A Wildly Volatile Year for Precious Metals—and It’s Only February! - Monthly Wrap Up

Announcer: You're listening to "Sprott Money's Monthly Wrap Up," with Craig Hemke.

Craig: Welcome back to the "Sprout Money News" and sprottmoney.com "Monthly Wrap Up" segment for the month of February 2022. I'm your host, Craig Hemke. Joining us this month is Conor O'Brien. Many of you will recall we've had Conor on before. He is a business partner of Eric Sprott, so he's certainly qualified to talk about geopolitics, macroeconomics, and certainly the mining sector. So we'll try to cover some of that stuff today. Conor, thank you so much for your time.

Conor: Hey, Craig. How are you?

Craig: Well, I'm fine, thank you. Yeah, boy, I tell you, there's no shortage of stuff to talk out this month. We're recording this on the 23rd, so there's even a few days left of the month. We're a little premature in that regard.

Conor: Yeah, yeah. Right. But there's plenty going on.

Craig: There certainly is. And before we get started, I wanna remind everybody. You know, this is all brought to you by Sprott Money. So we wanna thank them for providing this content. One of the ways you can do that is become a Sprott Money customer. And they've added some what they call special price products in both gold and silver. We're gonna talk a lot about the value of owning physical metal, and how that's being shown, again, to, especially to all the Canadians. You go to sprottmoney.com, you click on either the gold or the silver tab, and select specials, and it'll send you to a link where you'll find some tremendous bullion items, coins, bars, that are on sale on special. And again, that is happening all the time at Sprott Money, so make sure you keep them in mind whenever you're in the market to get some physical metal.

I would imagine, Conor, you and a number...a vast percentage, even, of Canadian citizens are looking into physical precious metals these days. You've been reminded lately of the value of them, haven't you?

Conor: Oh, my gosh, Craig. How about this? I'm short Trudeau and I'm long gold.

Craig: Oh, I like it.

Conor: Okay. Well, it's probably the best sales pitch I've ever heard by anyone ever, in terms of owning precious metals, gold or silver, and I'm actually talking about physical ones. Like, when the government's telling you that they might confiscate your bank account or your crypto because you've given $50 to the truckers, I mean, like, are they going to seize your trading accounts too? Are they gonna take in your RSP? You know, my guess is it's looking like, yes. And that's the ultimate reason right there to own gold and silver, is just, your fiat money, you should probably take some of that and buy some physical gold and silver from Sprott Money.

Craig: Absolutely. What is happening to you people up there, Conor? I mean, how are they [crosstalk 00:02:49]

Conor: Your guess is as good as mine these days, Craig. I'm befuddled by it daily.

Craig: I just can't believe that there isn't, like, some way for a popular...I mean, the amount of people that are going along with this, and cheering it on, Conor.

Conor: Yeah. You know, I'm optimistic that the global response, in terms of what the truckers have done, where you see there's trucker convoys globally, all in response to COVID lockdowns and that type of thing, it's gone on way too long, and people have just had enough. And all of a sudden, the story is kind of changing out there, where you're not really hearing a lot about COVID these days.

Craig: Right.

Conor: You're starting to hear a little bit more geopolitical aspects of things at the moment.

Craig: Well, that's for certain. And maybe that'll be the thing that eventually gets some of that stuff to go away, because it does seem, as, again, we're in a kind of a waning cycle of COVID at this point, and hopefully, we won't cycle back up again anytime ever. But we'll see. That, then, of course, is prompted, globally, well, at least in the West, and Canada, and the U.S., this idea of monetary tightening running, off of QE, and that sort of thing, and before the geopolitics kick in, what were we talking, six or seven or eight hikes in the U.S.?

Conor: Yeah, yeah. Right, right.

Craig: Gold's been rallying. What do you make of all that? Outside of the geopolitics, gold's been rallying on the higher interest rates.

Conor: Yeah, you know what? It's funny that... I wonder sometimes when I read the headlines whether or not they're expecting seven interest rate hikes in March alone.

Craig: Right.

Conor: You sit here and go, "Oh, another interest rate hike." I think that, you know, Goldman, Bank of America, JPMorgan, they've all got 7 to, I don't know, 700 interest rate hikes for the year. But now, all of a sudden, you're getting into the time where, as we were talking about, the geopolitical, like, obviously, Russia and Ukraine, making headlines. But I think the bigger thing that's going on for gold and silver at the moment is inflation. There's a major inflation problem, and it's getting worse by the day. You see the import prices that came out February 16th, they're up 2% month on month. It doesn't sound like a lot, but 2% month on month, you kind of go, "Well, to multiply that by 12, and then compounded, you're talking about close to 30% for import prices year over year. And that's a pretty steep number, when you're talking about that people really haven't seen 30% appreciation in their, like, salaries or income or wages or anything like that of the sort.

So, all the while, you're undoubtedly going into a slower period. Atlanta Fed, I think the...for Q1, they've got something like 1%, and I think a lot of that is, like, inventory rebuild, which is essentially what Q4, almost 50% of the Q4 GDP gain was an inventory build. And, ultimately, you're going into a slower growth environment, at the same time where inflation's getting ramped up, but then the Fed has to make this big decision about where interest rates should go, on the order of about 25 basis points. But that's in order to subdue what is something like 10% to 15% CPI per year.

Craig: Right. And, you know, I think the realization is taking hold that they're never gonna be able to raise rates high enough to where it gets above that level of inflation, and negative real rates are here to stay.

Conor: Right. Well, and on the back of that, Craig, like, what did they do? They sit there and go, "Okay, we'll raise interest rates," but mortgage applications are already crashing. I think the number this morning was down 13% for the week, and then the week before, they were down 5.5%. So, ratchet up interest rates, fine, but kill the housing recovery, or bull market, and also continue to just destroy the NASDAQ in terms of longer-duration assets, and, you know, oh, they're stuck from that perspective alone.

Craig: Right, right. Well, let's lead this over into commodities, then, in general, Conor, before we get to the precious metals and the shares. The commodity markets have been already moving up strongly this year, even before all this geopolitical stuff reared up. A lot of things look to be breaking out, and, obviously, those are inputs that are gonna drive inflation even higher. How do you see commodities in general? Is that a big driver?

Conor: Totally. Well, look at this, okay. What is a 50 basis point interest rate hike supposed to do about supply-side problems? Like, let's give a few examples. Oil prices, almost $100, natural gas, food at all-time highs, rice, wheat, corn, aluminum, nickel, tin, just name the commodity. And it's not necessarily limit up, but, like, these things have had huge moves, and they show no signs of abating in terms of accelerating higher. So, you know, in terms of commodity land, it's very difficult to have a 25 basis point or 50 basis point move in the Fed funds in order to subdue any prices like that, because these are supply-side issues, right? Like, it's not gonna do...there's no net effect, you know.

Craig: How about the geopolitical aspect that we're now dealing with, that's really ramped up in the last couple of weeks? What do you...? I mean, typically, it's always been, you know, my experience of price spikes and geopolitics don't hold, because usually it simmers down, but it doesn't seem to be simmering down this time.

Conor: Yeah. Well, I think there's a lot of other things going on, as we've mentioned before, just in this conversation alone, where the economy's weakening, you've got, obviously, the geopolitical on it. But, like, do you think that ultimately, if the Ukraine Russia thing was going on, that, like, what are you taking off the gold price? Ten dollars, $15, you know what I'm saying? Twenty dollars? I don't know what's built into it. I truthfully don't know. But, again, as we're talking about a lot of these supply-side issues in terms of silver, like, what's the silver deficit gonna be this year? A couple hundred million ounces? If all of a sudden, ETFs start to ramp up, or, sorry, soak up supply again? And just about everybody that you would know globally is probably going to places like Sprott Money to buy gold and silver.

And it looks as though that central banks are continuing to buy gold in big, big size. I think India took in a thousand tons last year for the entire country. Like, that's a third of global supply, by the way. So, you know, like, in terms of demand, it's obviously all there. Like, it seems, like, for me, in terms of all the other metals that you're talking about, or gas, oil, the demand is there. It's just that all of a sudden, the supply's dried up. You look at the last, like, 14 years in terms of what people have put into commodities, and in terms of, like, asset-based growth for other companies, it's de minimis. These people were just merely hanging on.

Craig: Mm-hmm. Well, let's turn this into what you and Eric do on a daily basis, and that is primarily dealing with the mining shares. Let's start with the large-cap stuff. You know, the GDX, we use that as a proxy, has been, it broke out, it's, like, a massive cup and handle formation on the chart.

Conor: Right.

Craig: Got a little flag handle. It looks like it's trying to finally break above there. You know, and some have said there's a reason why we've been consolidating like this. You know, the price has been going sideways for a year, and yet inflation's been up, and so, margins are getting squeezed and cash [crosstalk 00:11:02.331].

Conor: Totally. It's true.

Craig: Do you sense...? Let's start there. How are you guys positioning yourselves in terms of that? Do you sense now maybe things are turning around, with price going higher, and you start looking at the majors first, or where are you?

Conor: Well, we never really go down to the majors, but we are always majorly exposed in terms of gold and silver investments. There's probably, I'm gonna say, 100 investments that we have, and 100 of them are exposed to gold and silver. So, it ranges anywhere from a $5 million market cap explorer to something like First Majestic, which produces 25 billion ounces of silver equivalent a year. And, in that range, we find ourselves with a few interesting companies that we hope will be the biggest beneficiaries of a move like this. And ultimately, the GDX and the associated companies is typically not our bag. You might find us in the GDXJ bracket on occasion, but even that, kind of...we wouldn't find ourselves in the bigger market cap names in the GDXJ, either.

Craig: Okay. What...

Conor: Yeah.

Craig: How about this, Conor? You know, I've noticed, in the years I've been doing this, that bull cycles in the shares usually begin with the larger cap ones.

Conor: Sure.

Craig: You know, that's...

Conor: Sure.

Craig: ...when institutions start to nibble first. I've noticed the GDX outperforming the GDXJ.

Conor: Craig, that breakout in Barrick is very, very significant. Make no mistake, okay? The stock goes from $23, almost to $30 today, and I'm talking in Canadian dollars, and on massive volume. And there's call buyers all over the place in GDX, GDXJ, GLD, and Barrick itself. And all of a sudden, that money starts to trickle down and look for other places to go. And it looks for places like, okay, let's look down at El Dorado, let's look down at First Majestic, let's look down at some of the other companies that, I'm sure that you'll probably ask me about, like Karora Resources, a great producer in Australia that produces 100,000 ounces plus, at all-in sustaining costs of about call it a thousand an ounce. They're making, you know, 900 bucks an ounce today, you know. There's a fair bit of margin there. And then all of a sudden, you're talking about this on the other side of, when you've got the NASDAQ and a lot of these other companies like, let's use, like, Roku for an example, where it still trades at 65 times EBITDA, but meanwhile, it's down 85%. Like, does anybody want to be holding that bag anymore? Does anybody wanna see whether or not that can turn around into a supposed, a rising interest rate environment? I don't think so. You know? And especially while the economy's slowing.

Craig: Right, right. So, then, Conor, does it go...? Or at least, let me phrase it this way. Do you see it like the way I would see it? You kind of flow from the large ones, the GDX style, to the GDXJ starts to pick up...

Conor: Sure.

Craig: ...finally...

Conor: Totally.

Craig: ...get kind of a price breakout that gets people excited about the expiration companies again?

Conor: Yes.

Craig: Is there a price where you guys... I mean, I know you're already heavily invested in that sector, but is there a price for gold, or a breakout in gold that you're looking for, that would really begin to drive interest there again?

Conor: Well, I'll say, I think a lot of people have taken a lot of stock in what Michael Oliver's work has been for gold and silver, and he was kind of saying for gold, it's $1835. And clearly, we broke out through that. Now, in silver, it's $24 and 45 cents, and as I'm watching it, it's $24.47 now. It needs to close out a week higher than that. But I think once momentum people start to see where the momentum is, where it is no longer in NASDAQ, it's no longer...the NASDAQ is not going up every day, that all of a sudden, a lot of money is finding its way into commodities and the things there are working. Portfolio managers have to go to the places where it's working, because their jobs depend on it. Their jobs depend on positive returns. So they've got to go there. They have to see, in the screens, every day, where they see Barrick going up daily, they'd better do something about it, because all the other stocks that they own, they aren't working right now. So, does it end up proliferating down further in terms of market cap? Absolutely. It just takes a little bit of time. Obviously, the markets are just soft in general, so you just get a little bit of risk-off where people are losing in other places, and then they generally have to sell some things in order to finance, maybe, margin obligations, you know?

Craig: Right. Well, I tell you, it certainly is shaping up to be an interesting year. I remember discussing, calling it a wildly volatile and unpredictable year, and we're certainly headed down that road, and we're only two months in.

Conor: And you know what, Craig? I would just say one more thing about that in terms of, like, the wildly volatile year. As you say that, you know, the 5,000 year high in gold was $2,075. You're literally $270 from a 5,000-year high. Like, everybody's gotta be a little bit patient, you know?

Craig: Right, right. Exactly.

Conor: Like, just hold on.

Craig: Yeah. And, again, remind yourself, like you said, as we were discussing Canada, why you own that stuff in the first place, you know. I'm sure you've been worried...I mean, we've been worried on my side about the war on cash for a decade, right?

Conor: Yes. Yes.

Craig: And, geez, all of a sudden [crosstalk 00:16:53.002]...

Conor: Yeah. And it's not like the last 18 months hasn't been challenging, you know? It's been very, very challenging to watch other asset prices going up while you're fighting the good fight, and believing where you should be sitting is ultimately the right place, but taking the beatings kind of almost on a daily...

Craig: Yeah, yeah.

Connor: ...you know.

Craig: All right. As we wrap up, you know, we had some people write in when they heard you're gonna be the guest, and ask for your opinion on a, just a handful of names. I figured I'd just pick off a couple. There's one...I know I've heard Eric talk about this one before, called Pure Gold. Is there anything you can...

Conor: Sure.

Craig: ...[crosstalk 00:17:30] about that?

Conor: Yeah, yeah, yeah. Well, okay. The Pure Gold, they just did a financing that reminds me a lot of when Jaguar Mining did a financing at 8.5 cents. Now, that split-adjusted 85 cents. But, ultimately, Anglo, or Anglo Ashanti puts in $16 million, and then they come out with 19.9% of the company. And the stock price never sees the issue, price, again, of 53 cents. And when the company becomes capitalized with a partner like that, who's obviously done their technical due diligence and is fully capable of understanding that, yes, indeed, that this mine is indeed capable of producing 80,000, 100,000 ounces, 200,000 ounces, that they're probably putting their money where their mouth is. And I bet that if you see Pure Gold turning around with that kind of level of partnership, where they're kind of getting to those levels of production, that you'll probably end up seeing AngloGold Ashanti take them out. Like, to have something in Ontario that's producing kind of anywhere from a 80,000, and to the dream, 200,000 ounces, it's not gonna last anywhere near that long.

Craig: Yeah.

Conor: You'll probably see it get taken out well before then. So, I'm optimistic for a turnaround in Pure Gold. Ultimately, they've had some difficulties, teething pains, I'll just call them, in the beginning stages of mining. But hopefully, that's behind them. And there's, you know, a lot of positive things to come from them for the balance of the year.

Craig: All right. And how about just one more? What's APM?

Conor: APM is Andean Precious Metals. So, that's one of my favorite companies. I'll tell you why. Because it's very easy for people to understand it. I was a broker before, so you kind of had to pitch ideas to individuals and to clients, and, you know, kind of get behind things like this. And a lot of the times, with, like, exploration companies, it's difficult because you're just...ultimately, an investor has to be very patient, you're selling a dream ultimately, and, you know, there might not be much there. But in the case of Andean Precious Metals, it's very easy to understand. They produce 6 million ounces of silver per year, and the company has a $220 million U.S. market cap, but they have $100 million U.S. in cash. And that grows, by the way, by $10 million U.S. per quarter. So it has an enterprise value of $120 million, they have 100% ownership of a commercial-level oxide plant in Bolivia, that probably has a $300 million replacement value in today's inflation-adjusted territory, you know. And they actually just had their latest life of mine expansion study, which gives them 10 years of 6 million ounces of production of silver. And the best part of it is now that they've shown in this life of mine study is that they have 1,000 tons of tin production. And tin sells at $45,000 a ton.

Craig: Yeah, yeah.

Conor: In terms of tin producers, I can't name one. I literally just can't name one. It's kind of like trying to find natural silver producers. They're very, very difficult...

Craig: Right.

Conor: ...to find.

Craig: Right.

Conor: They're generally byproduct of something else. And in the case of Andean, you get silver, and then you get tin, two very rare metals to find, and it's a lovely combination, and especially with a balance sheet like that. Like, it gives them the ability to do just about anything they want. And in terms of dilution, which shareholders are very concerned with, and rightfully so, because it ends up really knocking any momentum out of the story, knowing full well that, okay, these guys just had a great bunch of drill holes but they're gonna have to raise money, and then there's probably gonna be a warrant overhang. But in this case, there's no such thing as that, you know. It's quite the opposite story. They would be the acquirer, and most likely deploying some of that cash to do so, and some combination of debt, because, knowing full well that if they're doing $10 million in free cash flow a quarter, that some bank would probably help them underwrite some acquisition or something like that. But either way, the story tells for itself, of, with 6 million ounces of production for 10 years and the tin kicker. That's a beautiful story.

Craig: Geez. And that much cash. Again, that's a new one for me. Andean Precious Metals, like the Andean mountains?

Conor: Yeah, yeah. Yeah. Yeah. Andean, you know, APM is the symbol, yeah.

Craig: I gotta check that one out.

Conor: And very well run from management perspective. Yeah. I have nothing but good things to say about that. I'm glad somebody asked about that.

Craig: Well, there you go. There's some value for everybody that's been listening.

Conor: That's an easy one.

Craig: And that's a great new name. We're always looking for interesting, and man, you laid that, I'm glad that got brought up as well. Again, obviously, there's great value to all this information that Sprott Money puts out, whether it's things like this, or "Ask the Expert" segment. That was recently posted with Peter Boockvar, who was chief investment officer at what? Bleakly Capital, I believe, is what his firm is called. Anyway, fascinating general discussion that Sprott Money posted about a week ago. You should look for that on their website. And really, there's all sorts of information that Sprott Money puts out besides just being a great bullion company. If you wanna make sure you're notified every time something is posted, just sign up for their free email newsletter, and you'll get an email every time something new comes out. Because again, there's all kinds of hidden nuggets in all of this information that they provide. Again, we've been speaking with Conor O'Brien. Conor, one of Eric Sprott's business partners, so you know he's wired in pretty well. And it's been a fascinating discussion. Conor, thank you so much for your time.

Conor: Oh, dope, Craig, any time. I appreciated it.

Craig: Well, hopefully, we can do this again soon. And from all of us here at "Sprott Money News" and sprottmoney.com, thank you for listening. We'll have more content like this for you in the days ahead.