Gold, silver price falls hit project financing

Junior mining companies 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 crossing the line.

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

The downward move has been largely driven by interest rate hikes in the US and the strength of the US dollar, Trevor Turnbull, director, gold and precious metals global equity research at Scotia Capital, told BNamericas.

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

“The producers are still making strong margins and their balance sheets are in really good shape,” he said. “Where this price is causing issue is with companies that are trying to develop and need to finance.”

Equity markets – which normally provide part of the financing needed to build mining projects – are virtually closed to these development-focused firms.

Financings that have been completed have been on highly dilutive terms, according to Turnbull. “The appetite for these deals is somewhat low, so it’s making it really tough to complete the financing packages that developers need,” he added.

STREAMS, DE-RISKING

One result has been heightened activity in the streaming space, with companies turning to royalty and streaming companies such as Wheaton Precious Metals in an attempt to begin to piece together financing for their projects, Turnbull said.

With equity financing limited, companies are also focusing efforts on de-risking projects, by getting permits in place and agreeing debt financing terms.

“It is possible that in better market conditions [companies] would be trying to move a bit faster,” he added.

PRICE REBOUND?

But the situation is likely to change quickly if gold and silver prices begin climbing again.

Rather than reaching 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 recover to, say, US$1,800/oz as much as you just need to see it trending upward and you will 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 pretty quickly in the upward direction, and companies will take advantage of that window to finance,” he said. “You could see the gold price start to rise and then a lot of financings that have been waiting for better conditions.”

PRICE OUTLOOK

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

Prices of gold have risen in many currencies globally, and a change in investor sentiment could be coming.

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

“We just haven’t reached that point but we do think that will be coming. There are a lot of the pieces in place for gold to go higher, but near-term it’s all about the dollar.”

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

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

A consultation with indigenous communities required for a restart is underway, but Turnbull does not expect operations to begin again until at least 2025.

“We continue to see strength in silver, driven by economic recovery where there would be more fabrication use for silver in electronics and some of the solar stuff that is getting funded through the US and other programs, but that has not really come to fruition in the price yet,” he added.

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

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