Falling gold and silver prices affect project financing

Junior miners are struggling to raise funds to advance gold and silver projects in Latin America as falling prices weigh on equity financing.

But any price recovery could see more financing deals cross the line.

Gold has fallen to around US$1,700/oz in recent weeks, after trading widely in the US$1,750-2,000/oz range for about two years, while silver has fallen from US$22-30/oz to $18-$20/oz. .

The move down was largely due to rising US interest rates and a stronger US dollar, Trevor Turnbull, director of global gold and precious metals equity research at Scotia Capital, told BNamericas.

And the impact on the mining industry is being felt most by project developers.

“Growers continue to make good margins and their balance sheets are in very good shape,” he said. “Where this price is causing problems is with companies that are trying to develop and need funding.”

Stock markets, which normally provide some of the financing needed to build mining projects, are virtually closed to these development-focused companies.

The financings that have been completed have been on highly dilutive terms, according to Turnbull. “Appetite for these deals is somewhat low, so it’s very difficult to complete the financing packages that developers need,” he added.

FLOWS, ELIMINATION OF RISKS

One result has been increased activity in the streaming space, with companies turning to royalty and streaming companies like Wheaton Precious Metals in a bid to start raising financing for their projects, Turnbull said.

With limited equity financing, companies are also focusing their efforts on de-risking projects, obtaining permits and agreeing to debt financing terms.

“It is possible that in better market conditions [companies] I’d be trying to move a little faster,” he added.

PRICE REBOUND?

But the situation is likely to change quickly if gold and silver prices start to rise again.

Rather than hitting a particularly higher price, market participants will want to see momentum and an upward trajectory in prices, which will boost sentiment and get people excited, Turnbull said.

“We don’t need to see gold rally to, say, US$1,800/oz as much as you just need to see an uptrend and you’ll see the markets reopen for people looking for gold exposure,” he added.

And the change could be sudden rather than gradual.

“When gold moves, it could move quite quickly in an upward direction, and companies will take advantage of that window to fund themselves,” he said. “You could see the price of gold start to go up and then a lot of financings that have been waiting for better terms.”

PRICE OUTLOOK

The outlook for gold and silver prices is favorable on many fronts.

Gold prices have risen in many currencies globally, and a change in investor sentiment could be in the offing.

“There is some money that is still happy to be in the broader market and hasn’t yet looked to that risk-off trade where they could spend more time thinking about gold and ways to preserve capital,” Turnbull said.

“We just haven’t gotten to that point, but we think it will. There are many pieces prepared for gold to rise, but in the short term everything depends on the dollar.”

For silver, prices could be supported by rising industrial demand and limited production growth opportunities.

Higher production could come from the build-up of new copper assets that produce silver as a by-product and a possible restart of Pan American Silver’s suspended Escobal asset in Guatemala, which previously produced around 20Moz/y silver.

Consultation with indigenous communities required to restart is underway, but Turnbull does not expect operations to start again until at least 2025.

“We continue to see strength in silver, driven by the economic recovery where there would be more manufacturing use for silver in electronics and some of the solar stuff that is funded through the US and other programs, but that really It hasn’t been finalized on the price yet,” he added.

Scotia Capital expects gold prices to be around US$1,800/oz next year, falling to US$1,600/oz in 2024, with silver at US$24/oz in 2023, falling to US$22.50/oz the following year.

Latin America is a key producer of gold and silver, with Peru and Mexico among the world’s largest metal miners.

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