared to current price (definitions), have remained the same. Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone.
Noble Capital Markets, Inc.
225 NE Mizner Blvd. Suite 150
Boca Raton, FL 33432
Noble Capital Markets, Inc. is a FINRA (Financial Industry Regulatory Authority) registered broker/dealer.
Noble Capital Markets, Inc. is an MSRB (Municipal Securities Rulemaking Board) registered broker/dealer.
Member - SIPC (Securities Investor Protection Corporation)
Report ID: 11369
Metals & Mining | Apr 06, 2020