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Tuesday, January 7, 2020
Minerals Industry Report
Metals & Mining 2019 Review and Outlook
Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.
Refer to end of report for Analyst Certification & Disclosures
- Will strength build in 2020? In 2019, mining companies (as measured by the XME) appreciated 11.8% compared to 28.9% for the broader market as measured by the S&P 500 index. During the fourth quarter, the XME outpaced the broader market and rose 15.1% versus 8.5% for the S&P 500. For the full year, gold and silver futures prices rose 16.0% and 13.4%, respectively, while copper increased 5.7%. We note that copper futures prices rose 8.5% during the fourth quarter and outpaced both silver and gold. In 2019, precious metals prices reacted to changes in monetary policy, economic growth and geopolitical expectations. For base metals, the key catalysts were economic growth expectations and issues around trade.
- Precious metals catalysts unfolding. As we move into the new year, the outlook for precious metals remains favorable in our view. Increasing geopolitical tensions, notably in the Middle East, increased risk of equity market volatility and a modest interest rate environment along with the potential for higher inflation may cause investors to increase allocations to precious metals for their defensive characteristics in a diversified portfolio.
- Increasing investor focus on the supply chain. With respect to base metals, economic growth expectations and issues around trade will influence prices. While the theme of “electrification” gained attention in 2019, sources and supplies of metals needed to support development of electric vehicles and green technologies will likely come into focus in 2020. As a result, investor interest in base metals-oriented companies could grow as the market begins to assess longer-term supply/demand and pricing trends for metals such as copper, zinc, cobalt and manganese.
- Mining stocks offer diversification benefits. In our view, mining stocks are an attractive way to gain exposure to metals given their leverage to strengthening metals prices. Precious metals equities may provide a hedge against volatility in the equity markets and offer diversification benefits.
Metals & Mining 2019 Review and Outlook
In 2019, mining companies (as measured by the XME) appreciated 11.8% compared to 28.9% for the broader market as measured by the S&P 500 index. During the fourth quarter, the XME outpaced the broader market and rose 15.1% versus 8.5% for the S&P 500. For the full year, gold and silver futures prices rose 16.0% and 13.4%, respectively, while copper increased 5.7%. We note that copper futures prices rose 8.5% during the fourth quarter and outpaced both silver and gold. In 2019, precious metals prices reacted to changes in monetary policy, economic growth and geopolitical expectations. For base metals, the key catalysts were economic growth expectations and issues around trade.
As we move into the new year, the outlook for precious metals remains favorable in our view. Increasing geopolitical tensions, notably in the Middle East, increased risk of equity market volatility and a modest interest rate environment along with the potential for higher inflation may cause investors to increase allocations to precious metals for their defensive characteristics in a diversified portfolio.
Central banks have increased gold reserves. According to the World Gold Council, reported 2019 net central bank purchases amounted to 562 tonnes through October 2019 which brought reported global gold reserves to 34,500.8 tonnes.
In 2019, exchanged traded products were a popular vehicle for investment exposure to gold. While 2019 global gold-backed ETF flows were a significant driver of gold demand, U.S. Mint sales of American Eagle gold bullion declined to 152,000 ounces in 2019 compared to 245,500 ounces in 2018. We think publicly-traded equities of metals producers offer an attractive way to invest given the disproportionate percentage impact higher commodity prices may have on a company’s bottom line and valuation for a given percentage increase in the commodity itself.
With respect to base metals, economic growth expectations and issues around trade will influence pricing. While the theme of “electrification” gained attention in 2019, sources and supplies of metals needed to support development of electric vehicles and green technologies will likely come into focus in 2020. As a result, investor interest in base metals-oriented companies could grow as the market begins to assess longer-term supply/demand and pricing trends for metals such as copper, zinc, cobalt and manganese. We note that for copper, the International Copper Study Group (ICSG) recently released preliminary data for September 2019. The data indicates that world mine production declined by 0.4% in the first nine months of 2019 due to reduced output in major producing countries such as Chile. World refined production was unchanged, while world refined copper balance in the first nine months of 2019 was a deficit of 390,000 tonnes.
In our view, mining stocks are an attractive way to gain exposure to metals given their leverage to strengthening metals prices. Precious metals equities may provide a hedge against volatility in the equity markets and offer diversification benefits.
GENERAL DISCLAIMERS
All statements or opinions contained herein that include the words “we”, “us”, or “our” are solely the responsibility of Noble Capital Markets, Inc.(“Noble”) and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.
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IMPORTANT DISCLOSURES
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Company Specific Disclosures
The following disclosures relate to relationships between Noble and the company (the “Company”) covered by the Noble Research Division and referred to in this research report.
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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE
Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ ‘Best on the Street’ Analyst and Forbes/StarMine’s “Best Brokerage Analyst.”
FINRA licenses 7, 24, 63, 87
WARNING
This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for any recipient particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess, or seek advice from their advisors, on whether any relevant part of this report is appropriate to their individual circumstances. If a recipient was referred to Noble Capital Markets, Inc. by an investment advisor, that advisor may receive a benefit in respect of
transactions effected on the recipients behalf, details of which will be available on request in regard to a transaction that involves a personalized securities recommendation. Additional risks associated with the security mentioned in this report that might impede achievement of the target can be found in its initial report issued by Noble Capital Markets, Inc.. This report may not be reproduced, distributed or published for any purpose unless authorized by Noble Capital Markets, Inc..
RESEARCH ANALYST CERTIFICATION
Independence Of View
All views expressed in this report accurately reflect my personal views about the subject securities or issuers.
Receipt of Compensation
No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public
appearance and/or research report.
Ownership and Material Conflicts of Interest
Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.
| NOBLE RATINGS DEFINITIONS | % OF SECURITIES COVERED | % IB CLIENTS |
| Outperform: potential return is >15% above the current price | 86% | 25% |
| Market Perform: potential return is -15% to 15% of the current price | 14% | 2% |
| Underperform: potential return is >15% below the current price | 0% | 0% |
NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from “Buy” to “Outperform”, from “Hold” to “Market Perform” and from “Sell” to “Underperform.” The percentage relationships, as compared to current price (definitions), have remained the same. Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone.
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Report ID: 11091
