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Nick Pocrnic: Welcome back to Market Points. My name is Nick Pocrnic, the Mining Sales Specialist at Scotiabank. We are recording this podcast on October 21st, 2024. Today, we’ll be diving into the upcoming U.S. election, in the context of the commodity markets. With the election just around the corner, we’ll explore how different outcomes could influence key commodities like gold, silver, copper, and uranium. We’ll also discuss the broader themes of the green transition, and the role of energy in meeting rising AI demands.
Joining me today in studio are three experts who will help unpack these dynamics. Hugo Ste-Marie, Director, Portfolio and Quantitative Strategy. Hugo, good day, sir.
Hugo Ste-Marie: Hi Nick, great to be here.
NP: Great to have you here. Ovais Habib, Managing Director, Precious Metals Research. Ovais, good day.
Ovais Habib: Thanks Nick, great to be here as well.
NP: And finally, Orest Wowkodaw, Managing Director, Base Metals out of Research. Good to see you.
Orest Wowkodaw: Thanks, Nick. Looking forward to our discussion.
NP: Gentlemen, once again, welcome. I’m excited to have each of you here, and I know our listeners are eager to hear your perspectives.
So, let’s start off with Hugo. How about giving us just a broad view of how elections have historically affected the commodity markets, and how do you see this particular election playing out in terms of market impact?
HSM: Absolutely. Thanks, Nick. Yeah, elections tend to, I would say, have a long-term influence on commodity markets rather than a short-term one, and it kind of makes sense, right? The president will have influence over, I would say, key industrials and, I would say, environmental policies, which in turn will have impact on commodity demand over time.
So I don’t expect that to change, so the election will have a long-term impact on commodity prices. What I think could change, however, is the commodity price response under a Republican or Democrat administration.
If we go back to the early 1970s, copper usually performed best in a 12-month period following the election of a Republican administration. In contrast, under a Democratic administration, silver tends to be the main, I would say, beneficiary, followed by gold, while copper usually retreats.
I think we have a different setup this time, and metals will likely respond differently than they usually did. In fact, I believe that if Harris wins, I would suspect we have a greener presidency than a Trump administration.
The Inflation Reduction Act will likely survive. That will probably secure, I would say, green spending. Harris will likely keep pushing to reduce emissions from buildings, heavy industries such as transportation. So, in a nutshell, as I was saying, green spending is secure and that should be more positive for copper and silver, and I would say all renewable-related commodities.
Under a Trump administration version 2.0, I’d suspect that Trump will likely slow down the energy transition. As you know, he has been very vocal about reversing some federal climate action, which has, in his opinion, created a lot of inflationary pressure, increased the cost of energy.
So, he has been also very vocal about the possibility of ending EV subsidies. So again, if he slows the green transition, the EV adoption could certainly mean less demand for copper and silver over time. I think under a Trump administration, gold is more likely to shine due to elevated uncertainty over the coming years.
But at this point, I would say when you look at the election, how it goes, it’s certainly too close to call. They’re head-to-head in most polls’ surveys. In terms of price response to the election, might be different this time around, this is key for us.
NP: What is your sort of take here on how oil and gas would perform in either a Trump or Harris presidency?
HSM: Even though Trump, I would say, is expected to, or has mentioned that he wants to bring energy prices down, I think what he might do in the U.S. to stimulate production might be more than offset by what we see on a geopolitical front, in the sense that we still have a war in the Middle East, we don’t know where it is going to go, but clearly if Iran gets involved prices could go up, and more likely Trump will probably be a hawk regarding Iran oil exports on the global market.
So, exports from Iran have been growing at a steady and fast pace in the past year-and-a-half or so. Nuclear relief is putting more efforts to bring that down. Again, that could offset probably a higher level of production at home. And overall prices could still manage to go up.
Under a Harris administration, even though she has been, I would say trying to get back in the middle closer to the political center, she’s still likely to get tough on the energy industries that could certainly put more pressure there.
NP: Orest, copper’s a core metal for you, and maybe just walk us through your thoughts on policies under both candidates and thoughts on the copper price as well. Would be good to get your take.
OW: Sure. Thanks, Nick. Building on what Hugo talked about earlier about precedents and post-elections, pre-elections and how that impacts the various commodities. Certainly, if we look at all the elections since 1972 in the U.S., copper has done better post-elections than pre-elections. On average, the copper price has been up about 10 percent per year post-election versus only up 4 percent pre-election years. And certainly the last two elections, we saw huge moves in copper; the 2016 Trump election victory, copper was up 37 percent after the year following that victory.
Similar to the 2020 Biden victory, copper was up 41 percent, but obviously, a lot of that had to do with the recovery post-pandemic. If we take a look at what’s happening on a specific party basis and history, I do think we could see some odd results this year in terms of reaction to commodity pricing.
I mean, historically, the copper price has done better under a Republican win versus a Democratic, and on average, copper’s been up about 11.8 percent per year in the year following a Republican win versus up 8 percent following a Democratic win. But I feel like this election could be very different just given the policies of the two candidates here.
Specifically, when I think about what Trump is, his agenda, he seems very intent on raising import tariffs specifically from China. In our view, that’s both inflationary and potentially negative for domestic economic growth. And then when you think about what the Democrats are standing for, this administration, just like the previous one, seems a lot more supportive of incentivizing domestic infrastructure reinvestment, advancing the energy transition, which are both positive demand drivers for copper.
So, I really feel like going into this election, a Democratic victory could actually be more positive for copper, at least in the short term. Certainly we’re bullish on the outlook for the copper market. We do see a structural imbalance coming from a lack of supply growth in the copper market.
I think, regardless of who wins, we are expecting higher copper pricing if we look out two, three, four years from now, as we see demand outstripping supply. But certainly in the near term, we are expecting some influence here from the election.
NP: When we talk about the electrification theme, and, you know, we’ve been having a lot of these conversations with investors this week ahead of Q3 earnings calls. And the AI theme, you know, something that we’ve been talking about on and off for most of the year. The first go around was in the spring, as you recall, and the copper and the copper equities ripped higher. Now it’s seemed that that theme seems to be making its way over to the uranium square here as of late. Orest, maybe just a walk-through um, your thoughts on the uranium trade from 30,000 feet.
OW: Yeah, it’s been an interesting ride. Obviously, on the uranium market, we went through a 10-year really painful bear market post-Fukushima.
And then all of a sudden, post-pandemic, nuclear technology basically went from pariah energy to part of the green solution. And then you overlay some of the geopolitics in the last few years, all of a sudden, countries are waking up to the fact that energy independence is also a pretty important thematic. It actually matters where you get your energy from, especially if those countries become more hostile from a relationship perspective.
So, we’ve seen a pretty big resurgence in nuclear over the last few years, and I feel like 2024, we’ve seen that taken to yet another higher level. I was recently with Cameco management, for example, they pointed out that the outlook for nuclear has not been this good for 40 years globally.
Really some interesting trends of late that’s gotten the market and the equities really excited. I went through a time where we were counting the number of closures, early closures of U.S.-based reactors. Really, that was only about five years ago. Now we’re talking about restarting idled reactors.
I think the market’s hoping that we’ll see some SMRs online by end of this decade. You know, if you’re big tech out there, you’re wondering how and where all the power is going to come from in the United States and other developed markets to be able to power these very hungry data centers and nuclear is one of the big beneficiaries of this trend.
So we’ve certainly seen that frenzy in the nuclear market is now translating into the uranium equities being the prime derivative of that trade and it’s certainly been significant volatility, but I do think the positive enthusiasm that we’re seeing a nuclear is warranted on uranium, although we’ve yet to see the uranium price move in contagion with the move in the equities. But certainly, the outlook for nuclear and by extension uranium looks very solid out there.
NP: And, you know, we’ve been talking about the need for power. And where is that going to come in the context of getting greener going forward, like the Freedom 2050, getting off fossil fuels, that’s one dynamic. And the other one that we’ve been talking about is the need for more power on the AI side.
Putting that in, you know, as the background there, but just in terms of the upcoming presidential election in the U.S. Do you think it matters either way?
OW: Yeah, that’s a good one. It’s not as clear cut, in my view, on the uranium side as it is, say, for copper.
Certainly, a Democratic win, I think, would be supportive of pursuing green energy. And uranium, nuclear, certainly falls into that category. But, I think the Trump administration is still bullish for nuclear at the expense of some of the renewables out there. Either way, I actually think nuclear, uranium, has a pretty positive outlook, more so than say copper, which seems a little bit more binary in the short term.
NP: So, Orest, we spent some time talking about the macro and the impact on the commodities. Maybe moving just in terms of the next leg on M&A in your space. We’ve seen some trades hit the tape here recently. Maybe share with the listeners your thoughts on what needs to happen for more M&A in 2025 and beyond. And where do you think the next trade sort of happen. Are we going to see a more consolidation on the small cap side? Are we going to see some of the big global miners actually get into the copper trade?
OW: Sure. Yeah. Thanks, Nick. I personally think we are going to see a lot more consolidation on some of these green commodities like copper and potentially uranium. And the issue really starts at the top.
If you look at the world’s biggest diversified mining companies, the truth is they’re just not that diversified. They’re actually heavily skewed to bulk commodities. And so they’re all under the same gun from their shareholders in that they need to add significantly more green metals to the portfolio, copper being the most in demand given the positive outlook for the fundamentals, especially on a medium- to long-term basis.
So we’ve already seen some big proposed transactions this year, but I think that trend will continue and it will trickle down to the mid caps and the small caps. And really, beyond just the portfolio transformation, the driving issue behind M&A is it’s just too hard to build mines. And that fact has just really not changed.
We’ve seen the copper production growth that I’m seeing last year, this year, next year, really is a result of the previous wave of projects finally reaching capacity and ramping. And when I look ahead, there’s very few projects that have been sanctioned post-pandemic. It’s not an issue of price, although that’s arguably part of the equation.
The bigger issue to me is a lack of available shovel-ready projects. And a lot of these big miners have balance sheets that are ready to go and they just don’t have projects to build. And that’s why I think we’re seeing more M&A and I think that will continue and it’ll probably trickle down from the large caps to the mid-caps to the small caps.
We have seen some large high-grade, I would call it world-class development deposits go already from an M&A perspective. I’m not sure if I necessarily see the more lower-quality, lower-grade deposits attract those kinds of bids at this point in the cycle. To me, those tend to come when we’re more at peak pricing.
Arguably, I think we’re closer to mid-cycle right now, but I think there’s definitely an arms race happening and will be happening here for copper assets. And it’ll be interesting to see also how that translates to the uranium market, with some big, high-grade deposits, reaching, or potentially reaching some big permitting milestones here over the next 6 to 12 months. Whether we see bigger fish come and diversify into uranium, ultimately, given it’s also part of the energy transition thematic here.
So, I think there’s, when I look at valuations out there on the equities, I think there’s definitely room for more M&A just given the difficulty in finding and building projects out there.
NP: Ovais, when it comes to the gold equities, we’ve seen some M&A here recently. It’s picked up. Maybe just walk through what you’re thinking in terms of valuation when it comes to M&A, consolidation in the senior space, in the junior space, what should we be looking for in 2025? Are we going to see more M&A?
OH: Great question, Nick, and I do believe yes. I think we will be seeing more M&A in the space. In my opinion, I think we’ll see more in the mid-tier space. Where I think the mid-tiers are looking for acquiring some of the juniors to replace the reserves and look at entering into, specific jurisdictions where they’re looking to improve their jurisdictions or even diversifying out of their existing kind of portfolio.
I think we should see some additional M&A in our space. And when I talk about mid-tiers, we’re looking at sub–$10 billion market cap and I think, companies that they would be looking at are, assets or deposits in Canada specifically to diversify their portfolio. U.S. is also a great jurisdiction. LatAm, I think we’re going to get some more transactions in that area as well.
Where I see less transactions happening would be, I would say, in West Africa or the Africas, where we’ve seen significant increase in geopolitical risk as well as these countries looking to increase their fiscal budget in terms of how much they’re taking from the board companies in terms of economics. So, I think we could see less on the West Africa side or Africa side, but I see more M&A taking place in the North America and South America. And the mid-tiers, I think, are going to be very active.
NP: So, you bring up a good point in terms of where we think these transactions or potential transactions can take place, and for various reasons. How do you sort of square that against valuation? Because these are assets that are trading at a premium to the group as a whole, aren’t they? So, how are you going to see that come through? Or, or how are companies with higher costs of capital going to be able to execute on transactions like that?
OH: In terms of the valuations where we sit right now, yes, clearly the North American development names or even, single asset producers are trading or have started trading at a premium. And that’s just because again, they are operating in better jurisdiction. They are looking for quality assets in quality jurisdictions. So, I think the mid-tiers will eventually have to pay up.
Now, again, we’ve seen transactions over the last couple of months where, you know B2Gold has acquired Sabina, Osisko was acquired by Goldfields. So, you can clearly see there is a room and there’s appetite for these North American producers and developers.
And I think, you know, the mid-tiers are going to gravitate towards these producers and which obviously would push the valuations even higher. There could be some bidding wars as well where we only have a certain number of developers and producers in this region. So we could see elevated levels of premiums associated with these transactions.
NP: I find it quite interesting that the most recent consolidation in the precious metal space has been the silvers, right? Between Gatos being taken out and SilverCrest just a week or two ago, right? So, do you think we’re going to see some more consolidation there on the silver side as well?
OH: I think so, Nick.
And, and I think, you know, these companies that were acquiring got to watch like First Majestic as well as Coeur acquiring SilverCrest. I think they’re going after quality silver projects, which before the silver price starts moving. So, I think there’s going to be a little bit of a scramble over here. Where I believe, we have a few names and under our coverage that still have not been acquired. And I think we could see further consolidation on the silver side. But yes, I do agree that, yes, we could see further consolidation in the silver side.
NP: Before we wrap it up, I’d love to get a quick takeaway from each of you. How should investors be positioning themselves given the potential outcomes of this election and your sort of key takeaways or key messages that you would like to leave listeners with. Maybe Hugo, we’ll start with you.
HSM: If I were to consider, I would say, only the U.S. election, all else equal, I think the Harris presidency would favour copper and silver over gold or energy. Trump presidency, my pecking order would be gold over copper and silver. And don’t forget to think about a potential contested election that could also happen just in the days or maybe next couple of weeks following November 5th. If that’s the case, I would say gold could have a strong run with uncertainty going up and volatility rising as well on the equity market.
When you consider everything, so not just the election, but the global macro geopolitical concern, I would say my pecking order clearly gold is the best position asset or commodity to, I would say shine under several macro political and geopolitical scenarios relative to other commodities. Then I would go with energy followed by copper and base metal.
We still like the copper’s longer-term fundamentals, but clearly, I think in the short run, the metals require probably a more perfect setup to work and shoot much higher. That would include like visible signs of a sustained economic turnaround in China, including a reversal of fortune for the real estate market there.
A lot of clients have been concerned about the rising U.S. unemployment rate of late. And clearly a Kamala Harris presidency would support all green investment. So, if you have, or were to get all those three factors clearly, then copper and base metal would work way better.
NP: Hugo, you saved the best for last there. You had that in your pocket, didn’t you? Just in terms of the potential for a contested election. You bring up a very good point, right? That’s a scenario with uncertainty, again what metal thrives in uncertainty?
Orest, not to be outdone and not take away from your spotlight when it comes to copper or uranium. How about your sort of closing thoughts here?
OW: We’re really bullish when we think about the medium-term outlook for both copper and uranium. I think both markets are really well positioned to outshine most other commodities we follow.
Now, the issue we see is just near-term with the election. I do think there’s going to be a fair amount of noise here. And ultimately, no matter who wins the U.S. election, I think sentiment on these stocks and all these commodities is going to be trumped by what actually happens in China in terms of the day to day, whether we’re stimulus or whether we see a slowdown in China.
I mean, copper specifically with half the global consumption coming from China, we might get a small bounce in, or weakness, in copper depending on the U.S. election result. But ultimately, I think if there is a change in sentiment on the Chinese demand that’s going to have a way bigger impact on which way the commodities and ultimately the equities go in the near term.
We don’t really see the big structural imbalances in copper for about two, three years out. So, I kind of think it’s going to be noise in the near term before we get to a much more structurally tight market down the road.
NP: Ovais?
OH: I think U.S. presidential election does play a part, but I think it’s not the main driver for gold. I think I want to really stress that. Where we’re seeing gold prices being governed by is the current economic policies in place, the Fed expected to cut interest rates further, you’re looking at above average geopolitical risk globally, you’re looking at strong central bank purchases. So, all these factors do play a part in the gold price, as well as, you know, silver price kind of catching up. So, we are definitely bullish going into 2025 and beyond, in terms of where the gold price will settle down.
NP: Ovais, thank you very much.
Gentlemen, appreciate you taking the time out of your busy schedules to do this podcast. For all the listeners, there is an 18-page report published by the team on the impact of the U.S. presidential elections. Feel free to reach out to your salesperson at Scotia to get a copy of that if you don’t have access via Bloomberg. Happy to kick that over to you.
Once again, Nick Pocrnic here from Scotia. Gentlemen, thank you very much.
HSM: Thank you.
OH: Thanks, everyone. Great discussion.
OW: Thanks very much for listening today.
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