The 800lb Gorilla in the Room
Morning Note from Victor Flores for Gold Forum Americas 2024, Day 1
In the past year, the price of gold has risen by 33.7% and year to date; the price is up 25.2%. Gold is now at all-time highs in nominal terms, and this should be music to the ears of the crowd assembled at Gold Forum Americas. But the subject of conversation revolves around the one thing missing at what should otherwise be a euphoric gathering: the lackluster behavior of the gold equities. Members of the Denver Gold Group and attending investors are puzzled by the disconnect; second-quarter financial results for the industry were stellar, but these companies' shares have not responded as forcefully as expected. Fund managers report that they are not seeing inflows.
The explanations for this phenomenon are varied and potentially complementary. Several of these seem to revolve around apathy towards gold equities, given the availability of other investment vehicles. In North America, speculative money still seems to be flowing into cryptocurrencies, which appears to have an appeal to a younger generation that has never heard of or been interested in gold. Crypto has blossomed into a full-fledged ecosystem with plenty of liquidity, and many reputable institutions (including some that offer gold products) now offer crypto-linked investments. In Asia, the well-reported interest in gold does not seem to translate into an interest in the stocks (Zijin and Shandong have underperformed gold). Chinese retail appetite for gold has been driven by a lack of other investment opportunities, given weak consumer demand, the crackdown on tech companies, and the dismal state of the real estate market.
An unpopular line of reasoning suggests that generalist investors have not forgiven the industry’s missteps regarding capital allocation and un-accretive M&A. There remains latent hope that investors will be unable to ignore the strong cash flow generation and strong financial results, that they will recognize that the industry has become a better allocator of capital and that once someone (perhaps quant funds?) makes the first move, the dam will break. Gold stocks will move, and the 800lb gorilla will quietly disappear.
In an excellent keynote presentation from Nikki Adshead-Bell (more on this to follow), she cites the lack of self-promotion in the industry. While the industry does provide ample support for gold as a commodity through its sponsorship of the World Gold Council, it does not do enough to promote the gold companies themselves. She noted that in today’s social media-savvy environment, where many get their news and information from TikTok and Snapchat, the mining companies either don’t have a social media strategy or are focused on platforms that are no longer as relevant.
Ms. Adshead-Bell pointed out that some gold miners highlight their copper credentials and believe they could be underperforming. She also noted that the industry doesn’t do enough to counter the (incorrect) perception that gold mining is a dirty industry that accounts for a disproportionate amount of greenhouse gas emissions (not true on either count). But it is up to the industry to try to dispel these notions.
Day 1 Presentation Themes
The first full day of presentations at the Gold Forum Americas 2024 featured several mid-tier companies, many of which focused on capital allocation as their overarching theme.
Perseus Mining, which produces approximately 500,000 ounces per annum from three mines in West Africa, pointed out that it has approved an AUD100 million share buyback and explained how it will manage the process according to market conditions. Similarly, Endeavour Mining pointed out that it would like to take advantage of the current strong cash flow generation to reduce its debt levels further. At a modest 0.8x net debt to LTM EBITDA, management would like to reduce it to 0.5x. Endeavour has already returned some USD900 million to its shareholders via dividends and share buybacks and expects to return a further USD460 million in 2024 and 2025. A much smaller company, Andean Precious Minerals, explained how it used its strong balance sheet to make an acquisition that has doubled its production without issuing any new equity. Harmony Gold Mines is husbanding the cash it generates so that it doesn’t have to come back to the market when it makes a construction decision on the Eva copper project in Australia.
Another group of companies highlighted that they are potentially poised for relating as they complete vital projects and begin deleveraging their balance sheets.
Equinox Mining has just completed the construction of the Greenstone gold mine in Ontario and, in the process of that and other projects, has accumulated some USD1.5 billion in debt. The company’s CEO is now focused on deleveraging the balance sheet, which he believes will lead to a re-rating of the shares. The CEO of Coeur Mining expressed a similar view, with the completion of the expansion of the Rochester mine in Nevada, the company has debt of around USD630 million, putting the company on a net debt to LTM EBITDA of 2.9x. Another large build that went over budget and stretched the company’s balance sheet is Iamgold’s Cote project in Ontario. The company’s CEO clarified that he focuses on seeing the asset through its ramp-up, seeking opportunities to optimize the mine and deleverage the balance sheet.
Some companies are pursuing a more traditional approach of creating value through the successful development of new assets and benefitting from the re-rating that comes following the start of the project. G Mining has recently started production at its TZ project in Para state in Brazil. It expects to extend its growth track record by developing the Oko West project in Guyana following the successful acquisition of Reunion Gold. This company has a unique business model in that it collaborates with its affiliate G Mining Services, a company with a track record of managing the construction of mining projects. Other companies that have also pursued the re-rate through build strategy are Bellevue Gold and De Grey Mining in Australia. The latter commenced production at its namesake mine in October 2023 at an initial rate of 165,000 to 180,000 ounces annually. It plans to expand to 250,000 ounces annually by increasing its underground production by 60% over the next three years. The latter is focused on developing its Hemi project, an AUD1.3 billion project that will produce 500,000 ounces per annum once in full production.
Although the environment for exploration companies has been challenging, this has not stopped them from pursuing exciting opportunities. For instance, Solitario Exploration and Royalty has recently returned some excellent results for its Golden Crest project in South Dakota. Interestingly, this project is not too far from the historic Homestake mine in the Black Hills but in an area that had never been explored before because of the abundant cover. Bravo Mining is exploring platinum-group metals in Brazil on its Luanga project in the Carajas district. Still, it has recently identified the potential for iron ore-copper-gold (IOCG) mineralization nearby, along with the same east-west trending structure that hosts many of Brazil’s large IOCG deposits.
Keynote Presentations
Joseph Cavatoni - World Gold Council
The WGC is an industry-sponsored advocacy group that seeks to create awareness of gold as a strategic asset and provides a wealth of statistics on gold to inform investors. He pointed out the increasing importance of the emerging markets in gold, with some 71% of demand coming from the developing world. Recently, there have been strong inflows into Chinese gold ETFs and strong buying from the People’s Bank. In addition to the PBOC, other central banks have also stepped up their gold purchases, given their unfavorable view of the USD as a reserve asset. Mr. Cavatoni pointed out that demand from North America and Europe has been more muted but expects the Fed's imminent beginning of interest cuts to be an essential catalyst to attract North American buyers.
Other important initiatives that the WGC is pursuing include Gold247, which aims to use blockchain technology to track gold, giving buyers a clear provenance of the product they are buying. Another is creating a digital gold market, which will allow gold trading with greater ease. Perhaps one of the most important initiatives is the support they have received for a bipartisan bill that would clarify the rules for U.S. 40 Act funds to own gold. Should this bill advance, this would potentially open a huge new market for gold.
Nikki Adshead-Bell - Cupel Advisory
If the outlook for gold is bright, the outlook for gold mining equities is more complicated. As noted previously, Ms. Adshead-Bell believes the industry suffers from a bad reputation, and its leaders need to do more to counter the negative impressions that many have. For instance, non-ferrous metals production accounts for only 0.7% of global greenhouse gas emissions, yet the industry is highly polluting. Environmentalists want to stop gold mining but wouldn’t think of stopping home-building, which generates an order of magnitude more greenhouse gases.
However, most of her presentation was devoted to the cyclical nature of the gold mining industry and how companies and investors behave during each cycle stage. Investors demand conservatism at the bottom of a downturn (think 2013-2015), and the industry focuses on balance sheet improvement. Mergers of equals take place to spread risk and create more investable businesses. As the sector recovers, exploration begins to pick up, and capital becomes more available. The M&A becomes riskier, and investors are again willing to pay for growth. As the bull market heats up, investors demand growth, capital becomes plentiful, and IPOs abound. Early-stage exploration (aka “moose pasture”) gets a premium valuation, M&A is characterized by risk-taking, and, in its final stage, the industry sees generalist investors enter the space en-masse. According to Ms. Adshead-Bell, we are in the early stages of a bull market in gold equities, which she characterized as a “stealth bull market.”
So, what should investors look for? She firmly believes that it starts with the people, noting that an outstanding management team can take a mediocre project and turn it into a success. In contrast, a poor management team can ruin an exceptional project. Second is the project itself, and geology in particular;. At the same time, fixing a metallurgical problem or improving a mining method may be possible; getting the gemologist and the resource wrong could prove fatal. The project's location is third on her list - this has a bearing on a project's geopolitical risk, which she notes is an issue wherever the project is located. Logistics, of course, are also important. Having a clear, well-defined strategy is the fourth attribute Ms. Adshead-Bell discussed, followed by the cost of capital and the need for clear catalysts. Finally, she highlighted the importance of promotion (with the word used positively). With thousands of listed mining companies, telling the story well is fundamental to gaining traction in the market.
Victor Flores writing for Denver Gold Group at Gold Forum Americas 2024