Base Metals Were Soaring, But Not Anymore. Are The Fundamentals Still Robust?

Base Metals Were Soaring, But Not Anymore. Are The Fundamentals Still Robust?


Metals and mining stocks enjoyed strong gains in the first quarter of the year but are now sliding back. Greg Barnes, Managing Director at TD Securities, tells Greg Bonnell even though the industry outlook remains positive, some companies are better positioned than others for a possible economic slowdown.


– Well, the value of many base metals hit record highs in the spring, but with those recession fears increasingly on the mind of some investors, price of copper, nickel, other metals have tumbled along with the mining stocks. Well, our featured guest today says the industry is in good shape heading into a possible slowdown, but some firms are going to be better positioned than others. Joining us now, Greg Barnes, managing director at TD Securities.

Greg, great to have you on the show. Want to start with that boom that we’ve seen in the last several months. And I guess, it’s faith been shaken recently? What’s going on out there?

– I think the recession talk, Greg. And your comment about volatility [LAUGHS] is very apt. These stocks have bounced around like crazy, and this is what we’d normally see as people get worried about global growth, and whether there’s going to be a recession, or whether there won’t be a recession, what the Fed’s going to do. It’s not unusual for these stocks to act like this. And the commodities themselves have been very volatile, too, as you mentioned copper and nickel down sharply, and they are.

But I think the fundamental long-term story remains very solid, and that’s demand driven by a transition to a low carbon world. So I think the long-term thesis remains very strong, but over the near to medium-term we do have to worry about global growth, and that’s just a normal type scenario or normal cyclicality that we’d see in the mining sector. So it’s not something that we haven’t seen before and we’ll see again.

– Yeah, unfortunately, I think we’re getting used to volatility–

– Yes. [LAUGHS]

– –and bumpy rides to get to where we need to go. What can mining companies do in an environment like this? Because it’s still highly variable, right? We are not guaranteed to fall into recession. And then even those who are in that camp say, oh, it’s short and it’s mild, or it’s this, or it’s that. What are the actual companies have to do in a time like this?

– Well, I think the mining companies have set themselves up very well over the past several years. And we have had strong metal prices. And they’ve bolstered their balance sheets. They’ve been generating a lot of free cash flow. They’ve been paying back debt. They’ve been returning capital to shareholders.

And when I look across, particularly, the Canadian names, I don’t see anyone who’s got a real problem on their balance sheets or a problem with liquidity. So they’re all well-positioned, but what they will do is if we go further into a slowdown, and say, we have a hard landing, they will reduce CapEx. They’ll delay projects.

A lot of them have put in place performance dividends, a base dividend, and then a dividend on top of that, if they’re doing well financially. And they’ll probably reduce those performance dividends, not the base dividend, but the performance dividend will probably be reduced. So overall, again, they’re in good shape. They have levers they can pull to offset lower metal prices. And again, I don’t see anyone who’s got a particular problem on their hands from a balance sheet point of view, which is very different than where we’ve been in past cycles.

You think of 2008, 2009, there are a couple of companies that were in dire financial straits. And they really had to pull every lever they had to avoid bankruptcy.

GREG BONNELL: Absolutely.

– We’re not we’re not in that kind of situation this time around.

– It’s good to hear we’re in a better situation this time around after the financial carnage of 2008, 2009. You mentioned the fact that they might have to pull back on capital expenditures. What does that do further down the road? Because we know, you said, longer term, the world is hungry for what these companies are taking out of the ground. But if they have to go through a period of not investing as much, does that set up an imbalance later on?

GREG BARNES: It absolutely does. And if projects get delayed and management teams decide we’re not going to sanction that project in 2022 or 2023, that automatically adds a year or two to when they can actually finish building the mine. And that pushes– or it extends the period of supply tightness that we’re already expecting post-2024. So I think if you’re looking at metal prices and you’re bullish on it longer term, this should underscore that bullishness, because we will not get the supply response that we’d been expecting, albeit with a delay. The delay will be longer.


– So we need more copper, we need more nickel. And a severe slowdown in 2023 or 2024 will push that supply response out even further.

– We take a look at the materials basket, the mining stocks, but they’re not all the same, clearly. If we did enter a period of slower economic growth or even a contraction, are some parts of the mining space sort of better positioned than others?

– No, they’re all in pretty much the same boat. When commodity prices come down, they all come down [LAUGHS] at the same time, whether it’s copper, nickel, zinc. Gold, in some recessions it goes down, in some recessions it goes up. There’s no real rhyme or reason to it. It does very much depend on what inflation is doing, what the Fed is doing, what interest rates are doing, what exchange rates are doing.

So it’s a bit harder to call what gold will do, but the gold companies, too, like the bass metal companies are well-positioned financially. They don’t have any issues from a balance sheet perspective. So gold could do better in a coming recession, but it’s kind of a flip of the coin to be honest with you–

GREG BONNELL: I thought I understood gold at some point in my career–


– –in a very 10,000 foot way, that, in times of turmoil, here is a haven asset. And then in recent years, it’s sort of tested my understanding of it. I mean, what’s going on with gold?

GREG BARNES: Well, I will point out where a lot of commodities are down sharply this year, copper down 10, 15, maybe a bit more than that, percentage terms. Gold is effectively flat. So gold has acted as a safe haven during 2022.

When we’ve seen a lot of things, the S&P was down 21% just recently, over the past six months, and gold has held flat. Bitcoin is down 70% from the peak. So gold has been a safe haven. It has been store of value. It’s done exactly what it was supposed to do.

But you mentioned at the beginning, at your introduction, is there some concern now that the Fed may not go as far as people were thinking, in terms of raising rates. I think that’s pressuring gold. So it’s a very difficult call on what the gold price is going to do.

– You mentioned inflation briefly there, in terms of what are the inputs of the price of gold, but what about for the mining sector and for the mining companies? We’ve heard so many companies and corporate leaders come in and talk about how tough it is in this environment with supply chain disruptions, with soaring inflation to operate. What does that do for the mining industry?

– Inflation is a real issue. Cost inflation, we’re up probably 10% year-over-year, in terms of costs. Going into the year, the companies are expecting 5% to 7%. It’s been exacerbated by the war in Ukraine and supply chain issues on top of that. So we’re looking at operating costs probably going up 10% year-over-year.

And like I said, capital costs, cost to build a new mine are going up even more, 15% to 20%. And that’s just lack of people. It’s lack of equipment. It’s royalties and taxes going up. There’s a whole host of things that are pressuring costs.

So it’s– you understand why the commodity or the equities are down, the mining equities are down. You’ve got commodity prices going up, going down, and costs going up. You’ve got margin compression. And again, that’s not all that unusual in the scenario that we’re in right now.

– Recently, we had Bart Malek on, and he was talking about sort of, I guess, a tension point in the energy trade when you talk about actual physical demand for barrels of crude versus how people play it in the financial markets and the financialization of the space. Does the mining sector suffer from that at all, in terms of contracts for certain metals, perhaps not reflecting truly the demand for the metals?

– Yeah, well, that’s a good question currently. We’re trying to figure out where demand is going. We don’t really know. Is it going to be a mild recession? Are we going to avoid a recession completely?

The markets, in my view, right now are discounting a hard landing and demand is holding up OK. I was speaking to a mining company this morning. They have not seen any reduction in demand for the copper they’re producing. None.

Inventories are extremely low. So the market is tight. Demand is holding up. But where is demand going over the next six 12, 24 months? That’s the question.

And the market is saying, it’s going a lot lower. The market might be wrong. We’re going to have to wait and see. [LAUGHS] So it’s a bit of a tricky time right now to make that call.

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