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Mining Monthly: July Edition

What you need to know:
• The precious metals markets rebounded well in July following a healthy consolidation period in May and June.
• M&A continued to be light in July, primarily due to the new uncertainty regarding interest rates following strong economic data and the BoC and the Fed raising rates.
• Safe-haven assets like gold and silver continue to look highly attractive with mining equities trading close to trough multiples, creating buying opportunities for when investment dollars flow back into the sector.

Sentiment Update
Commodity prices as well as mining equities rose in the month of July, bouncing back from two modest down months in May and June. Gold rose 2.3% to $1,965.7/oz, while silver outperformed rising 8.1% to $24.7/oz, and copper also increased 5.5% to $4.0/lb, resolidifying a consistent uptrend over the last 12 months (gold, silver, and copper up 11.0%, 21.7%, and 12.5%, respectively). Mining equities also performed well in July, with the GDX up 4.3% and the COPX up 11.0%. This compares to broader markets like the S&P500 which was up 3.1% and the TSX which was up 2.2%. The battery metals space was mixed with lithium down 12% but cobalt, nickel, and others were up 7%+. As expected, following two months of consolidation (May and June), the precious metals and other commodity prices rebounded in July, and we anticipate this will continue into the back half of the year. We are remaining patient as mining equities trade at close to trough multiples but don’t expect this to last with the backdrop of persistent elevated metals prices, a poor supply outlook, and increasing demand across almost all metals.

M&A activity was again light in July, similar to June, which we believe was due to the lack of clarity on the direction of interest rates. As described in our April and May Mining Monthly notes, there was a sizeable spike in M&A transactions due to the potential of peaking of interest rates, however, new data suggests that both the U.S. and Canada may continue to tighten (as exemplified by the June 7th hike from the BoC). We believe this lack of clarity may further slow transactions until a more lasting pivot is guided from both the Fed and BoC, where we expect M&A to pick up again.

On July 12th, the Bank of Canada increased rates by 25 bps to 5.0%, after a conditional pause that was put in place after the hike in January. On July 26th, the Fed also increased rates by 25 bps to a target range of 5.25-5.5%, bringing benchmark borrowing costs to their highest level in over 22 years. Also on July 12th, U.S. inflation came in at 3.0% YoY and 0.2% MoM, compared to consensus of 3.1% YoY and 0.3% MoM. This compares to U.S. Core inflation data which came in as 4.8% YoY and 0.2% MoM, compared to consensus expectations of 5.0% YoY and 0.3% MoM. Canadian core inflation was once again lower than expectations, posting 3.2% YoY and -0.1% MoM vs. consensus of 3.5% YoY and 0.5% MoM.
Much of this drop is attributable to a large decrease in energy prices with gasoline down 22% YoY, while food inflation was still up 9% YoY.

On July 27th, the U.S. GDP Growth Rate came in at +2.4% QoQ vs. consensus of +1.8%, highlighting strong growth but a sizeable gap in GDP growth to the inflation rate still remains. Canadian MoM GDP Growth came in at 0.3% in line with consensus and up from 0.0% last month. The strong economic data posted last month leads us to believe that there could be more rate hikes to follow, however, the governments need to consider their rapidly increasing debt service costs.