Australia Precious Metals Update: Q2 2022 in Review

Australia gold price update: Hedge status offering support

A strong US dollar was one of the major factors weighing on gold’s growth in the second quarter. Rising bond yields and soaring inflation also heightened price pressure as markets reacted to US monetary policy.

Gold’s status as a hedge against uncertainty provided some support, preventing the yellow metal from shedding more than US$125 over the three month period. Ending the session at US$1,805 per ounce, the gold price was also aided by strong Q1 gains, as per the Office of the Chief Economist's Resource and Energy Quarterly.

“Heightened geopolitical risk, following Russia’s invasion of Ukraine, drove investment flows into safe-haven assets (such as gold exchange-traded funds),” it reads. Equity market weakness and ever-increasing inflation concerns also helped gold, with investment demand in Q1 coming in nearly three times higher year-on-year.

But gold's muted Q2 performance meant that it wasn't able to remain at historically high levels, coming in at an average price of US$1,880 over the first half of 2022.

Gold’s standing as a hedge against uncertainty will stay in focus for the remainder of the year, according to the report. “World gold consumption is forecast to increase by 6.1 percent to 4,265 tonnes in 2022, driven largely by stronger investment demand — rising by 28 percent year-on-year,” states the June market overview.

Continued geopolitical upset and economic slowness resulting from inflation will drive investment demand, which is now slated to increase to 1,284 tonnes in 2022, a 30 percent uptick from projected demand in March.

The growth in demand will be met by a 3.5 percent increase in global gold supply.

“World gold mine production is forecast to rise by 2.5 percent in 2022 to 3,671 tonnes, led by increases in China, Australia, North America and West Africa,” the quarterly gold update notes. “High gold prices are also expected to support greater recycling activity, with recycling volumes forecast to rise by 4.6 percent to 1,196 tonnes.”

In Australia, gold production is set to record another year of growth, increasing at an average annual rate of 7.7 percent into 2024. “Production is forecast to reach 338 tonnes in 2022-23, propelled by production from new mines and existing mine expansions,” the report explains, mentioning several projects.

The assets named include Red 5’s (ASX:RED,OTC Pink:REDLF) 6.2 tonne per year King of the Hills gold project in Western Australia, slated to enter production in September. Calidus Resources' (ASX:CAI,OTC Pink:CALRF) 4.3 tonne per year Warrawoona gold project in Western Australia commenced production in May, while Heritage Minerals plans to open the 1.6 tonne per year Mount Morgan tailings project in Queensland in 2023.

Australia silver price update: Demand weakness weighing on price

As mentioned, because it was unable to capitalize on safe-haven and inflationary hedge demand like gold, the silver price fell 17.5 percent between April and June. Weakened industrial demand arising from declining economic outlooks also prevented silver from gaining any ground over the three month period.

The war in Ukraine and China’s zero-COVID policy are expected to continue weighing on economic growth, which is likely to keep the white metal rangebound at the US$18 per ounce level.

“Global GDP growth is now projected to slow sharply this year, to around 3 percent, and remain at a similar pace in 2023,” a June report released by the Organization for Economic Co-operation and Development reads. “This is well below the pace of recovery projected last December.”

Inflation, which has reached record highs this year, is a key factor in economic growth, and is forecast to average 5.3 percent in Australia in 2022.

Australia ranks fifth globally in terms of silver production, and output is likely to tally 1,300 tonnes this year, largely unchanged from 2021. The majority of silver output comes as a by-product of base metals and gold mining.

Currently there are more than a dozen silver projects and mines in New South Wales, as well as several applications in various stages of approval.

“(The state) hosts a wide range of silver-rich deposits in a range of tectonic settings. In some deposits silver is produced as one of the primary commodities,” according to the New South Wales government. “In many others it is a significant credit along with gold, copper, lead and zinc.”

On the other side of the country, Galena Mining (ASX:G1A) is in the process of building its Abra base metals mine, which also hosts a significant silver deposit. In mid-July, it said that progress was 78 percent complete.

The company has scheduled first lead-silver concentrate production for January 2023. According to Galena, the Abra mine has an estimated life of 16 years, and is forecast to produce an average of 93,000 tonnes per annum of lead and 553,000 ounces per annum of silver.

Australia platinum and palladium price update: Exploration key

Russia's invasion of Ukraine was a key catalyst for palladium and platinum prices in the March quarter, with platinum values surging to a H1 high of US$1,154 per ounce as concerns about the future of supply mounted. The uncertainty caused palladium to skyrocket to an intraday all-time high of US$3,189 on March 9.

Russia ranks second in terms of annual production of both platinum and palladium, outputting 19,000 kilograms of platinum in 2021 and 74,000 kilograms of palladium. Because Russia produces as much as 37 percent of primary palladium supply, this market was especially exposed to Russian volatility.

Both metals were unable to maintain higher price thresholds through Q2 as concerns around potential embargoes and sanctions diminished. Values for the autocatalyst metals found some support from the recovery in the global automotive sector; however, gains were impeded by weakness in industrial fabrication demand.

By the end of the June quarter, platinum prices had fallen from US$985.88 to US$894.02, a 9.23 percent decline, while palladium had shed 14.48 percent, slipping from US$2,279 to US$1,949.

With more than a US$1,000 difference, the price ratio between platinum and palladium makes substitution in the auto sector more likely. Used in catalytic converters to reduce emissions, palladium became the metal of choice when values for platinum spiked in 2011.

“Palladium has been substituted for platinum in most gasoline-engine catalytic converters because of the historically lower price for palladium relative to that of platinum,” a US Geological Survey mineral summary explains. “About 25 percent of palladium can routinely be substituted for platinum in diesel catalytic converters; the proportion can be as much as 50 percent in some applications.”

Since then, palladium prices have steadily risen, making it more affordable for automakers to switch back, especially as countries bolster emissions standards and vehicles require more loadings of the metal.

Although Australia doesn’t rank in the top five in terms of annual platinum and palladium production, the value of these in-demand metals is helping to drive exploration.

Northeast of Perth, Chalice Mining (ASX:CHN,OTCQB:CGMLF) is developing the Julimar project, which houses “the largest platinum-group metals (PGMs) discovery in Australian history.” A significant deposit dubbed Gonneville was discovered at the project during the first drill program in March 2020, and in early July, Chalice released a new resource estimate that increased the amounts of PGMs, nickel, copper, cobalt and gold found at Julimar.

“Apart from further increasing the contained metal, this Resource update has resulted in a significant increase in the higher-confidence Indicated Resource — which now represents ~70 percent of the total,” Alex Dorsch, director and CEO, said in a statement. “Importantly, 90 percent of the resource above a depth of 250 meters is now classified as Indicated, which represents a major de-risking step for the project.”

Not far from Julimar, Caspin Resources (ASX:CPN) is developing its own PGMs project, Yarawindah Brook. Earlier this year, Caspin identified the “potentially significant” Serradella prospect on the property.

“Our drilling has taken broad steps across Serradella, which is technically more challenging but can reward with more rapid advances to discovery,” Greg Miles, Caspin’s CEO, told shareholders in a project update. “A vector to the more prospective parts of the intrusion is what we’ve been looking for, and just these few results appear to provide that critical piece of information.”

Both these projects could help fuel the clean energy transition, as platinum can be used in the production of hydrogen. Steadily increasing emissions regulations in China and around the globe will also require more loadings of the metals in catalytic convertors, which will help prop up demand as well.