Commodity Update
Chart: How Every Commodity Performed in 2016
2016 Commodity Performance
It was an up and down year for commodities, but things ultimately finished in the black.
The S&P Goldman Sachs Commodity Index (GSCI) climbed 10.1% on the year – it was just enough to edge out the S&P 500, which ended 2016 with a 9.5% return.
Winners in 2016
The biggest winners on the year were base metals and the oil and gas sector.
Here’s how base metals did:
Base Metal | Q1 | Q2 | Q3 | Q4 | 2016 |
---|---|---|---|---|---|
Iron Ore | 37.0% | -6.2% | 6.3% | 31.1% | 81.0% |
Zinc | 20.0% | 13.1% | -3.2% | 26.1% | 65.7% |
Nickel | -3.1% | 13.9% | 11.9% | -5.0% | 17.3% |
Aluminum | 3.8% | 7.2% | 1.4% | 4.0% | 17.3% |
Copper | 0.1% | 3.9% | -0.5% | 13.1% | 17.1% |
Iron ore and zinc were the best performing commodities on the face of the planet in 2016. Iron finished up 81%, its first calendar gain in four years. Meanwhile, zinc shot up 65.7% on the year as major zinc mines shut down, and supply stockpiles dwindled.
Oil and gas also posted a major comeback in 2016:
Energy | Q1 | Q2 | Q3 | Q4 | 2016 |
---|---|---|---|---|---|
Natural gas | -17.0% | 53.3% | -2.7% | 28.0% | 58.5% |
Oil (Brent) | 0.6% | 35.1% | -1.2% | 13.6% | 52.4% |
Oil (WTI) | -3.2% | 37.3% | -2.1% | 11.4% | 44.9% |
It was a volatile year overall, but it appears that the worst of the downturn in energy prices is over.
Losers in 2016
Not all energy-related commodities could be so lucky.
Uranium continued its epic nosedive, losing -41.6% on the year. U3O8 now trades for $20.25/lb, a tiny fraction of its previous highs of over $100/lb in 2007.
Energy Losers | Q1 | Q2 | Q3 | Q4 | 2016 |
---|---|---|---|---|---|
Uranium | -16.0% | -7.4% | -12.0% | -14.7% | -41.6% |
Coal | 0.5% | -9.3% | 1.3% | 0.0% | -7.7% |
Coal has also performed abysmally, at least in North America where CAPP prices finished down on the year -7.7%. We previously showed the decline of coal in three charts, and it seems that coal will likely continue to be an unpopular choice for utility companies in the U.S. and Canada.
That said, it is worth mentioning that Australian coal prices went bonkers earlier this year due to a Chinese administrative oversight.
Mining
Volatile Returns: Commodity Investing Through Miners and Explorers
The companies that mine or explore for metals offer additional leverage to commodity prices, creating opportunities for astute investors.
Volatile Returns: Commodity Investing Through Miners
Investors consider gold and silver as safe haven investments. But the companies that produce gold and silver often offer volatile returns, creating opportunities for astute investors.
Volatility is a double-edged sword, particularly when it comes to commodity investing. During the good times, it can create skyrocketing returns. But during bad times, it can turn ugly.
Today’s infographic comes to us from Prospector Portal, and shows how investing in precious metals equities can outperform or underperform the broader metals market.
Capitalizing on Volatility: Timing Matters
Just like most investments, timing matters with commodities.
Due to the complex production processes of commodities, unexpected demand shocks are met with slower supply responses. This, along with other factors, creates commodity supercycles—extended periods of upswings and downswings in prices.
Investors must time their investments to take advantage of this volatility, and there are multiple ways to do so.
Three Ways to Invest in Commodities
There are three primary routes investors can take when it comes to investing in commodities.
Investment Method | Benefits | Limitations |
---|---|---|
Direct physical investment |
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Commodity futures |
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Commodity-related equities |
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Among these, commodity-related equities offer by far the most leverage to changes in prices. Let’s dive into how investors can use this leverage to their advantage with volatile metal prices.
The Fundamentals of Investing in Mining Equities
When it comes to commodity investing, targeting miners and mineral exploration companies presents fundamental benefits and drawbacks.
As metal prices rise, the performance of mining companies improves in several ways—while in deteriorating conditions, they do the opposite:
Category | Rising Commodity Prices | Falling Commodity Prices |
---|---|---|
Outlook | - Improved outlook | - Deteriorated outlook |
Stock Price Movement | - Equity growth | - Equity decline |
Dividend Payouts | - Increased dividends | - Decreased dividends |
Financial Performance | - Increased earnings | - Decreased earnings |
With the right timing, these ups and downs can create explosive opportunities.
Mining companies, especially explorers, use these price swings to their advantage and often produce market-beating returns during an upswing.
But how?
The Proof: How Mining Equities React to Metal Prices
Not only do price increases translate into higher profits for mining companies, but they can also change the outlook and value of exploration companies. As a result, investing in exploration companies can be a great way to gain exposure to changing prices.
That said, these types of companies can generate greater equity returns over a shorter period of time when prices are high, but they can also turn dramatically negative when prices are low.
Below, we compare how producers and exploration companies with a NI-43-101 compliant resource perform during bull and bear markets for precious metals.
All figures are in U.S. dollars unless otherwise stated.
Mining Company | Company Stage | Primary Metal Produced | Market Cap. Oct 31, 2019 | Market Cap. July 29, 2020 | Bull Market Performance (Nov. 1, 2019-July 29, 2020) | Bear Market Performance (Jan 02 – Dec 31, 2018) |
---|---|---|---|---|---|---|
Banyan Gold | Exploration/ Development | Gold | $6M | $40M | 500% | -44% |
Renforth Resources | Exploration | Gold | $8M | $10M | 11% | -10% |
Auryn Resources | Exploration | Gold, Copper | $181M | $330M | 60% | -39% |
Wesdome Gold Mines Ltd. | Production | Gold | $1,104M | $1,885M | 68% | 110% |
Monarch Gold | Exploration/ Development | Gold | $57M | $148M | 139% | -23% |
Red Pine Exploration | Exploration | Gold | $13M | $22M | 29% | -55% |
Revival Gold Inc. | Exploration/ Development | Gold | $27M | $74M | 113% | 5% |
Erdene Resource Development | Exploration/ Development | Gold | $36M | $111M | 222% | -56% |
Endeavor Mining Corp. | Production | Gold | $2,622M | $5,874M | 54% | -13% |
Yamana Gold Inc | Production | Gold | $4,572M | $8,279M | 87% | -22% |
During the bear market period, the price of gold declined by 2.66%, and despite engaging in exploration activity, most companies saw a slump in their share prices.
In particular, exploration companies, or juniors, took a heavier hit, with returns averaging -31.66%. But even during a bear market, a discovery can make all the difference—as was the case for producer Wesdome Gold Mines, generating a 109.95% return over 2018.
- Average returns for gold producers including Wesdome: 24.83%
- Average returns for gold producers excluding Wesdome: -17.65%
During the bull market period for gold, gold mining companies outperformed the price of gold, with juniors offering the highest equity returns averaging 153.43%. Gold producers outperformed the commodity market, the value of their equities increased 69.61%—less than half of that of exploration companies.
Silver: Bears vs Bulls
Similar to gold mining companies, performances of silver producers and explorers reflected the volatility in silver prices:
Company | Company Stage | Primary Metal Produced | Market Cap. Oct 31, 2019 | Market Cap. July 29, 2020 | Bull Market Performance (Nov. 1, 2019-July 29, 2020) | Bear Market Performance (Jan 02 – Dec 31, 2018) |
---|---|---|---|---|---|---|
Silvercrest Metals | Exploration | Silver | $694M | $1,449M | 78% | 117% |
Pan American Silver | Production | Silver | $2,973M | $10,550M | 125% | 1% |
Golden Minerals | Exploration | Silver | $30M | $80M | 80% | -42% |
Americas Gold and Silver | Production | Silver | $335M | $482M | 10% | -56% |
Dolly Varden Silver Corp. | Exploration | Silver | $28M | $74M | 152% | -32% |
Endeavour Silver | Production | Silver, Gold | $458M | $837M | 72% | -10% |
During the bear market period for silver, its price decreased by 9.8%. Explorers and producers both saw a dip in their share prices, with the equity of silver producers decreasing by 21.63%.
However, the discovery of a high-quality silver deposit again made the difference for SilverCrest Metals, which generated a 116.85% return over the year.
- Average returns for silver exploration companies including SilverCrest: 8.32%
- Average returns for silver exploration companies excluding SilverCrest: -27.86%
On the other hand, during the bull market period, the price of silver increased by 34.33%. Silver exploration companies surpassed the performance of the price of silver.
- Average returns for silver producers: 69.04%
- Average returns for silver exploration companies: 95.36%
The potential to generate massive returns and losses is evident in both cases for gold and silver.
The Investment Potential of Exploration
Mining equities tend to outperform underlying commodity prices during bull markets, while underperforming during bear markets.
For mining exploration companies, these effects are even more pronounced—exploration companies are high-risk but can offer high-reward when it comes to commodity investing.
To reap the rewards of volatile returns, you have to know the risks and catch the market at the right time.
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