By Willem Middelkoop
For more than 20 years I have been investing in the metals & mining sector. And although I have visited many projects in all that time, I had never been deep underground. After the annual Mining Indaba conference in early February in Cape Town, entirely focused on mining in Africa, the time had finally come. I was invited to visit Premium Nickel Resources' (PRNL) project in northeastern Botswana, the Selebi mine. A great opportunity to finally descend a kilometer underground.
In the financial markets, a remarkable trend is unfolding - a noticeable divergence between the rising price of gold and the struggling valuations of gold mining stocks (GDX Gold Miners ETF). While gold has been on the rise, poised for a breakout, the paradoxical decline in the shares of gold mining companies raises questions about the underlying factors contributing to this unexpected separation. What could these factors be?
In a Silver Bullion article, Willem Middelkoop calls gold's rise "an unremarkable but profound shift." He believes the change in gold's status in the monetary system is due to several developments. Consider the U.S. sanctions against Russia, the freezing of Russian dollar reserves. Non-Western countries have become aware of the risks when their national interests do not align with those of the Americans. In addition, further rising gold prices are to be expected due to the significant losses of bondholders from Fed rate hikes. Balance sheet losses at central banks may be offset with a revaluation of gold to avoid bailouts, however, this will potentially undermine confidence in national currencies and encourage emerging markets to switch from fiduciary (trust-based) currencies to gold.
In a previous update we concluded M&A activity was picking up in the mining space. A recent piece of research pointed to the fact over 60% of all M&A activity in mining happened in the critical metals arena. Only a few years ago, the majority of the buyouts were precious metals related.
It has affected our portfolio in a very positive way since three of our lithium positions have been the subject of takeover proposals since September. Around 15% of our portfolio is lithium-related, while the broader critical metal space is around 40% of our AUM. This includes copper and nickel as well.
Mergers and acquisitions (M&A) in mining have surged recently. This year, deal activity is poised to reach the highest levels in a decade. Majors are benefiting from elevated financial flexibility, due to exceptionally high profits from 2021 to 2022. More importantly: this M&A trend is expected to continue through 2024. Fitch Ratings, a respected credit rating agency, foresees much more corporate activity among mining firms. Our analysts are seeing 4 reasons for this: declining reserves, the energy transition, rising cash flows, and current valuations.
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