2023-04-13 08:21:01 ET
Summary
- SilverCrest Metals Inc. explores and develops sites in Mexico containing precious metals.
- The outlook for precious metals depends on the dynamic between inflation and monetary policy in the wake of global economic instability brought on by inflation and rising interest rates.
- While the company is experiencing some short-term challenges, its expansion efforts bode well for its future.
Investment Thesis
SilverCrest Metals Inc. ( SILV ) explores and develops sites in Mexico containing precious metals. Primarily, the company explores silver and gold assets. Gold and silver prices fluctuate in response to changes in investor demand, just like the prices of other types of investments. The fundamentals of supply and demand, as well as the state of the economy, can cause price changes.
The outlook for precious metals depends on the dynamic between inflation and monetary policy in the wake of global economic instability brought on by inflation and rising interest rates. The strong US dollar also influences the price of precious metals, especially gold. Although the short-term forecast for precious metals is dismal because of the US currency and the economy, I am pretty pleased with the company's dedication to expansion ambitions, which appear to be paying off.
I am upbeat about this company's long-term and rank it a buy for investors wishing to diversify their portfolio in the precious metals sector. Due to its expansion plans, severe macroeconomic headwinds are transient and will subside.
Gold and Silver Prices Fluctuate: A Little History Behind The Volatility
Gold and silver prices can fluctuate like any other financial item on the market. Supply and demand fundamentals might shift, which can cause a price shift. Traders set gold spot prices on futures exchanges. When the US market is closed, metals contracts are traded in London and Shanghai. However, the US COMEX exchange is the most prominent and influential metal price market. The spot price is when a transaction can be settled instantly.
A century ago, an ounce of gold cost only $20. Gold's price per ounce has ranged from $1,200 to $1,900 in the past few years. Over the previous century, that's a tremendous increase in absolute terms. Gold's high price has nothing to do with market forces. It's because the value of the currency used to express gold prices has dropped significantly. (Since the Federal Reserve was established in 1913, the value of the US dollar has fallen by about 97%.)
Gold and silver prices follow similar trends, albeit with differing intensities. Due to silver's higher volatility, gold's price swings are often amplified when the precious metal is involved.
However, there may be times when silver's price diverges from gold's. For instance, silver prices may spike in isolation from gold if there is an actual scarcity in the silver market. Gold, as a haven, might see gains during a financial crisis, but silver's industrial demand might take a knock.
The Outlook Of Precious Metal
The price of precious metals saw a tiny uptick in December, but it's still far lower than in March 2022. Safe-haven demand and high inflation worries are still being outweighed by rising interest rates and a strong US dollar. Both positive and negative forces will act on precious metal prices in 2023. Tightening monetary policy more forcefully in reaction to high inflation would have a depressing effect on prices. In contrast, a halt or reversal of interest rate hikes and an escalation in geopolitical tensions may have the opposite effect.
In 2022, the Federal Reserve raised its key policy rate seven times by 4.25 percentage points, hitting its highest level in 15 years. The dollar index has also risen to its greatest level in 20 years. Thus, gold-backed exchange-traded funds continue to lose money, reducing investment demand. Gold prices fell owing to weak jewelry demand, particularly in China, due to pandemic restrictions. These variables outweigh robust central bank purchases.
Demand from industry, which accounts for over half of all silver demand, has fallen. While demand for photovoltaics (from the solar industry, for example) keeps rising, demand for consumer devices has dropped significantly. The November drop in global electronics production was the lowest since June 2020. Developed and developing countries have seen a decline in new export order s for manufactured goods.
This data suggests that the prognosis for precious metals is sensitive to how central banks handle inflation and interest rates. Trends in the price of precious metals will be determined by their development.
Dollar Predominance in Precious Metal Prices
Since the US dollar is the most widely used currency worldwide, it serves as the basis for pricing precious metals like gold and silver. Given the widespread usage of the dollar in international trade, it is not surprising that the value of precious metals is pegged to it. This is especially true during economic downturns when people seek safety in the form of precious metals as a hedge against inflation.
Since the early 1970s, when the United States abandoned the Gold Standard, there has been a relative inverse relationship between the financial patterns of precious metals and the United States Dollar. Silver and gold tend to maintain their low prices when the dollar is strong. Given the strong US dollar, this explains why the current prices for precious metals are common.
The US Dollar Index started 2022 strong. As the index is known, the Dixie reached 20-year highs from late April through late September. In the fourth quarter of 2022, the Federal Reserve raised interest rates to combat increasing inflation, cooling the dollar. The 2023 inflation and interest rate projections have fluctuated. The dollar mostly matched. The dollar reached its highest level since November in early March before investors' concerns over US bank viability caused a rapid reverse. As of midday March 16, 2023, the USDX is up 0.89% and 6.6% from a year ago.
The US dollar's future could affect inflation, international trade, technology stocks, and fiat currency alternatives like gold due to the uncertain economic prognosis for 2023.
Away From Temporary Headwinds: SILV's Long-term Term Growth Laid Strongly
The foregoing headwinds and the gloomy forecast for the precious metals are, in my opinion, cyclical and transient, making it all the more important to keep an eye on the company's fundamentals as they will ultimately define its position in this market. In light of this, SILV has invested in growth through various expansion plans, which appear to have begun bearing fruit.
Among its development initiatives is the Las Chispas Processing Plant Ramp-Up. Ahead of the 2021 Feasibility Study deadline, Ausenco Engineering Canada Inc. finished building the Las Chispas processing plant and turned it over to SilverCrest at the end of May 2022. SilverCrest has also completed its construction projects , including a road, bridge, 55 kilometers 33 kilovolt ("KV") power line, dry stack tailings facility, and assay laboratory. The final development piece is a 26-kilometer powerline for the Comisión Federal de Electricidad ("CFE," Mexico's power regulator).
The location has temporary access to CFE's 55 KV powerline, which provides adequate power for operations. Total construction capital costs are expected to be $133M, less than the $137.7M budget projected in the 2021 Feasibility Study.
The processing facility's daily tonnage and metallurgical recovery are already outpacing the 2021 Feasibility Study ramp-up forecasts of 850 tonnes per day and 87.9% Au and 84.8% Ag, or 86.3% AgEq for the month of September 2022. Recoveries of 96.3% Au and 96.8% Ag, or 96.6% AgEq, were projected to average for September 2022, with 986 tpd being the output. The achieved metallurgical recoveries (986 tpd) are higher than the recovery rates projected by the 2021 Feasibility Study, but this may change once the plant is operating at its total 1,250 tpd capacity.
Using this information as guidance, the company has made significant expenditures to boost productivity, which, in my opinion, put it in a stronger position once the tailwinds die down and prices rise. The fact that the company is not only ahead of time but also below budget indicates significant cost savings. Although the company's profitability may be held captive by the size of its investments, I am confident it will become profitable once full commercialization is achieved.
Conclusion
The current macroeconomic climate and the dollar's strength have led to low precious metal prices and uncertainty in the business. These challenges, though, are temporary, and I have confidence that they will fade away in due time. As a result, I'm enthusiastic about the company's growth strategies. Once the production is completely commercialized, the business will be in an excellent position to continue expanding. Therefore, I recommend the stock to investors who want to broaden their holdings in the precious metals market, with the caveat that they tread carefully given the company's dismal near-term prospects.
For further details see:
SilverCrest Metals: Short-Term Headwinds Persist, But The Future Is Bright