Market Commentary - Metals Team, January 2022

16 February 2022

The year of the tiger by Mark Smith

The 2022 year of the tiger promises a year of positive change, traditionally symbolizing strength, bravery and wisdom. These are worthy attributes when investing in the natural resource sector. The precious and base metal equities continue to enjoy high commodity prices and are generating attractive sector fundamentals relative to other indices. If we screen the NYSE Arca Gold Miners Index against the other 8 S&P 500 industrial indices the precious metal miners screen very well.

• a 12-month trailing FCF Yield of 5.4% and 2021 operating margin or 27.6% relative to the average of the other eight industrial indices at 3.3% and 14.3% respectively.

The base metal miners screen equally well;

• a 12-month trailing FCF Yield of 7.2% and 2021 operating margin of 21.6% relative to the average of the other eight industrial indices at 3.3% and 14.3% respectively.

The FED’s hawkish turn in policy in January 2022, led to market speculation of 4-5 rate hikes in 2022 and quantitative tightening. The broader markets and the precious metal equities sold off and volatility indices spiked. The risk now is that the FED aggressively tightens into an economic slowdown, while short term, there is little evidence that inflation pressure is abating. By contrast, there is growing evidence of inflation broadening out and moving towards a more entrenched nature as reflected in wages, labour shortages and prices. These conditions are good for precious metals.

Overall, 2021 represented one of the best years for base metals in over a decade for copper (avg. of $4.25/lb v. $2.80/lb in 2020), zinc (avg. $1.35/lb v. $1.05/lb in 2020), and nickel (avg. $8.37/lb v. $6.41/lb in 2020). While global economic growth is expected to slow, the base metals could be supported by tight inventory levels, continued supply disruptions and the broader trade as an inflation hedge.

One thing is sure the metal markets will not remain flat, and this creates opportunity for an actively managed, evergreen resource fund. In January we added two new investments in manganese and lithium and participated in a $75m capital raise for Centaurus Metals, who will use the proceeds to fund a 90,000m drilling campaign and a feasibility study for the Jaguar nickel project. We sold half our position in Mincor when nickel prices spiked above $10.80/lb. The fund is now primed to take advantage of the strengthening inflationary winds with our precious metal exposure, while we continue to benefit from targeted stock picking within the battery and renewable metal space.

The 2022 year of the tiger promises a year of positive change, but we haven’t forgotten the negative (anode) side of the battery market in the ASMF.