Market Review and Outlook
Markets breathed a sigh of relief as Congress voted on a bill to raise the debt ceiling. The deal ‘kicks the can’ down the road to January 2025 after the next U.S. presidential election. The S&P 500 was virtually flat in May. The year-to-date gain at the end of May was 8.8%, but the sectors are diverging. The gains were concentrated in three sectors: Consumer Discretionary, Information Technology and Communications, which are the only positive sectors year-to-date. The TSX declined in May and is about where it started the year (flat year-to-date). The information technology sector is the outlier on the TSX with a year-to-date gain of more than 40%. Markets have had a lot to digest recently.
Now that the debt ceiling debate deal is done, markets can go back to focusing on Fed interest rate increases, which the highest probability for an increase or for the Fed to hold at its June 13-14 meeting changes almost daily as new data is released. A large portion of economic data in both the US and Canada continues to come in more robust than expectations, but other factors, such as the deeply inverted yield curve points to recession.
The banking problems appear to be largely in the background at the moment. However, the Dow Jones Regional Banking Sector Index remains at a low level, and we are not convinced that further vulnerabilities will not show up in the coming months in the banking sector, or in commercial real estate, or sovereign debt.
Mounting Government Debt
Rising interest rates are pushing over-indebted countries to their limits. Politicians and international agencies such as the World Bank and IMF (International Monetary Fund) stand on soap boxes shouting the need for fiscal constraint. But mostly this is posturing or promises made to complete the debt restructuring or get additional loans needed in the immediate situation. Fiscal constraint and ‘paying down’ debt largely seem to be a notion of the past – today’s solutions usually come down to debt restructuring or some form of ‘pretend and extend’.
The recent deal to raise the debt ceiling in the US is an example of this mentality. The deal ‘waives’ the debt ceiling until January 2025. This is a precarious date, as the newly elected Congress and US president take office in January 2025. Congress is sworn in at the beginning of January and the U.S. president on January 25, 2025. The US avoided a default and can continue to issue debt into the financial markets. And if markets do not buy the newly issued debt the US treasury can turn to the Federal Reserve to snap up the excess. Even though the US is paying a much higher interest rate this year compared to the last several years, it can continue to pay the interest on that debt by issuing more debt. For other countries this is not the case, however. The rise in interest rates has pushed other countries to the brink and now a sovereign debt crisis is lurking.
Lithium Prices Begin to Turnaround in China, After A Sharp Decline
In China’s domestic spot market – the key determinant of prices globally – lithium carbonate and hydroxide prices have plunged by more than 60% from the record highs seen last December. As of early May, spot prices for ‘lithium carbonate battery grade, EXW China’ stood at only US$26,850 per tonne – 67% below the US$81,000 record of December 7, 2022. ‘Lithium hydroxide EXW China’ has also dropped by 63.5% over roughly the same time period (based on BMI price assessments). Outside China, ‘combined spot & contract prices’ have followed suit, in lagged response to weaker prices in China, but so far have held up at higher levels. ‘Lithium carbonate CIF North America’ has fallen from a high of US$70,000 per tonne in mid-January to US$47,500 in mid-May. Turning to feedstock, spodumene prices FOB Australia (6% concentrates) averaged US$4,750 per tonne in early May – 25.8% below the US$6,401 record high at the end of 2022 but tumbled further to US$3,250 on May 17. Prices in China appear to be bottoming now. BMI reports that spot ‘lithium carbonate battery grade EXW China’ inched up to US$33,600 in mid-May. Lithium hydroxide has also found a floor and is rebounding now. While lithium prices are not truly set on commodity markets and do not fluctuate intra-day, prices can nevertheless be quite volatile – when market sentiment changes dramatically. The price correction came at a time of stepped-up world supplies and global macro-economic headwinds. However, of greater importance has been the expiry of Beijing’s cash incentives for electric vehicle purchases in late 2022, producing a huge swing in actual consumer NEV sales – pushing purchases to record highs in 2022: Q4, and then to low levels in the opening months of 2023. This caused a significant inventory buildup in China of cathode materials, cathodes, and batteries at manufacturing facilities, requiring inventory reduction and reducing lithium orders.
Gold & Silver Mergers & Acquisitions
Since 2010 there have been nearly 2,900 gold related M&A deals totaling over to $240B. Over the last 12 years, on average there have been 220 deals annually. In 2022, deals of ~$21B closed, with slightly over $10B in 2021. There have been a few notable deals including the Agnico Eagle/ Pan American Silver acquisition of Yamama Gold Inc. which closed in March 2023 for ~$4.8B. Post the transaction, Pan Am added four new mines (Cerro Moro, El Penon, Mineara Florida and Jacobina), with Agnico now having complete ownership of the Canadian Malartic Complex. Collectively, Yamana’s former mining assets produced ~9.2 silver ounces and nearly 400K gold ounces last year. In 2022, Endeavour Silver acquired the Pitarrilla project in Mexico for ~$70M. As shown in Figure 1, for primary silver producers since 2010, there have been 186 completed or pending M&A valued slightly over $17.6B1. In 2021 and 2022, there were 22 and 19 completed deals, respectively. To date in 2023, deal volume has been relatively light, totaling less than $300M over 11 deals.
M&A activity has been much more prevalent with the gold producers, highlighted by Agnico acquiring Kirkland Gold in 2021 for slightly over $10B and Newmont’s recently renegotiated bid for Newcrest for ~$19B.
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