Canaccord: Gold to Outperform, Lithium to Bottom in 2020

Last year was a relatively good year for Australia’s mining sector, driven by price increases in key commodities such as gold, nickel and iron. 

Speaking at this year’s RIU Explorers Conference in Fremantle, Western Australia, Reg Spencer of Canaccord Genuity said he remains optimistic about the resource space in 2020.

From a macro standpoint, one of the main catalysts seen at the start of this year was a phase one trade deal between the US and China. The agreement was expected to remove uncertainty in global markets, but that’s been overshadowed by the COVID-19 coronavirus outbreak.

“There’s a saying, ‘When the US sneezes, Australia catches a cold,’” he said. “But what happens when Australia’s largest trading partner and the world’s second largest economy catches a serious case of the flu? Well, our view is that the real impact of the coronavirus is yet to be fully understood or appreciated.”

Beyond the impact of COVID-19, Canaccord sees mostly a positive outlook for the metals and mining sector this year, with key themes revolving around sustainability and climate change.

“We (also) expect to see more M&A activity in the Australian gold sector,” he said. “But unlike what we saw in 2019, where a lot of the activity was at the larger end of the market spectrum, we expect to see more activity to be focused on the small caps.”

Other key themes for the year include a lack of new discoveries, the use of new technologies and ongoing skill shortages in the industry.

In terms of commodities, Canaccord expects gold to outperform in 2020. A nickel recovery is also on the horizon, while copper and key battery metals are expected to bottom.

“There are many reasons to remain bullish on gold in 2020 and beyond,” Spencer said. “The Australian gold market continues in its decade-long bull run.”

The gold price has touched six year highs already this year at US$1,600 per ounce and AU$2,400, with these record gold levels expected to encourage increased exploration spending, which could potentially lead to new discoveries.

“(However,) the easy pickings are gone,” Spencer said, adding that major greenfield discoveries will be deep, in new terrains or offshore.

Looking over to lithium, Canaccord sees short-term challenges, but the picture is still bullish long term.

“The supply-side response has been pretty significant,” he said, talking about how the changes to China’s electric vehicle (EV) subsidy policy, and more recently COVID-19, have impacted near-term demand.

Spencer noted that if all the capacity closures, curtailments and delays seen since August of last year are added up, they would equate to a total of 420,000 tonnes of cumulative lithium carbonate equivalent capacity over the next two to three years. That represents 140 percent of the 2019 market size.

“It’s signals like this that give us a little bit more confidence that we’ve probably seen the worst of the falls and that the market is preparing itself for a bottom,” he said.

Spencer also touched on the recent upward move in lithium stocks on the back of Tesla’s (NASDAQ:TSLA) positive fortunes; the increase came despite the fact that the US-based company only represents about 15 percent of the market share for EVs.

For Canaccord, the long-term outlook for lithium remains bright, with carbon dioxide emissions reductions becoming a key objective for governments.

The expert said the lithium market is expected to bottom in 2020, with Europe picking up some of the slack on EVs, but it won’t be until 2021 that prices may rally.

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Securities Disclosure: I, Priscila Barrera, currently hold no direct investment interest in any company mentioned in this article.