Canaccord Analyst: Gold Sector Volatility Presents “Good Value” Opportunity

Commodities such as lithium and copper enjoyed significant price growth in 2021. However, this wasn't the case for gold, even though it traditionally performs positively amid uncertainty.

Following 2020’s record-setting performance, which saw gold reach an all-time high of more than AU$2,840 per ounce, the precious metal slid lower last year and then moved sideways for the rest of the 12 month period.

The yellow metal does remain at historically high levels, but as Paul Howard, mining analyst at Canaccord Genuity (TSX:CF,OTC Pink:CCORF), pointed out, there's a major discrepancy right now between what the gold price is doing and what's happening in the corresponding equity space.

“Since the beginning of the pandemic ... gold has been up both in US and Australian dollar terms, yet at least the producers that we cover at Canaccord, they're down; the Australian gold index is also down,” Howard told attendees at the recent RIU Explorers Conference, held in Fremantle.

“So there's a clear disconnect we see between gold equities and the gold price. And that's creating some extreme, screamingly good value in the gold game at present.”

Some of that value is likely related to the 191 initial public offerings (IPOs) that occurred on the ASX in 2021, the highest level in a decade. Of the almost 200 IPOs seen on the exchange last year, 107 were in the mining services sector, with 36 percent of those representing gold companies and 20 percent being in the copper space.

The bulk of these new entrants are exploring in Western Australia. According to the Australian Bureau of Statistics, mineral exploration expenditure rose 7.7 percent in the third quarter of 2021.

A rise in exploration expenditure amid higher commodity prices is simple math, although as Howard explained, that wasn’t the case for gold, which didn’t see a proportionate increase in exploration funds.

“I think perhaps that gap is being filled by mergers and acquisitions (M&A),” Howard said at the event. “So what's happening is they’re not putting the money into the ground — people are taking the money and actually just acquiring assets with it instead of spending it.”

The increase in M&A has also exacerbated a pre-existing shortage of developers; according to Howard, cost pressures have resulted in a “lack of developers” in the Australian gold sector.

“They've been picked off along the way — you've seen a lot of the gold M&A. So when people get into that development space, the mid-tier gold producers are just acquiring them,” Howard said. “We're not seeing many companies make that jump, because there is risk as a single asset, as a gold developer going into production.”

While this is what the landscape looks like now for gold, the analyst at Canaccord pointed to the surge in resource exploration as a possible changing tide in the industry.

“(There is) a raft of juniors with some solid resources looking to move into development, or perhaps get picked off along the way as we see with this gold M&A heating up, certainly in Western Australia,” he said.

Fundamentally, gold looks poised to perform well, but Howard and Canaccord are taking a cautious stance in the near term while remaining bullish on the yellow metal longer term.

More broadly, the mining analyst expects strength in lithium to continue after 2021's jump of nearly 500 percent.

“In the commodity space, on lithium, we think the market remains in deficit until 2024 to 2025,” Howard said. “We think that price is going to remain strong. There will be a little bit of additional supply coming on towards the end of the year, but really in the longer term, that demand is going to outweigh that supply.”

On the base metals front, 2021's strong showing has continued this year and is anticipated to keep pace over the coming months, driven by supply disruptions in South America and mounting demand.

Moving forward, the analyst highlighted a number of factors investors need to be cognizant of in the resource space, including growing skill shortages and a lack of open borders.

“There's (also) been a big emphasis on ESG,” Howard said. “Lots of M&A happening, we've seen that in the Western Australian gold space, I think that's going to continue. And there's a lack of new discoveries.”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.