Gold SWOT: Palladium and Platinum Continue to Struggle Under Weight of the Chip Shortage

Strengths

• The best performing precious metal for the week was gold, up 0.5%. Agnico Eagle announced it entered into an agreement to acquire Kirkland Lake in a merger of equals. The combined company will have annual production of 3.4 million ounces and reserves of 48 million ounces in mining-friendly jurisdictions (mainly Canada and Australia). Agnico Eagle estimates pre-tax synergies of $800 million over five years and $2 billion over 10 years, implying annual synergies of $200 million, with most of the synergies in Canada. The combined company will have the highest quality portfolio, in terms of lowest costs, best jurisdictions and ESG performance, among senior gold companies.
• For $50 million, Maverix agreed to acquire a gold stream from Auramet that will deliver 5,000 ounces of gold to Maverix per year. Maverix will make ongoing cash payments equal to 16% of the spot gold price for each gold ounce delivered. After a total of 50,000 ounces of gold have been delivered to the stream, Auramet will have the option to terminate the stream for a cash payment of $5 million less certain cash flows related to the stream.
• According to Stifel, Pure Gold, on the back of the recently completed C$23 million equity financing, has significantly improved its balance sheet. Based on Stifle’s estimates, Pure Gold will remain compliant with its debt covenants as long as gold prices remain above $1,400 an ounce, with spot prices currently at $1,750.

Weaknesses

• The worst performing precious metal for the week was palladium, down 2.7%. Gold slid on a stronger dollar and higher Treasury yields as Federal Reserve officials talked up the prospect of tapering asset purchases. The benchmark 10-year U.S. yield rose to the highest since June on Tuesday, diminishing the allure of non-interest-bearing bullion. European stocks and U.S. futures both sold off, stoking demand for the dollar which climbed to the highest in more than six weeks. The turbulence in markets follows comments on tapering from prominent Fed officials. Governor Lael Brainard and New York Fed President John Williams both said it may soon be time to scale back asset purchases, though also highlighted the impact of the recent resurgence in virus cases. Bullion has struggled this year as central banks signal the stimulus brought in to combat the pandemic will be reined in. It’s now trading near the lowest in more than six weeks, with most of the decline occurring following a Fed meeting at which Chair Jerome Powell said tapering could start soon.
• Wheaton Precious Metals CEO Randy Smallwood says it’s getting “tougher and tougher” for mines to get approval and to get developed, posing the biggest challenge for his company to spend money. Without mines getting developed, and with exploration having a harder time finding new greenfield precious metals deposits, Smallwood says the company won’t have too many other options than to boost the dividend, considering all the cash it is earning.
• Palladium and platinum, precious metals that are used in catalytic converters, are heading for their fifth straight monthly declines due to the semiconductor shortage that’s curbed automobile production. Palladium is down 23% so far in September, poised for the biggest monthly drop in 13 years.
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Opportunities

• Brixton Metals announced new assay results from additional surface rock samples on the Trapper Target. Rock grab sample D131206 assayed 135.5 grams per tonne of gold and 172 grams per tonne of silver. Six rock grab samples returned greater than 10 grams per tonne gold.
• According to Bank of America, news emerged that China is planning to further consolidate its rare earth industry, combining the existing six state-owned enterprises to just two, split between northern and southern regions. Analysts believe this will eventually result in an almost even split on a total rare earth oxide basis, albeit with virtually all heavy rare earth production in the south. While details remain limited at this stage, the bank believes consolidation is aimed at further cleaning up environmental compliance, particularly among heavy rare earth producers. It also believes consolidation will inevitably lead to further supply insecurity, adding further impetus to efforts to onshore supply chains in the U.S. and Europe. This can only be positive for pricing.
• South Africa’s mining industry has given its backing to moving the continent’s most developed economy away from coal but said it must be done gradually and responsibly. South Africa’s economy expanded over the last century through the development of the world’s biggest gold and platinum reserves, which require significant and reliable power supply.

Threats

• Hunan Gold has faced some recent production issues. Two of the company’s units suspended production at concentrating mills recently due to local power curbs, the company said in a statement to the Shenzhen Stock Exchange.
• The mining sector's tax contribution to the Peruvian economy is lower than other industries, Minister of Energy and Mines Iván Merino told the Congressional Budget and General Account Committee. Mining and hydrocarbon operations account for a high percentage of Peruvian exports and gross domestic product, yet their tax share is just over 21% while other sectors generate 40%, Merino said.
• Centerra Gold said that it filed an application seeking urgent interim measures in its international arbitration against the Kyrgyz Republic and Kyrgyzaltyn OJSC to address alleged operational and safety issues at the Kumtor gold mine. Centerra's filing seeks to prevent the Kyrgyz Republic and the state-owned gold refiner from damaging the mine's value and long-term viability, the company said in a statement. "Statements by Kyrgyz officials since the government's illegal seizure of the Kumtor mine indicate that they are departing from the approved mine plan in ways that will cause irreversible damage. Based on recent reports, the government has also failed to adequately protect the mine's infrastructure from flooding and other threats and may be facing production difficulties," said Centerra COO Dan Desjardins in the statement.