Markets & Metals Navigator: Bitcoin $20K, Silver and the Copper Crunch

Bitcoin Rips & Silver Follows Suit

Bitcoin (BTC) smashed through the $20K mark with authority last Wednesday, ending the week at $23,844 – up 27%.  Bitcoin has clearly established itself as the beta play on global fiat currency devaluation and institutional investors are beginning to take note.

As Bitcoin broke out, silver mounted an impressive rally of its own – rising 8% last week, ending the week at $25.81/oz.  This is the second time this month that silver has rallied over 7% in a week, injecting much needed life in the precious metals space.

The gold-silver ratio now stands at 71x, a significant pull back from its peak of 114 in March of this year.  During the last precious metals bull market, after the global financial crisis, the gold-silver ratio went as low as 38x in March of 2011. We believe investors should be prepared for further outperformance of silver vs. gold bullion over the medium term, as the gold-silver ratio trends towards the long-term average of 54x.

The Copper Inventory Crunch

Copper has had one of the most solid commodity bull runs in 2020, the red metal is up 28% year-to-date – outperforming all other base metals and outperforming gold (+25%).

Gigi Penna of Caldera House highlighted one of the key reasons for the rally – the current copper supply crunch. Global stockpiles of copper are at their lowest levels in 6 years.

As we stated in the Navigator last week, we are firmly in the view that copper is a leading indicator for inflation in the global economy. We believe the combination of tight supply/demand fundamentals along with global monetary money printing will leave copper well positioned again to be a top performing commodity in 2021.

Sierra Metals: Profitable Production Growth Runway Ahead

Copper miner Sierra Metals (NYSE:SMTS, TSX:SMT) has recently completed preliminary economic assessments (PEAs) for all three of its major mines: Yauricocha, Bolivar and Cusi.

The geological technical reports highlight a very profitable production growth runway ahead for the company. Each of their expansion projects are very value accretive, given the attractive internal rates of returns (IRRs) and high absolute net present values. To put it in perspective the value of all three expansions (US$114M) represents 21% of the current market cap of Sierra Metals (US$530M).

Management’s production outlook represents an impressive 14% compound annual growth rate (CAGR) over the next 5 years, placing Sierra Metals as one of the highest growth copper mining companies in the world.

At 1.5x forward price-to-sales, Sierra trades at a 47% discount to its copper peers, a 82% discount to silver peers and a 80% discount to the gold miner peer group.

The Fed May Not See Inflation But Americans Do

The NPR reported last week that 1 in 3 adults hare having trouble paying basic expenses such as food, rent, car payments, medical expenses or student loans.

The graph below clearly highlights the issue for the average American, U.S. wages have failed to keep pace with the rising costs of education, health care and housing.

The coronavirus has been an important trigger to highlight these disparities that have been festering for decades.  We believe investors will continue to look to gold, silver and bitcoin to hedge again these inflationary elements of the economy.

Shotgun Wedding: Tilray and Aphria Merge

Last Wednesday (December 16th) Tilray (NASD:TLRY) and Aphria (NYSE:APHA) announced they would combine their operations to form an entity worth C$4.8 billion and with 12-month trailing sales of $874 million.

Aphria shareholders will effectively be paying a 23% premium to Tilray’s previous day closing price of $7.87. Since the merger announcement Tilray stock price is up 13% and Aphria’s stock price has slumped 6%.

Tilray has been a disappointment for investors after a very quick rocket ship takeoff when it first listed in 2018, price-to-sales has fallen from a peak of 600x to its current 5x multiple.

Consolidation is certainly welcome in the cannabis industry but we fail to see the synergies in this merger, specifically we believe Aphria could have gotten better value with another acquisition.

 

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Sierra Metals is a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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Capital 10X gets down to the real money business, actionable financial insights for traders and investors. We analyze company earnings, interview management teams and help teach the fundamentals of financial analysis and options trading. Our mission is to hunt for genuine 10 baggers.
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