Resource Insight – February 2024

Three Metals In The Rough

Overview of 2023

The past year proved to be profoundly disheartening for the Canadian junior mining sector.  According to our assessments, the sector experienced a staggering decline of approximately 45%, leaving investors understandably discouraged and prompting questions about its viability as a lucrative investment destination in 2024.  Amidst the gloom, however, lies a silver lining: The extensive sell-off wasn’t confined to specific commodities or prompted by a decline in fundamentals; instead, it represented a widespread market adjustment as capital exited the industry.

It’s reassuring to note the return of price stability to the sector.  While not providing remarkable gains since the mid-November lows, there has been an approximate 6% appreciation, indicating a gradual improvement as the primary driver of volatility in recent years, namely inflation, begins to subside.  Furthermore, the TSX Venture Index, predominantly comprising small-cap mining companies, has surged by around 7.5% from the same mid-November lows, underscoring a broader trend of recovery.

The rebound in value provides much-needed support following the sharp decline experienced last year.  Additionally, the tightening of supply in key markets such as copper, uranium, coal, and iron as we enter 2024, underscores ongoing supply challenges.  Moreover, with inventories for certain metals reaching notably low levels (e.g., copper at only ~3 days), The Manager anticipates attractive pricing for these commodities in the coming year.  Looking ahead, there’s a prevailing outlook for a new “commodities super cycle”, particularly in metals such as copper, driven by the increasing demand spurred by global decarbonization efforts to combat climate change.

Naturally, uncertainty remains a prevalent factor.  Heightened macroeconomic concerns stemming from elevated interest rates, high oil prices, a strong U.S. dollar, and slowing growth in China persist, keeping global recession fears at the forefront of everyone’s minds.

The Commodities We Like, and Why

We highlight three metals that we believe have positive growth stories for 2024.

Uranium

We maintain a positive outlook on uranium, buoyed by proactive government policies, growing public acceptance, climate change mandates, and improved economics – all of which bolster the market.  On February 2, Bloomberg reported a “breakneck rally in uranium prices is set to continue as a supply crunch worsens”.  This supply squeeze is driven by industry giants like Kazatomprom, the world’s largest uranium producer, which recently slashed its production guidance for the year by as much as 14%.  In response, uranium futures surged by 5% to over $106 per pound, marking the highest price since 2007. The Manager anticipates further price increases as supply struggles to meet demand, a consequence of years of underinvestment in the industry following the 2011 Fukushima disaster. This, coupled with global decarbonization efforts, has reignited investor interest in the uranium industry.

Source:  Scotiabank

As prices soar to unprecedented heights, uranium producers stand to reap significant benefits.  However, we are observing compelling evidence that the insatiable demand for uranium financial assets is now shifting towards junior mining companies.  These firms have emerged as ripe acquisition targets for industry majors seeking fresh sources of supply amidst growing demand.

Gold

While our thesis on gold may not be unique, we firmly believe that certain crucial factors influencing its value, such as geopolitical tensions, central bank purchase, and monetary policy easing, have yet to be fully reflected in its price.  As monetary policy loosens further this year, interest rates are expected to continue their recent downward trend, along with the U.S. dollar, creating a highly favourable environment for gold.  Despite uncertainties around the rate outlook, the recent cooling of underlying inflation to a nearly three-year low bodes well for gold, providing sustained support.  Additionally, on the demand side, the outlook for gold remain promising.  Total demand for gold reached a record last year and it is projected to rise further in 2024 as the Federal Reserve moves towards cutting interest rates this year.

Source:  Scotiabank

Typically, narrow bands mark periods of low volatility, hinting at market consolidation and the potential for an imminent breakout.  Longer term, we hold the view that the price of gold maintains a correlation with junior mining stocks.  As we anticipate positive price movements in the precious metal throughout the year, we foresee a corresponding enhancement in the performance of gold junior miners.

Copper

Copper plays a vital role in number sectors, including construction, infrastructure, manufacturing, and electrical applications. With anticipated economic growth this year, especially in emerging markets such as China and India, the demand for copper is poised to rise significantly as these nations prioritize investments in infrastructure and urbanization development projects.  Moreover, robust demand from the Western world further reinforces the optimistic outlook for copper.

The looming global supply shortage, as evidenced below, coupled with the parabolic forward price response, remains an ongoing theme.  Moreover, supply disruptions persist, exemplified by the closure of the Cobre Mine in Panama, which was one of the largest copper mining projects in the world.  Major industry players have begun scaling back their copper production forecasts potentially exacerbating the anticipated deficit in the copper market in 2024. Compounded by the lengthy 12-year timeline required to establish a new copper mine, the outlook suggests that structural deficits will persist for the commodity for many years to come. Source:  Scotiabank

Our ongoing perspective is that copper prices will remain robust in the years ahead.  This positive trajectory is expected to benefit junior mining copper stocks that: a) possess a high-quality and extensive resource base, b) are well-capitalized, c) boast strong management teams, and d) employ sound strategies for resource expansion.

Summary

Despite the challenges facing the junior mining sector in 2024, we remain optimistic about the potential for growth this year.  Despite the sharp downturn in value, stability has returned to the sector, and we believe there are positive catalysts this year that will drive growth, namely a more supportive interest rate environment, stronger forecasted year-over-year global growth, and the positive attributes in the uranium, copper, and gold spaces that make these commodities very attractive.