August has seen quite a bit of turbulence in the mining sector, with gold prices having hit record highs early in the month, were seen to pull back with many investors looking at taking profit. As a result many mining and exploration stocks have also plateaued or pulled back, but should this be seen as a consolidation period before moving higher, or should investors be looking outside of the resource sector for significant gains?
Analysis by S&P Global Marketing Intelligence shows that Q2, 2020 has been a phenomenal period in the exploration and mining sector, with the mining exploration price index having reached the highest point since 2013, ricing an impressive 32% on the previous quarter. In addition, 21 of the top 25 largest mining companies posted gains in June, having capitalised on rising commodity prices across the board. M&A activities have also taken of with 38 deals having been recorded by S&P. Rick Rules also pointed out that we will be seeing majors de-vesting some of the more technical projects, with the aim of replacing these with more suitable larger tonnage operations that can replace the current resources mined.
On a macro-outlook moving forward, the Fed Chairman Jerome Powell, announced on the 27th that the central bank will be more inclined to allow inflation to run higher than the standard 2% target before hiking interest rates. This means that monetary policy will aim for inflation in an attempt to support employment and prevent stalling the economy. This is key for gold and gold miners, as we will now be seeing ‘spenders and speculators’ being encouraged by governments over ‘saving’. We have already seen this in the last few months with the gold mining ETF, GDX, leading the junior gold miner ETF, the GDXJ. This shows more generalists looking to invest into the ‘mining stock safe haven’, resulting in the counter intuitive boost in the GDX pulling away from the generally more volatile GDXJ.
Moving into September, I am intending to hold my investments in gold and silver, looking to top up on those explorers with news coming out from exciting projects, and a stricter stock picking criteria for early stage base metal projects. Following the M&A strategy Rick Rules has indicated with the majors, my stock picks will be focusing on large, world class potential deposits in the early stages to pre-development, even if they are at a relative premium.
For more information on the company’s covered in this monthly review, broker notes or analysts of other opportunities, please feel free to contact Charlie at Charlie.Stephenson@SICapital.co.uk.