By Ellsworth Dickson
The many readers who have been following the recent rise in the price of gold must be a happy bunch.
After hitting a high of US$1,950 an ounce in January 2021, there was a long downtrend trend in the price. Not counting the sudden dip and recovery in early March, gold finally established an upward trend. As of May 31, the bid for gold was US$1,907 an ounce.
The recent positive gold price action is attributed to inflation concerns, extreme volatility of cryptos, the lower U.S. Dollar, 10-year U.S. Treasury Bonds and rising world geopolitical tensions with maybe the worse yet to come.
Speaking of 10-year Treasuries, the yield of 1.61% is down from the long term average of 4.37%. With the annual inflation rate for the United States being 2.6% for the 12 months ended March 2021, I fail to see why investors would buy them knowing they will lose over 1% in the end. I can only speculate that they were purchased for their security.
Some analysts are of the view that the enormous debt of the U.S. and possible increasing inflation could also drive gold prices higher as well as China’s recent approval of allowing huge imports of gold. Meanwhile, Federal Reserve Chair Jerome Powell said that its monetary policy will remain unchanged and downplayed rising inflation fears.
Another development has been the huge consumer interest in gold (and silver) products from various mints. Both the Royal Canadian Mint and the U.S. Mint report almost selling out of certain coins and bars. Will that affect the price of gold?
In its latest report reviewing Q1 2021, the World Gold Council stated, “While the average gold price in Q1 was 13% higher y-o-y, it declined by 4% q-o-q. The opportunity to buy at lower prices, relative to the highs seen last year, boosted consumer demand, particularly as many markets continued to emerge from lockdown and economic recovery lifted sentiment.”
For example, bar and coin investment of 339.5 tonnes (+36% y-o-y) was buoyed by bargain-hunting, as well as by expectations of building inflationary pressures, according to the WGC report.
It’s amazing how many people are buying jewellery during the COVID-19 pandemic. The WGC report noted that jewellery demand of 477.4 tonnes was 52% higher y-o-y. The value of jewellery spending – US$27.5 billion – was the highest for a first quarter since Q1 2013.
According to the World Gold Council, growth in consumer demand was offset by strong outflows from gold-backed ETFs (gold ETFs), which lost 177.9 tonnes in Q1 as higher interest rates and a downward price trend weighed on investor sentiment.
Q1 2021 also saw continued healthy levels of net buying by central banks: global official gold reserves grew by 95.5 tonnes, 23% lower y-o-y, but 20% higher q-o-q.
Gold used in technology grew 11% y-o-y in Q1 as consumer confidence continued to recover. Demand of 81.2 tonnes was just above the five-year quarterly average of 80.9 tonnes.
Another factor that could impact the gold price and that is world governments taking steps to control digital currencies. Crypto currencies have been a competitor for investor dollars and some people have made big money on paper. Others have not done so well. However, some investors are expecting digital currency disruptions will drive investors away from cryptos and into gold sector investments. Maybe it has started. On May 19, Bitcoin fell 30% to US$30,000 from $71,000, its worst one-day loss since March 2020 and has shown volatility since. These huge swings in the value of Bitcoin are much more than volatility in the price of gold. Meanwhile, some countries such as Turkey are banning cryptocurrencies.
To top it off, there is the mass psychology angle or “herd mentality”. There is nothing like investor enthusiasm to drive prices upward – and, of course, that includes gold stocks.
At the current gold price, gold producers can generate good cash flow and numerous gold exploration projects look attractive. While no one knows the future and there are always levels of resistance, these are encouraging bullish signs for gold to continue to perform.
Triumph Gold Corp. [TIG-TSXV; TIGCF-OTC; 8N61-FSE] is a growth-oriented precious metals exploration and development company with a focus on creating exploring and developing its 100%-owned district-scale Freegold Mountain Project in the Yukon Territory. The property already has over 2 million ounces gold equivalent on three deposits that still have lots of growth in them. Apart from growing these, following up on new exploration discoveries is also high up on the company’s list of priorities.
The company is led by an experienced team with a collective history of exploration to mining success, technical acumen, and capital raising ability. CEO John Anderson raised over $50 million for Triumph Gold. Brian Bower, Lead Director joined the company last summer and has been building an all-star technical team to support Jesse Halle, VP Exploration. With a new office in Kelowna to focus completely on leveraging the 80 years of technical data on the property, including almost 150,000 metres of drilling and the recent 3-D inverse magnetic studies and recent AI work performed my Minerva Geosciences,
Triumph Gold’s flagship project is the Freegold Mountain Project located in the Dawson Range gold-copper belt. The project covers a 200-km2 road accessible portion of the Big Creek Fault, a structural system directly related to gold-rich porphyry, epithermal and related polymetallic vein and skarn mineralization. The district scale project is host to abundant copper-gold prospects, as well as three NI 43-101 compliant mineral deposits.
Freegold Mountain is located in an area that also hosts Western Copper and Gold’s [WRN-TSX] Casino Project as well as Newmont Corp.’s [NGT-TSX; NEM-NYSE] Coffee deposit, and Rockhaven Resources Ltd.’s [RK-TSXV] Klaza gold project. Goldcorp, a Canadian company that subsequently merged with Newmont, gained exposure to the road-accessible Freegold Project by taking a 19.9% stake in Triumph for $6.3 million.
Since Triumph Gold acquired the property in 2006, more than 20 mineralized zones have been identified, and NI 43-101-compliant mineralized resources have been delineated in the Revenue (gold-silver-copper-molybdenum porphyry-related) deposit, the Nucleus (gold-silver-copper) deposit, and the Tinta Hill (gold-silver-copper-lead-zinc vein-related) deposits.
The three deposits host open-pit constrained mineral resources, with two of the deposits (Revenue and Tinta Hill) including deeper, high-grade mineralized resources considered amenable to underground extraction methods.
Recent drilling on two new discoveries include 400 metres of 0.73 g/t gold, .023% copper and 0.025% molybdenum within over 600 metres of 0.67 g/t gold, 0.019% copper and 0.032 moly. This sits above another 102 metres of 0.73g/t gold, 0.18% copper and 0.055 moly in the same hole that the company believes is near the source for these impressive grades as it is in higher temperature Potassic altered chalcopyrite and magnetite.
Higher grade (+1.4 g/t gold equivalent) mineralization in the newly discovered Blue Sky Porphyry Breccia is now included in an underground portion of the Revenue resource. Similarly, the new Irene Zone, which is a higher grade epithermal vein discovered in 2018 and confirmed last summer to be part of a 3.7-km long structure where most drilling has confirmed multi-gram gold over multi-metres, will be sure to awaken the market to what this property could host. Triumph recently expanded its Yukon land holdings by striking a deal with Teck Resources Ltd. [TECK.B-TSX; TECK.A-TSX; TECK-NYSE] to acquire the Big Creek copper-gold property in acquisition is strategic and accreditive for both as it is situated along the proposed road extension to either Western Coppers Casino Deposit or Newmonts’ Coffee Project. When the road is built, the additional property will have the same benefits the company currently enjoys from the current infrastructure on the Freegold Mountain Project.
Triumph’s technical team is in the final stages of designing an exploration program for the Freegold Mountain Project this year, which is scheduled to commence in late spring. It said the program will focus on both resource expansion and testing of new targets at Revenue, Nucleus, and the Melissa Zone as well as the Tinta Deposit.
The program will be based on the significant advancements made in the first half of 2021 through a number of successful initiatives. They include the digitization and validation of geological, geochemical and geophysical data in a recently-acquired 3D modelling software, resulting in confirmation and generation of new exploration targets throughout the project area.
The company continues to aggressively explore, building ounces at the existing deposits and evaluating the multitude of other targets located on the Freegold Mountain property.
Meanwhile, Triumph expects to benefit from the Yukon’s Resource Gateway Project, which is expected to deliver $360 million for upgrades to infrastructure in the Dawson Range, including upgrades to the existing Mount Freegold Road.
The 6,464-hectare Tad/Toro property is also expected to benefit from this upgrade as it is located 40 kilometres northwest of Freegold Mountain. Historical drill results from the Main Zone include 1.05 g/t gold and 19.5 g/t silver across 7.15 metres. Values in old trenches that require further investigation include 0.46 g/t gold and 26.1 g/t silver over 37.8 metres.
On May 31, 2021, Triumph Gold shares were trading at 20 cents in a 52-week range of 48 cents and 13 cents leaving the company with a market cap of $27.76 million based on 138.8 million shares outstanding.
Telson’s flagship Tahuehueto mining project, located in northwestern Durango State, is in an advanced stage of development, with mine construction planned through 2021. Campo Morado, the company’s other key asset, is an underground polymetallic base metal mine with infrastructure, installations, and equipment capable of processing 2,500 tonnes of ore per day. Acquired from Nyrstar Canada (Holdings Ltd.) in June 2017, Campo Morado is located in Guerrero, about 160 kilometres southwest of Mexico City.
When Tahuehueto reaches the commercial production stage next year it will transform Telson, into a high-growth multi-mine primary precious metals producer. In 2022, Telson is forecasting that revenue from gold and silver production will account for 59% of its net revenue, up from 35% in 2021.
The change in focus to precious metals is a move that is likely to result in a re-rating of Telson shares, which last traded at 65 cents as of this writing on May 31, 2021. The company had a 52-week range of 62 cents and $0.075 with a market cap of $136.2 million based on 252.2 million shares outstanding.
Approximately 31% of the outstanding shares are held by management and insiders.
At a gold price of US$1,899 an ounce, Telson’s two projects contain, within measured and indicated resources, 2.51 million gold equivalent ounces, calculated using only gold and silver as priced on February 12, 2021. The estimate excludes inferred resources and base metals.
In keeping with the transition plan, Telson recently signed a letter of intent with a group of lenders, which have agreed to provide the company with US$25 million, allowing the company to complete the construction of its Tahuehueto gold mine and meet debt obligations.
The Funding Syndicate includes Accendo Banco S.A. de C.V., Empress Royalty Corp. and Endeavour Financial.
The US$25 million included an US$8 million equity private placement which closed on March 30, 2021, a US$5 million Empress Royalty Corp. silver stream (100% of the payable silver production from the mine for the first 1.25 million ounces following by a step down to 20% of the silver production) and a US$12 million debt facility from Accendo.
The funding package allows Telson to negotiate a potential restructuring of the company’s loan debt with Trafigura Mexico S.A. de C.V. and Nyrstar as contemplated in a previously announced waiver agreement (see April 17 and June 18, 2020 news releases). In December 2017, Telson secured a US$15 million loan and offtake agreement with Trafigura. The loan facility put Telson in a position to fund construction at the Tahuehueto gold mine.
But Telson was forced to secure a waiver on its loan agreements after Campo Morado was put on care and maintenance due to declining zinc prices and community issues in August 2019. After mining resumed in January 2020, the mine was put on care and maintenance a second time in April and May, 2020 due to Mexican government-mandated COVID-19 restrictions.
During the year ended December 31, 2020, Campo Morado produced 28,031 tonnes of zinc concentrate and 5,794 tonnes of lead concentrate. It ranks as the sixth largest zinc concentrate producer in Mexico.
However, Tahuehueto is Telson’s flagship asset. It is located on a 7,495-hectare land package which remains largely unexplored.
Tahuehueto is a district-scale project with similar multi-vein potential as First Majestic Silver Corp.’s [FR-TSX; AG-NYSE; FMV-FSE] San Dimas silver mine. Proven and Probable Reserves at the site stand at 613,000 ounces of gold equivalent at 5.84 g/t gold equivalent. On top of that is a Measured and Indicated Resources of 955,000 ounces of gold equivalent at 4.86 g/t gold equivalent.
With construction expected to be complete by the end of 2021, Tahuehueto is targeted to produce 42,000 ounces of gold equivalent (AuEq) annually at an all-in-sustaining cost of US$808 an ounce AuEq over the first five years.
Existing reserves are expected to support a mining operation for nine years. But based on Measured and Indicated Resources outlined so far, the project’s lifespan could run to 20 years.
Moneta Porcupine Mines Inc.’s [ME-TSX; MPUCF-OTC; MOP-XETRA] objective is to uncover the exploration potential of its Tower Gold Project located in the prolific Timmins, Ontario gold camp, an area that has historically produced over 85 million ounces of gold.
To that end, the company has combined its Golden Highway Project with the adjacent Golden Bear assets, including the Garrison Project, from O3 Mining Inc. [OIII-TSXV]. The combined and significantly enlarged gold project is now collectively known as the Tower Gold Project located 100 km east of Timmins. The combined 200 km2 land package hosts a total indicated resource of 3,967,000 ounces contained gold and inferred resources of 4,399,000 ounces contained gold.
This now means that Moneta Porcupine holds a 100% interest in one of the largest undeveloped gold resources in North America covering over 17 km strike length and 4 splays of the gold rich Destor Porcupine Fault Zone. The project hosts both high grade underground resources, amenable to bulk tonnage underground mining methods, and near surface economic open pit resources over a combined strike length of 8 km. The majority of gold is hosted within a Timiskaming age sedimentary basin hosting a regional banded iron formation, adjacent to which the majority of ounces occur, with the remaining 9 km and adjacent splays untested. Moneta is currently testing the large resource expansion potential to define the total gold endowment on the Tower Gold project and expects to have a new expanded updated resource upon completion of the current drill program.
Economic open pit resources are comprised of a total of 3,335,000 ounces of indicated resources contained within 116.7 million tonnes grading 0.89 g/t gold and 2,270,000 ounces of inferred resources contained within 79.4 million tonnes of 0.89 g/t gold, at a cut-off grade of 0.30 g/t gold. The project also includes underground resources comprised of 632,000 ounces of indicated resources contained within 4.9 million tonnes of 4.05 g/t gold and 2,129,000 ounces of inferred underground resources within 15.7 million tonnes of 4.21 g/t gold, at a 3.0 g/t gold cut-off.
Recent PEA studies on the underground South West deposit at the Tower Gold project by Moneta in September, 2020 a project amenable to bulk underground mining demonstrated robust economics at a cash cost of US$590/oz at a gold price of US$1,500/oz. A recent PEA study on the Garrison deposits in December 2020 also proved robust economics with cash costs of $720/oz gold. It is expected that the expanded resource base from this years’ 70,000 m drill program will result in a significantly expanded scope and production profile in the planned updated PEA study which will address the combined project.
The project is within trucking distance of six mills, each of which could potentially offer toll milling services.
Moneta is well financed having completed a $22.6 million bought deal equity financing at the time of the Garrison acquisition and is fully funded to drill test the expansion potential of the integrated project.
Gary O’Connor, CEO, said, “With the completion of the current 70,000-metre drill program, we plan to update the resource estimate later this year followed by an updated and expanded preliminary economic assessment study (PEA) on the combined projects with a significantly larger production profile.”
Moneta Porcupine Mines’ management team combines over 35 years of financial management, geology, and mineral exploration experience. Moneta’s CEO, Gary O’Connor, has a proven track record of project development and brings world-class expertise in mining investment. Together, he and his team are preparing the company for outstanding economic growth and mineral exploration opportunities.
The company is supported by various institutional shareholders, including Scotia (1832), Dundee-Goodman, Eric Sprott, RBC, Mackenzie, K2, J. Zechner and US Global. Moneta Porcupine has 555,444,336 shares outstanding.
Just How Big Is China’s Property Sector, And Two Key Questions On Policy And Tail Risks
Just How Big Is China’s Property Sector, And Two Key Questions On Policy And Tail Risks
While the broader US stock market was giddily melting…
While the broader US stock market was giddily melting up in the past week, things in China were going from bad to worse with Evergrande set to officially be in default on Oct 23 when the grace period on its first nonpayment ends, and with contagion rocking the local property market - which as we explained last week just saw the most "catastrophic" property sales numbers since the global financial crisis - sending dollar-denominated Chinese junk bonds to all time high yields.
So even though it is now conventional wisdom that China's property crisis is contained (just as its concurrent energy crisis is also somehow contained), we beg to differ, and suggest that the crisis hitting the world's largest asset class is only just starting and is about to drag China into a "hard landing", with the world set to follow.
And yes, with a total asset value of $62 trillion representing 62% of household wealth, the Chinese real estate sector is not only 30 times bigger than the market cap of all cryptos and also bigger than both the US bond and stock market, but is the key "asset" that backstops China's entire financial system whose deposits at last check were more than double those of the US. In other words, if China's property sector wobbles, the world is facing a guaranteed depression.
So given the escalating weakness in China’s property sector, which has been in focus given intense regulatory pressure on developers’ leverage and banks’ mortgage exposure, and consequent contraction in sales and construction activity, it is natural to ask how significant a hit this could pose to both China's and the global economy. To help people get a sense of scale, below we excerpts some of the key findings from a recent note from Goldman showing just how big China's property sector is.
- A wide range of estimates for the scale of China’s property sector — up to about 30% of GDP — have been reported in the media and by other analysts. Different definitions of the scope of the sector largely account for the disparity.
- The most important distinctions are what types of building are included (residential, nonresidential, or all construction including infrastructure), what economic activity is included (only the construction itself, or all the value-added embedded in the finished residence e.g. domestically produced materials), and whether related real estate services are also included.
- A narrow definition of “residential construction activity as a share of GDP” could be as low as 3.6% of GDP. Expanding this to include all related domestic activities - e.g. materials like metals, wood, and stone produced domestically and used in housing construction, as well as services like financial activities and business services used directly or indirectly by the housing sector - would account for 12.4% of GDP. Adding nonresidential building construction and its associated activity would take it to 17.7%. Finally, including real estate services—which show a high correlation with broader property trends—would take the number to 23.3%. (All these numbers are based on detailed 2018 data, and exclude infrastructure spending not directly related to residential and nonresidential buildings.)
- The property sector’s share of the Chinese economy has grown fairly steadily over the past decade, after surging in the stimulus-fueled recovery just after the 2008 financial crisis.
Digging into the definition of the “property sector”, there are three main questions that need to be kept in mind:
1. What types of construction? One important difference is in what types of construction activities are included. Construction broadly consists of three categories: residential housing, nonresidential buildings, and infrastructure-related construction. In China, residential construction appears to be about half of total construction—the rest is either non-residential building construction or civil engineering works, plus a small amount of installation/decoration activity. Specifically, residential and nonresidential buildings represent around 70% of total construction, and residential floor space under construction is typically about 70% of total floor space under construction.
Note that this ~50% share for residential share of total construction is not unusual in international perspective. For example, the residential share is similar in the United States—though it reached into the 60-70% range during the peak years of the housing bubble—and has been about 40-50% in South Korea for some time.
2. What types of economic activity (only construction, or everything necessary to complete the finished building)? An even more important distinction is what types of activities one counts. Strictly speaking, the construction industry itself represents about 7% of China’s GDP. This represents wages, profits, and taxes from the construction sector (regardless of what type of construction or what end users). This is the value added of the construction sector itself, or the narrowly defined activity of building things.
However, the construction industry uses a lot of output from other sectors – both materials (cement, wood, steel, etc.) and services (transportation of materials, financial services) to create finished buildings. Put another way, there are a lot of “backward linkages” from the construction sector: a home purchase requires not just the value added from construction industry, but also the value added from the “upstream” industries that provided the materials and were otherwise involved in the completion of the finished product.
To gain some intuition for this, in the chart below, Goldman shows how much of each industry’s domestic value added ultimately goes into “final demand” of the construction industry (purchases of property by consumers or investment in property by businesses). For example, about one-third of value added in “wood products” goes into construction, about one-half of basic metals value added goes into construction, and essentially all of construction’s value added goes into construction final demand. (Note that this includes direct and indirect requirements—for example, basic metal output that is sold to firms in the metal fabrication industry that then sell to the construction sector would be counted as part of final demand for construction.)
The next chart shows what fraction of the final demand for construction is provided by each sector. Roughly speaking, if we think about this as “the total domestic value added embedded in an apartment”, almost 30% of this is provided by construction activity, 8% from nonmetallic mineral products, etc.
From the perspective of total domestic value added from all industries embedded in the final demand of the construction industry, the overall construction industry’s final demand accounts for roughly one-quarter of China’s GDP. This estimate is based on China’s most recent (2018) “input-output” table—which indicates the final output of each industry, as well as how much input is used from every other.
3. Should real estate services be included. Some analysts focus on property construction only, while others add the “real estate services” sector e.g. the leasing and maintenance of buildings when estimating the impact of the housing sector of the economy. These activities contribute roughly 6-7% of GDP in China. In many countries, real estate services are somewhat less volatile than housing construction. The likely reason is that real estate services relate in part to the stock of existing buildings than the flow of new building construction. Even if there were a housing crash and building construction stopped, most real estate services could theoretically continue. As evidence of this, in the US housing crash, construction sector GDP fell by ~30% peak to trough but real estate services never declined. That said, in China the “real estate services” sector has been significantly more volatile, almost as volatile as the construction sector itself.
Contributions by type of demand and activity
Taking these three factors into consideration, Goldman next shows estimated shares of China’s activity in the next chart, and breaks down construction into its main components while showing the share attributable to real estate services. The “sector activity” column shows the share of GDP accounted for directly by activities of that sector. In other words, companies and workers engaged in all types of construction activity accounted for 7.1% of China’s GDP in 2018. The “final demand” column shows the share of GDP accounted for by all the domestic economic activities embodied in final demand for that sector. In other words, the demand for buildings and other construction also generates demand for materials and other types of services — and adding the value added in construction and all of these “upstream” sectors together gives the numbers in the right column
Putting the above together, the size of China’s property sector therefore depends on the question we want to answer:
- What share of Chinese economic activity do workers/companies involved in residential construction represent? Here, one should look at domestic value-added (the left column). This is 7.1% for overall construction and just 3.6% for residential construction only.
- How much economic activity is driven by demand for residential property construction? Residential property demand drives 12.4% of GDP (right column, second row in table), because in addition to the construction activity it creates demand for all the materials and other services involved in building construction.
- What about the impact of total demand for property construction? Including non-residental buildings as well as residential, and the total upstream requirements of both, we want to look at the “domestic value added in final demand” of construction of residential + nonresidential buildings. This is 17.7% of GDP (12.4%+5.3%).
- How much of the economy is at risk from a property downturn? Here, we could potentially add end demand for real estate services to the above calculation. This would be another 5.6% of GDP, suggesting 23.3% of the economy—nearly a quarter—would be affected.
Finally, if one adds all construction and all real estate and all their associated activities, we get just over 30% of the economy (24.5%+5.6%), although it is worth caveating that this may be an overly broad definition for the property sector, as it includes infrastructure-related activity, which if anything is likely to be ramped up by policymakers in the event of severe property sector weakness.
* * *
Yet even a nice big, round 30% estimate for how much China's property sector contributes to GDP, does not encompass all the potential spillovers from a construction sector downturn. There are at least three others:
- Second-round effects. A shock to construction (or any other sector) implies a drop in wages and company profits in that sector. This in turn implies lower income for the household and business sectors — and incrementally lower consumption and investment respectively. Such “second-round” or “multiplier” effects aren’t included in the estimates above.
- Fiscal spillovers. Land sales represent an important part of local government revenues in China (roughly 1/3 in gross revenue terms). Governments acquire land usage rights from rural occupants and sell them at a premium via auctions to developers. If land sales revenues fall because of a housing downturn (through some combination of fewer successful auctions and/or lower land prices), budgets will be squeezed, which could limit local governments’ spending and investment.
- Spillovers abroad via imports. As the world’s largest trading nation, China does not get all of its construction materials and other intermediate inputs domestically. In addition to the estimates above, which focus on domestic value-added, about 11% of the total value added embedded in China’s construction final demand is from foreign sources. (This is about 3% of China’s GDP, although it makes more sense to look at each trading partner’s exposure relative to the size of its own economy.) So, if we wanted to look at the total size of China’s construction sector in terms of driving economic activity, regardless of where that economic activity occurs (perhaps to compare China’s construction sector to other countries with different levels of import intensity) the figure in the top right cell in Exhibit 3 would be 3% larger.
Putting it all together, and China's property sector emerges as the mother of all ticking financial time bombs.
* * *
Which brings us to what is Beijing's latest policy action (if any) to prevent this potential financial nuke from going off, and what are any additional tail risks to be considered.
Well, as noted above, China's property sector began the week with sharp price falls across the board, with China's junk bonds cratering to near all time lows and with signs that the concerns are spilling over to the broader China credit market with spreads widening across the board. Some key updates:
- Recent news suggest China property stresses are building up. A number of China property HY developers have made announcements over recent weeks regarding their upcoming bond maturities.
- On 11 Oct, Modern Land launched a consent solicitation to extend the maturity on its USD 250mn bond due on 25 Oct by 3 months
- Xinyuan Real Estate announced on 14 Oct that the majority of holders of its USD 229mn bond due on 15 Oct have agreed to an exchange offer. Note that Fitch considers both transactions to be distressed exchanges.
- Furthermore, Sinic announced on 11 Oct that they are not expecting to make the principal and interest payments on its USD 250mn bond due on 18 Oct. These indicate that stresses amongst developers are building.
Meanwhile, the grace period on Evergrande's missed coupon payments is ending soon. Evergrande missed coupon payments of USD 148MM on 11 Oct. This came after missing an earlier coupon payment on 23 Sep. The earlier missed coupon has a 30-day grace period, which ends on 23 Oct, and should that not be remedied in the coming week, the company will be in default on this bond. With Evergrande USD bonds priced at around 20, a potential default is unlikely to have large market impact, though if the company is able to remedy the earlier default, this could provide a positive surprise for the market.
Despite these mounting risks, the market staged a sharp rebound at the end of the week, with news emerging that policymakers are seeking to speed up mortgage approvals (if not followed by much more aggressive easing, this step will do nothing but delay the inevitable by a few days).
And while Goldman's China credit strateigst Kenneth Ho writes overnight that valuation is cheap across the lower rated segments within China property HY, market direction hinges on whether they will be able to refinance and avoid defaults. In particular, he notes that with $6.2bn of China property HY bonds maturing in Jan 2022, policy direction in the coming two months will be key. And since Goldman remains in the dark as to what Beijing will do next, as it remains "difficult to foresee how policy developments will play out in the coming weeks", Goldman prefers to wait for clearer signs of policy turn before shifting lower down the credit spectrum.
* * *
This brings us to what Goldman calls two key questions on China property - policy and tail risks, which will dictate the direction of the China property HY market.
As discussed in depth in recent days, Beijing's tight regulatory stance is increasingly affecting a broader set of developers, as slowing activity levels are adding to worries across China property HY. For the period from early August to the first week of October, the volume of land transactions cratered by 42.5% compared with the same period last year, and for property transaction volume, this fell by 27.0%.
Difficult credit conditions and weak presales add pressure to developers’ cash flows, and these factors are what led to the pick up in defaults and stresses in China property HY. Therefore, unless there are clear signs of an easing in policy direction, Goldman warns that tail risks concerns are unlikely to subside, and these will dictate the direction of China property HY market. As noted by Goldman's China economics team, credit supply holds the key to China’s housing outlook in the near term, emphasizing the need for policy adjustments in order to stabilize the housing market. Incidentally, the latest monthly Chinese credit creation numbers showed a modest miss to expectations, as total TSF flows came in at 2.928TN, just below the 3.050TN consensus, and up 10.1% Y/Y, lower than the 10.3% in August (the silver lining is that M2 rose 8.3%, up from 8.2% in August and above the 8.2% consensus).
That said, given the sharp slowdown in residential property activity levels over the past two months, policy stance appears to have relaxed over the past two weeks if somewhat more slowly than most had expected. The table below summarizes a number of policy announcements and news reports that suggest some easing of policies are taking place.
That said, the announcements and policymakers’ statements do not signal a large shift in overall policy direction yet. For example, the more concrete measures such as home buyer subsidies and the reduction in home loan interest rates are conducted at a city, and not national, level. And whilst Bloomberg reported that the financial regulators have informed a number of major banks to accelerate mortgage approvals, the precise details are lacking. The recent actions are therefore mostly in line with the overall policy stance. On one hand, policymakers remain focused on the medium term goal of deleveraging, and will want to avoid over-stimulating and reflating the property sector; on the other hand, policymakers have stated that they want a stable property market and to avoid systemic risks from emerging, suggesting that they would seek to avoid over-tightening. The problem is that they can't have both, and one will eventually have to crack.
Goldman is somewhat more optimistic and writes that finding a balance will take time, adding that "given the need to balance the competing policy objectives, further measures could continue to emerge piecemeal, and visibility on the timing and the type of policy actions are limited." Furthermore, there may need to be further downside risk towards the property sector before we see a more decisive change in direction in the policy stance. This means that tail risks concerns are unlikely to subside, despite signs that policy direction is gradually shifting.
* * *
Assuming help does not come on time, the next key question is how fat is the tail as large amounts of bonds trading at stressed levels. Currently, the China property market is pricing in elevated levels of stress. Their price distribution is shown below indicating that 38% of bonds (by notional outstanding and excluding defaulted bonds) are trading at a price below 70, and 49% of bonds are below a price of 80.
Are market prices overly bearish on tail risk, or are they accurately reflecting the stresses amongst property developers? With policymakers likely to maintain their medium term goal to delever the property sector, it is unlikely that tail risk concerns for higher levered developers will not subside. However, how “fat” the tail is will depend on the policy stance over the next two months.
A big challenge going forward is that there are sizeable bond maturities in the next year, which will heavily influence tail risk. As noted above, a number of developers have conducted or are seeking to complete distressed buybacks, and defaults rates amongst China property HY companies are soaring. As such, the policy stance in the next two months will be critical.
As shown in Exhibit 2, China property HY bond maturities are relatively light for the remainder of 2021, but pick up substantially in 2022, with USD 6.3bn of bonds maturing in January alone!
A full list of bond maturities from now to February 2022, is shown below.
It goes without saying, that should policy easing over the next two months be insufficient to ease the financial conditions amongst developers, there could potentially be a meaningful pick up in credit stresses at the start of 2022 just as the Fed launches its taper and just as a cold winter sends energy costs to unprecedented levels.
Finally, for any investors seeking some exposure to China's HY market assuming that the worst is now over, Goldman agrees that while valuation is cheap across the lower rated segments within China property HY, the key determinant on market direction won't be valuation, but rather hinges on whether developers will be able to refinance and avoid defaults - i.e., can the Ponzi scheme continue.
Eagle Plains Resources releases Donna drill results, provides Knife Lake update
Eagle Plains Resources (EPL.V) has released the assay results from the 12 hole drill program completed at the Donna project in British Columbia. The…
Eagle Plains Resources (EPL.V) has released the assay results from the 12 hole drill program completed at the Donna project in British Columbia. The drill program was completed in the first few weeks of the summer period but the labs are still slow so it took a while for the company to see the assay results. As a reminder, the summer drill program was directly following up on the exploration activities in 2020 when the Donna activities had to be suspended due to bad weather.
The summary of the more important drill holes can be found above. The best interval was actually hole DO19001 which encountered 1.5 meters of 9.41 g/t gold. That hole was the deepening of a previous drill hole that was completed in 2019. Hole DO21002 was drilled from the same drill pad and targeted the hanging wall and footwall ones. Some gold was detected (with 0.77 meters containing 4.46 g/t gold and 2 meters of 1.33 g/t gold as main features) but the other intervals were less intriguing. Holes 3 to 12 were all drilled at and around the past producing Morgan mine area and while the holes intersected limestone and metavolcanics, and we hope the data from the drill core will help the Eagle Plains geologists to further refine and re-define the exploration targets on the property.
Also keep in mind the surface exploration activities at Donna just continued throughout 2021 and the company’s field team collected in excess of 1,200 soil samples, 84 silt samples and 92 rock samples from the main zones of importance at Donna. All the data from the drill program and field exploration program is being analyzed and the results will be used to put together a 2022 exploration program.
Eagle Plains also provided an update on the Knife Lake project in Saskatchewan, where partner Rockridge Resources (ROCK.V) has just completed its geophysical program. That summer program included an airborne electromagnetic survey, conducted over 610 line kilometers over the Gilbert Lake area, where no modern exploration activities have taken place.
Disclosure: The author has a long position in Eagle Plains Resources. Eagle Plains is not a sponsor of the website, but related company Taiga Gold is. Please read our disclaimer.
Mountain Boy Minerals awaits assay results on seven holes drilled at American Creek, surface sampling returns high grades
Drilling at Mountain Boy Minerals Ltd.’s (TSXV: MTB) (OTCQB: MBYMF) (Frankfurt: M9U) flagship American Creek property in British Columbia…
Drilling at Mountain Boy Minerals Ltd.’s (TSXV: MTB) (OTCQB: MBYMF) (Frankfurt: M9U) flagship American Creek property in British Columbia is progressing well so far, with a total of seven holes completed from two drill pads.
Five of the holes were completed in the High-Grade zone, with the remaining two on the High-Grade extension. Core samples have been shipped to the lab, with assays pending.
The drill has since been mobilized to the third pad at the Maybee zone, where drilling is currently underway.
Results from surface sampling of the property earlier this season have also been received, with assays of up to 3,444 ppm Ag (Maybee zone), 6.166% Cu (High-Grade zone), 15.26% Pb (Mann zone) and 17.57% Zn (High-Grade zone).
The recent work by MTB included mapping and sampling along the cliffs north of the old mine, an area that had not previously been examined due to the difficult access.
Geologists skilled in rock climbing traced the structure hosting the High-Grade mineralization approximately 400 m to the north, identifying an area now referred to as the High-Grade extension, where the initial two holes were completed.
Geological work is continuing, focusing on the area between the High-Grade zone and the Maybee zone, a 2 km long corridor within the 33 sqkm property. Multiple veins in that area remain underexplored to this day.
The intent of the current program is to improve the geological context with the intent of identifying further drill targets.
“Silver and base metal mineralization has been identified over multiple kilometers and includes some exceptional grades. We are working systematically toward an understanding of this extensive and robust mineralizing system which we firmly believe has the potential to host the kind of deposit for which the Golden Triangle is renowned,” Mountain Boy CEO Lawrence Roulston commented in a news release dated August 16.
American Creek Overview
The American Creek project is centered on the past-producing Mountain Boy silver mine, located 20 km north of Stewart in BC’s Golden Triangle.
The property has favourable host stratigraphy, including rocks from the Lower to Middle Jurassic Mount Dilworth formation and Lower Jurassic Hazelton Group. Recent geochronology also confirmed the presence of Early Jurassic intrusions on the property.
There is abundant evidence pointing to large, continuous regional and property scale faults, folds and shear zones, which are often related to mineralization in the region. Significant alteration and mineralization have already been observed along these structures forming the American Creek corridor.
Therefore, Mountain Boy Minerals considers the area to have “real potential to host one or more deposits.” While it holds a significant land package, with a variety of targets identified, much of the project area remains underexplored.
Mapping and prospecting on the project so far have already led to multiple discoveries, including a new area of gold-silver-base metal mineralization on Bear River Ridge, a silver and base metal intermediate epithermal system along an approximate 2 km trend, and — more importantly — an Early Jurassic latite porphyry intrusion below the epithermal system.
This previously unrecognized intrusion is similar in age to the many Jurassic Intrusions that are related to several deposits in the area, including the Premier porphyry, which is directly related to what was once considered North America’s largest gold mine.
Ascot Resources is currently focused on restarting the historic Premier mine, which has produced over 2 million ounces of gold and 45 million ounces of silver.
The Stewart mining camp — where American Creek and many other MTB projects are found — is part of the larger Stikinia Golden Triangle and is known to contain well over 200 mineral occurrences.
“The presence of numerous nearby past producers, an evolving understanding of the geology and encouraging results and discoveries in the region all support the highly prospective nature of the area,” the company commented on its flagship asset.
2021 Exploration Program
For this year’s program, detailed structural mapping has concentrated around the many mineralized showings on the American Creek project, including the High-Grade zone.
Results from this mapping suggest that the High-Grade zone mineralization is related to an interpreted shallow westward dipping thrust fault and east-west steeply dipping cross-cutting structures.
It is postulated that the best mineralization occurs at the intersection of these two structures, and this year’s drilling will test this hypothesis.
Geologists have been working with a mountain guide mapping the cliffs around the historic silver mine. This has resulted in the discovery of several new mineralized showings to the north. The mineralization appears to be within the same stratigraphic horizon as the High-Grade zone and is cut by similar steeply dipping cross structures.
Drilling last year demonstrated that the shallow structures intersected in drill holes are rich in base metals and likely represent one of several mineralizing pulses in the epithermal system.
Guided by additional mapping results, the company has turned to steeper cross structures and localized ore shoots during this season’s drilling.
The 2021 drill program is specifically targeting four areas: the High-Grade zone, the newly discovered extension of the High-Grade zone, the Four Bees zone and the Maybee zone to the north.
Drilling of the High-Grade zone occurs at a different azimuth with the intent of testing the intersection of the shallow westward dipping thrust fault and the east-west cutting cross structures.
In 1999-2000, 51.6 tonnes of material were extracted from the High-Grade vein and sent to the Cominco smelter in Trail, BC. The documented grades of 13.6 tonnes of this material were 18.854 kg/t Ag, 1.1% Zn and 2.5% Pb.
These exceptional grades demonstrated why this is still such a compelling target to drill.
BA Project Update
Elsewhere in the Golden Triangle, Mountain Boy is also moving forward with a drill program on the BA silver-lead-zinc VMS project, located 18 km northeast of Stewart.
The 10,658-hectare BA property was acquired by Mountain Boy in 2006 following the discovery of the Barbara zone, where initial sampling yielded assays of 5.24% Zn, 0.66% Pb and 55.2 g/t Ag over 1.7 m, and 2.17% Zn, 0.41% Pb and 13.5 g/t Ag over 1.2 m.
Drilling continued at the Barbara zone over a three-year period, with a total of 13,570 m in 93 holes completed from 55 different drill pads. Significant silver, lead and zinc mineralization was encountered both in drilling and on surface.
A joint venture was later formed with Great Bear Resources to conduct an aggressive exploration program of the Barbara zone and its surroundings, which brought the total drill count to 178 holes (28,484 m).
A preliminary resource (2016) of the Barbara zone on all the drilling (excluding surface trenching was) showed 8.93 million tonnes of ore at 0.96% Zn, 0.017% Cu, 0.30% Pb and 36.77 g/t Ag, for a total of 188.6 million pounds of zinc equivalent (1.96% zinc equivalent).
The current drill program is designed to target the northern extension of the mineralized horizon at the Barbara discovery that was drilled between 2007 and 2010.
The historic drilling delineated substantial near-surface silver-lead-zinc mineralization extending over 610 m, striking north-northeast. Since then, receding glaciers at the northern end of the zone have exposed further mineralization at surface.
This mineralization has subsequently been sampled in three channel sampling campaigns extending the zone of mineralization to at least 700 m. Assays of up to 601 g/t Ag, 1.98 g/t Au, 3.31% Pb and 9.96% Zn have been returned from these programs.
Mountain Boy’s drilling of two highly prospective silver properties comes just as the precious market is experiencing a rebound due to re-emerging inflation concerns around the global economy.
For the month of September, the US consumer price index rose by more than forecast, which underscored the mounting inflation pressures in the world’s #1 economy. This in turn has driven up investor demand for assets that serve as inflation hedges such as gold and silver.
Coming off a record year, silver prices have somewhat pulled back in recent months, but the latest economic indicators are suggesting another rally is in the works, especially with the US Federal Reserve looking to tighten its stimulus measures very soon.
Daniel Briesemann, an analyst at Commerzbank AG, wrote in a Bloomberg note that he expects the tapering to be announced at the next meeting early in November, he said.
“The market is now seeing a major pivot here as far as how inflation is showing more signs of being persistent than transitory, and that’s likely to force the Fed’s hand to deliver a rate hike well in advance of what people were anticipating,” Oanda’s senior market analyst Edward Moya told Reuters this week.
The anticipated Fed tapering has so far led to a retreat in 10-year Treasuries and the greenback, both of which are traditionally investment alternatives to safe-haven metals.
In silver’s case, the outlook is particularly bright given its strong industrial demand on top of the monetary driver. In fact, much of silver’s value is derived from industrial demand and supply fundamentals. It’s estimated around 60% of the metal is utilized in industrial applications such as solar panels and electronics, leaving only 40% for investing.
A report by BMO Capital Markets shows that silver consumption by the solar industry alone could grow by 85% to about 185 million ounces within a decade.
In addition, silver demand for “printed and flexible electronics” is forecast to increase 54% over the next nine years, rising from 48Moz in 2021 to 74Moz in 2030.
Then there are the automotive and 5G sectors, which are likely to become even bigger demand drivers in the future. A comprehensive report by Sprott titled ‘Silver’s Clean Energy Future’ found that three areas of growing demand for silver — solar, automotive and 5G — potentially account for more than 125 million ounces in 10 years.
The question is whether the world will have enough supply of the metal by then.
According to the 2021 World Silver Survey, global demand for silver in 2021 is expected to outpace supply by 7% (+8% supply vs +15% demand), at which rate a significant market deficit will begin to surface.
In an article earlier this year, we showed the world has already reached peak mined silver. At the moment, there are simply not enough projects in development to generate the kind of production to match an accelerating demand.
When it comes to mining precious metals, the prolific Golden Triangle of British Columbia has never disappointed. Having consolidated a large property position within the region and integrated a wealth of exploration results, Mountain Boy Minerals could be well on its way to making an important silver discovery.
At American Creek, which is centered on a past-producing high-grade silver mine, work to date has supported the hypothesis of a large mineralized system capable of hosting deposits of the same scale as many others in the Triangle.
This year’s drilling at American Creek will test the true extent of this geological system, which, by the end of the program, could be demonstrated to extend over a 2 km length, containing several areas of silver-rich mineralization.
The fact that MTB compares this geological setting to the Premier camp, an important historic gold-silver producer, is also encouraging.
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