Have Gold Miners Earned Back Trust?
Not yet, says VanEck’s Imaru Casanova, but there is a path to redemption
It’s not easy being a specialist gold fund manager, according to VanEck portfolio manager, gold and precious metals strategy Imaru Casanova.
Speaking via video link from New York at this week’s AFR Mining Summit in Perth, Casanova lamented the lack of generalist investor interest in the gold sector.
“There’s a particular kind of frustration that comes with running a specialist fund in a sector you know so well, like I know this one and have been involved with for so long, and believe deeply in, at a time when everything is going right and still not be able to get investors more broadly to pay attention,” she said.
“Gold is at all-time highs. Producers are carrying the best balance sheets they’ve had in a generation. Free cashflow is strong. Management teams, by and large, are showing more discipline than this sector has historically been known for by almost every measure.
“The conditions for a sustained re-rating of gold equities are in place, and yet the generalist investor is largely absent. The capital that could flow into this sector, and that this sector deserves, is sitting on the sidelines. It’s going into gold ETFs, or it’s going somewhere else entirely.”
What’s missing?
Based on conversations with generalist investors, Casanova said there was one thing needed to achieve a re-rating in gold equities – trust.
“I spent a lot of time talking to existing and potential clients about gold and gold equities, and at some point, almost always, during the conversation, we get the question, the comment, that makes it clear that they see the opportunity, but they’re not yet convinced,” she said.
“It’s not scepticism about gold – it is the lack of trust in gold equities as the right vehicle to get exposure to gold.”
Casanova said the memories of value destruction in the previous cycle was still too fresh in some investors’ minds.
There was still a perception of poorly conceived mergers and acquisitions, cost creep, dividend fragility, low returns and hard-to-manage risks.
“These are not irrational fears – they’re the accumulated memory of a sector that in the past has let investors down,” Casanova said.
The road back
Casanova offered six principles to convert sceptical capital into committed shareholders.
“Protect your leverage to the gold price, defend margins, and fight cost inflation, regardless of the gold price environment,” she said.
“Avoid hedging too much of your production – it removes the main reason investors want to own gold equities.”
Casanova said gold miners should set guidance they could beat and aim to under-promise and overdeliver every time.
“A consistent track record of delivery does compound into a valuation premium,” she said.
Value creation should also be defined.
“State your ROIC target, your hurdle rates publicly, then report against them,” Casanova said.
“If you won’t measure it, the market won’t believe it.”
The fourth principle is accountability.
“This is a complex and risky business. Things will go wrong,” Casanova said.
“When something goes wrong, own it early, explain it clearly, and show what changes were made to address it and learn from those lessons.”
Simplicity is also important, according to Casanova.
“One strategy, consistently executed,” she said.
“The best gold companies are boring in the best way possible – we like it that way.
“Additional complexity is a red flag.”
Any M&A should be clearly justified and promised synergies and savings should be tracked and reported quarterly.
“This single change would do a great deal for sector re-rating,” Casanova said.
Expanding on M&A, Casanova said the best consolidation was regional, rational and tracked.
“Strong, proven management teams controlling more assets – we’re all up for that,” she said.
“What doesn’t work? Scale for its own sake, diluted management focus, cross-continental complexity synergies that are never delivered, integration risk that is always underestimated, poor, rushed due diligence that leads to material surprises.
“We want growth that makes sense, regional know-how that can be leveraged, manageable size – six to eight operations – clearly stated synergies with honest post-mortems, and quarterly tracking against commitments.”
Scarcest resource
Casanova said a big component of a company’s success and the most important driver behind building trust was management.
“Unfortunately, that might be the scarcest of all resources in this industry,” she said.
“Elite, tier one management. We focus a lot on tier one assets, but what we really need more of in this industry is tier one teams that can produce gold profitably from even the most challenging deposits.”
She said the characteristics of successful management teams were proven success through a full cycle – not just a bull run, technical expertise and regional know-how, capital allocation discipline, quality communication and a well-articulated strategy, stability and succession, and skin in the game.
“This is a highly fragmented sector, and with too many assets in too many hands, more companies and assets than it has great teams to run them,” Casanova said.
“Poor leadership can destroy value at every stage of the gold mining cycle – we all have seen that in action.”
Casanova said the only way to achieve a re-rating was to build trust.
“If we build it, they will come. Isn’t that what they say? We need more than just specialist mining funds. We need generalist capital,” she said.
“A small allocation from the generalist pool can have large implications in what’s a relatively small sector.
“Companies with trusted management retain shareholders in downturns. They consistently demonstrate the ability to navigate the cycles.”
Casanova said gold equities needed to earn their seat at the table.
“The opportunity in front of this sector is larger than the next quarterly result or the next resource upgrade,” she said.
“If the industry continues on this current path – disciplined, transparent, accountable – gold mining equities can earn something that has long eluded them: a permanent place on the radar of global investors, a recognised allocation slip sitting right alongside other real assets and natural resources, and hard asset strategies in sophisticated portfolios around the globe.
“Not just owned opportunistically when gold spikes, but held structurally because the case is compelling and the trust has been built – that is the real prize – and I feel for the first time this is genuinely within reach.”