Mexico’s proposed higher mining royalties could block nearly $7bn in investments
The Mexican government proposed raising mining royalties under the argument that metal prices have risen in recent years.
Steve Todoruk, an Investment Executive at Sprott Global Resource Investments Ltd. since 2003, said recently positive signs were beginning to take shape for the bigger mining firms. Many of these big companies are now healthy enough to start acquiring assets, scooping up the low-hanging fruit in the sector – attractive assets or companies that are still cheap.
Many of these smaller companies are already showing signs of share price strength. Steve tells how the metals and stock markets have behaved over the last six months:
Gold started the year off with an upswing off the multi-year low of around $1,180 per ounce reached in December, 2013. By March, gold was trading at nearly $1,400. Silver had a similar course. It rose from a low of $19 per ounce last December to a high of $22 by mid-March. Many small gold and silver mining and exploration companies saw a big improvement in share price during this period too.
After around mid-March, prices began moving down once again. Gold fell back to around $1,250 by the end of May. Silver retreated back under $19. Many of the juniors gave up their gains as well.
The decline, however, failed to create new lows in the gold price; instead, gold started heading higher in June, when it was already around $70 higher per ounce than the previous low in December:
In the last three weeks, gold has enjoyed a steady rise once again, climbing in part thanks to hawkish comments from Fed Chairman Janet Yellen and the crisis in Iraq, which have increased the need for safety. Gold has risen from around $1,250 in May to around $1,320 as of June 24th, an increase of around 6%. Gold is still beneath is high of 2014, and yet certain junior mining companies have taken off in this latest rally, reaching yearly highs from a modest rise in the gold price. Detour Gold Corp. increased 32% in the last three weeks, from $10.10 per share to around $14.00 today.1
We see the same trend in certain silver stocks too. Silver, like gold, has experienced a modest rise in the last three weeks, going from around $18.70 to close to $21.00 per ounce today2, a 13% increase. Meanwhile, silver miner Mag Silver Corp. has gone up by over 43%, from around $7.60 to over $11.00 in a little over three weeks.3
Mag Silver and Detour Gold offer extreme cases, but several other stocks in the resource sector, large and small, appear to be outperforming the metals substantially and are currently trading at year to date highs:
Other companies putting in substantial gains despite moderate rises in the metals include Franco Nevada, Royal Gold, New Gold, Semafo, Asanko Gold, Premier Gold Mines, Tahoe Resources, Roxgold, and Agnico Eagles Mines.
What does this move mean for investors?
The sharp increase in many resource sector share prices could mean that investors are finally able to catch their breath. A sudden improvement in metals prices may not be needed in order for many of these companies to continue to perform well. Investors in the sector are looking for consolidation and further evidence that the bottom is truly behind us. The longer we remain above the December low, the more convinced the market will become that a recovery is brewing.
The market was pleased to see that in the latest leg down, gold did not retread an old bottom. Instead, it hit a higher low than previously. So investors are beginning to feel more confident in the sector, and trying to buy the companies that are perceived as having the most high-quality assets and best management teams.
As Steve mentions, gold set a higher low in the latest leg down, rebounding from around $1,250 per ounce, versus around $1,180 last December. We have yet to see whether gold – and silver – will reach higher highs, as well. Seeing higher highs in addition to a higher low would validate Rick Rule’s assertion earlier this year. He said then that he expected the market to decline following an effervescent first few months. But he also believed that the market was probably past its lows, meaning that we would see a “rising channel with higher highs and higher lows” for both the metals and associated equities.
Investors in the sector could see further moderate rises in the metals, which, as we have seen in the last three weeks, can generate much larger short term gains in particular resource stocks.
Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive. To contact Steve, e-mail him at [email protected] or call him at 1.800.477.7853.
1 https://www.google.com/finance?q=TSE:DGC
3 https://www.google.com/finance?q=TSE:MAG
Disclaimer: Past performance is not indicative of future results. Companies mentioned here are for informative and illustrative purposes only and do not constitute recommendations.
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Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.
By Henry Bonner
