July 29th, 2022 | 09:57 CEST
Inflation, gold and silver - The pot is bubbling: Barrick Gold, Manuka Resources, First Majestic, Standard Lithium
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"[...] We knew the world was rapidly electrifying and urbanising and needing significant amounts of copper to do so. [...]" Nick Mather, CEO, SolGold PLC
Born in Munich, he first studied economics and graduated in business administration at the Ludwig-Maximilians-University in 1995. As he was involved with the stock market at a very early stage, he now has more than 30 years of experience in the capital markets.
US interest rate hikes - An opportunity for gold and silver
Now it is fixed. The US Federal Reserve raised the key interest rate by another three-quarters of a percentage point to 2.25 to 2.50%. Overall, it is the fourth increase this year and since the beginning of the coronavirus pandemic. Already in June, the FED had raised the rate drastically. In this short sequence, this is the most significant rate hike since 1994, almost 30 years ago. The fear of exploding inflation must be so great that even the recovery of the world economy after the pandemic shock is risked. But for stocks in the precious metals sector, it could mean a spring awakening.
Barrick Gold and First Majestic - In the lower valuation band
Two well-known gold and silver stocks should now be brought back into focus. The first is probably the best-known gold stock, Canada's Barrick Gold. The Company is represented in 18 countries and produces copper and gold. With an annual production of about 200 tons of gold, Barrick is the second largest gold mining company in the world after Newmont Mining. In January 2019, the Company merged with African competitor Randgold Resources Limited.
Because mining costs have risen sharply due to inflation and increases in the cost of energy commodities, the Company's fundamental valuation is currently remarkably low. Recently the share price reached a 3-year low of EUR 14.50. The P/E ratio fell with the price to about 13.5, and the valuation is only at book value. The current dividend yield for Barrick Gold is 3.8% based on the share price level, thus significantly above the average value of the last few years.
At First Majestic, the fundamentals do not currently read quite as well. The Company is one of the largest silver producers, with properties in Mexico and Nevada. The stock is now trading about 68% below its all-time high, which was reached at the beginning of 2021. First Majestic produced 7.7 million silver-equivalent ounces in the second quarter, but the problem remains the Nevada Jerritt Canyon gold project. Contrary to announcements, sustaining costs (AISC) are rising dramatically to over USD 2,000, which hurts at a spot price of USD 1,740. Margins are shrinking, and at the same time, further investments are needed in Jerritt Canyon. For this purpose, USD 100 million is to be collected via a capital increase. In the current environment, one should keep a close eye on precious metal prices and buy into Barrick Gold and First Majestic with rising momentum. The opportunities should present themselves over the next few weeks.
Manuka Resources - The market must have missed something
Those who go looking will also find a lot of interesting mining stocks in Australia. Completely overlooked, it seems, is our new discovery, Manuka Resources Limited, based in the Cobar Basin of New South Wales. The Company is the 100% owner of two fully permitted mining projects, one gold and one silver, both located in the Cobar Basin. The total exploration zone is approximately 1,150 sq km.
The Mount Boppy gold mine has recently completed Phase 1 production and is processing its gold ores at its processing plant in Wonawinta. In the past, the mine has produced 500,000 ounces of gold. Drilling and geophysical programs are currently underway that could significantly expand the proven mineral resources. The nearby Wonawinta Silver Project hosts an ongoing mine with a processing plant and adjacent properties for expansion exploration. Silver production could resume at the site in April 2022. Historically, 3 million ounces of silver have been produced there, with mineralization grades going up to 70 g/t AG. A JORC resource estimate should be available by the end of Q3 2022. This should be extremely exciting.
The 285 million shares issued launched at the end of 2020 amid the COVID pandemic at a price of AUD 0.60. There are 54 million options with strike prices between AUD 0.25 and AUD 0.50 still on the market, all of which expire by mid-2023. The Company is only about AUD 11 million in debt and still has enough money in its coffers for further exploration. An 18,800-meter program has been underway since October 2021 and should be completed soon.
The stock market has punished the Manuka share price in the current environment, causing it to plummet by 75%. Overlooked here are probably the excellent prospects, the existing mining operations and the ongoing production with positive cash flows. So it should come as no surprise if Manuka takes off strongly in the near future without any announcement. The stock is traded in Australia and Frankfurt. Speculative investors can buy the stock at EUR 0.11.
Standard Lithium - Still worth a look
With the electric boom, many battery commodities such as copper, nickel and lithium have also exploded in price. Copper had crossed the USD 10,000 mark by early 2022, and lithium has increased in price by a whopping 1200% since early 2021. Nickel had made a speculation-induced runaway above USD 100,000 but has since come back sharply and is currently trading only slightly higher at around USD 21,300. Lithium shares had their big run at the end of 2021 when it was probably believed that there would be no more combustion engines in a few months. One of the top stocks in the sector is Arkansas-based Standard Lithium. The stock has gained 740% since its IPO in 2019 but is currently down about 50% from its high.
To date, Standard Lithium has yet to generate any US dollars in revenue or profit from its two projects, Smackover and Bristol Lake. The current valuation and fantasy result only from the reported lithium deposits, but the valuation is based on the flowery forecasts for the sale of electric vehicles in the next few years. Most automotive CEOs assume there could even be a raw material shortage for battery materials in a few years; they are obviously not concerned about the impending electricity shortage, especially in Europe.
The Standard Lithium shareholders are looking forward to the completion of the projects and the start of production in the next 3 years. Only then will it be decided at which price lithium will really be traded and which yields the mining operation will then deliver. Before that, billions of dollars of investments will still be made in an uncertain economic environment. At least Standard Lithium has started with the feasibility study, and with Lanxess and Koch Industries on the operational side, two very renowned partners are on board. Nevertheless, it is highly speculative!
All of the commodity stocks mentioned above harbor opportunities and risks. An investment in the resource sector should therefore be strictly diversified and include appropriate stop-loss limits.
Conflict of interest
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