Industry Overview...Metals & Minerals

Industry Overview...Metals & Minerals

Our 2022 Sector Outlook

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The global economy is no doubt in a better position than we thought it would be at this time last year. But while year-ahead growth expectations rose rapidly through the early part of the year as vaccines rolled out, the optimism has pulled back sharply in recent months. Stepping back from the noise, 2021 has still proven to be a stronger-than-expected year, with that momentum likely carrying over into the start of 2022 . The relative buoyancy of global demand, against a complex and inelastic web of global supply chains has boosted inflation around the world. Fiscal and monetary stimulus has supported the elastic demand response. Many of these factors are expected to fade in 2022. That being said, TDS expects global GDP growth of ~4% y/y in 2022, which will be supportive for base metals consumption.

With slowing fiscal and monetary stimulus and likely some easing in supply chain bottlenecks, we think that it is unlikely that metal prices will return to their 2021 highs, but we also do not believe that a rout in metal prices is in the offing. Recent negative supply shocks are also unlikely to be fully resolved in 2022 due to what look like semi-permanent scarcities of labour, logistics, and other infrastructure resources. In conjunction, we also believe that resource nationalism could intensify into 2022, particularly in South America. A reversal of these issues will be required for a sustained and rapid pace of production increases. At this stage, available inventory of metals such as zinc and copper are quite limited, which is a situation that we do not expect to change very much next year. We are forecasting tightly supplied markets for copper, nickel and zinc through at least H1/22.

Mine supply is taking hits from all directions. We continue to anticipate above average copper mine supply growth over the next two years. Although supply growth is heavily weighted toward the latter part of 2022 and 2023 with several large, new copper mines reaching production. In the interim, constrained supply (particularly following the closure of the Las Bambas mine in Peru, 2% of global mine supply) will support prices. While we expect a substantial increase in total nickel supply, demand is expected to grow at a faster rate in 2022. Thus far, China's power crisis has forced stainless steel mills to curtail their operating rates, but the power shortage has cut both ways, as the impact of these restrictions on Nickel Pig Iron (NPI) has further tightened nickel supply in China. Power shortages and surging power costs have also become critical for zinc smelters. However, while some smelters have sufficiently felt the squeeze from the power crisis to curtail production, zinc miners have benefited from exceptional margins. We forecast that refined supply growth will likely moderate as high power prices and low treatment charges pressure smelter output.

Our Sector Stance: Overweight

Overweight sector recommendation maintained. We continue to believe that copper has very positive medium to long term fundamentals, supported by the transition to a low-carbon economy and weak copper supply pipeline.

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Our High Conviction Buy

Solaris Resources Inc.

SLS-T: C$16.11; SPEC BUY

12-Month Target: C$22.00

■ Solaris has been a preferred name of ours for risk tolerant investors since we initiated coverage in September 2020. Given current market conditions, we believe exploration-stage companies (pre-resource) could get to a valuation above C$3bln (SLS currently ~C$1.8bln) if they continuously deliver positive results.

■ World-class discoveries are rare and unique, and we believe that Solaris is in the early stages of making multiple world-class discoveries among the 7km x 5km cluster of porphyries on the Warintza property in Ecuador. The company has already made discoveries at West/East (last year). First results from South are expected soon and Solaris recently proposed a spin-out to unlock additional value.

■ Our model for Warintza is based only on Central (we anticipate resources of ~620 Mt at ~0.65% CuEq), however, recent drilling suggests that we could potentially see a much bigger resource and does not incorporate the potential at the company's other targets (West, East, South, Yawi, etc.).

■ Copper M&A cycle has begun –Solaris, in our view, continues to be the best copper take-out development story in our coverage universe. Copper M&A cycle has begun, demonstrated by Sandfire's $1.9bln acquisition of MATSA (September 2021), Capstone's purchase of Mantos (November 2021), Lundin Mining's proposal to acquire Josemaria (December 2021), among others.

■ We expect the stock to continue to re-rate higher as the company demonstrates the growth potential of the project.

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TD Securities Inc,

Equity research,

January, 2022