Focus on the positive: M&A and strong metal prices in the year ahead

With rising Covid-19 infections, a new and more infectious variant of the virus, and a vaccination rollout slower than most would like, along with the sickening scenes from Washington, D.C. on Jan. 6 that saw a mob incited by U.S. President Donald Trump launch an attack on Capitol Hill, it’s important to try to stay at least a little bit positive as the new year begins.

That’s why we’ll focus here on the good news: Agnico Eagle Mines’ decision to rescue TMAC Resources in an all-cash deal with an equity value of $286.6 million – 26% higher than an earlier bid from China’s state-owned Shandong Gold Mining, which was blocked in the final weeks of 2020 by the Canadian government under the national security provisions of the Investment Act of Canada. Many analysts believe 2021 will see other big M&A deals in the mining space, too.

Haywood Securities reasons that the Agnico-TMAC transaction “signals the potential for further consolidation among North American based mid-tiers over the nearer-term.” Writes the Haywood team: “We surmise prospective consolidation targets may include Pretium (high-grade production in Canada); Liberty Gold (growing resource in favourable jurisdiction), and Belo Sun (large-scale resource, awaiting permit re-instatement).”

But we can also take cheer from a sixty-five page report from BMO Capital Markets (Commodity Outlook 2021: How Now Cash Cow) published in mid-December by the bank’s team of mining analysts led by London-based veteran Colin Hamilton. While Hamilton cautions that some bottlenecks in supply chains and container availability for transport have already emerged and are likely to continue to do so over the course of the year, by and large he is upbeat about the picture for many of the key metals in 2021.

For base metals and bulks, the report states: “margins are expected to remain significant across the sector, underpinning potential for increased capital returns and extremely attractive multiples,” while 2021 is expected to be a year “of relative stability for gold and silver, as traditional demand steps up to offset weaker ETF flows.”

The BMO analysis also points to an industrial recovery that “keeps on broadening” and foresees “further demand gains over the coming months, bolstered by restocking through global goods chains, with the peak growth rate around April 2021.”

“Typically, industrial commodity prices do well when global industrial production is accelerating, and from a previous forecast of 3.4% industrial output growth in 2021, we now expect 6%, the strongest since 2010.”

The analysts forecast that the first six months of 2021 “is set to post growth figures that will look extraordinary, whether for economic growth, industrial output, or commodity demand,” and reasoned that they can “easily foresee a scenario whereby Chinese GDP rises over 10% year-on-year in Q1, while global industrial output should be up more than 10% year-on-year in Q2.”

Moreover, they said, “base metals and bulk commodity demand growth will look stellar, with 2021 as a whole set to see the strongest growth rates since the post-GFC (Global Financial Crisis) period.” Importantly, however, while BMO is predicting a “strong cycle”  – it doesn’t believe it is the start of a new super-cycle.

Fiscal stimulus programs to deal with the economic fallout from Covid-19 will also help support spending on green initiatives and the global energy transition to renewable energy and electric vehicles, which are metals intensive, the report states.

In terms of equities, BMO encourages investors to “stay selective.” In the base metals and bulks space, BMO advises exposure first to: “producers that are less ‘price sensitive’ in commodities that have already rallied; 2) in commodities that are yet to recover meaningfully, and /or 3) to producers that offer meaningful volume growth or significant cash generation.” The bank’s top picks in the base metals and bulk space are, in alphabetical order: Anglo American, Constellium, Copper Mountain, Freeport McMoRan, Ivanhoe Mines and Lundin Mining.

As for precious metals, BMO’s preference is for “larger, more established names with strong track records and cash generation potential and companies with significant positive catalysts in 2021” and the analysts point out that “effective allocation of the excess cash will be one of the key differentiators in terms of determining investor interest and relative equity performance.” With that in mind, BMO’s top picks are: Agnico Eagle Mines, Endeavour Mining, Kirkland Lake Gold, Pan American Silver, SSR Mining and Yamana Gold.

Happy New Year!