"There are a myriad of red flags investors must be cognizant of. The most fundamental one is the construct of management. Management teams that do not have the in-house expertise and rely on external sources to deliver project advancement increases risk for the investor.”
There seems to have been a lull in the precious metals markets since August. Do you think this is a consolidation period before a move higher?
We are seeing a natural consolidation within the precious metal market given the significant run up after the onset of the pandemic in March, and this is healthy. There is also the seasonal factor in play, as the market typically softens in the fall before a rally into December and the new year. Additionally, historical analysis clearly indicates that during election years there is downward pressure on the precious metals market, as investors wait for the election result to react. We saw that in 2016, when prices were suppressed and roared back into a rebound after the election.
There has been talk of what a Covid vaccine could do to precious metals. While it may cause a short-term blip, in the long-run it will not impact prices because the amount of government debt is such that it will take years to switch away from low and negative real treasury bond yields: the most significant driver for the price of gold. We are heading towards stagflation. Governments will raise the monetary base to cover their obligations and this will bring inflation coupled with non-existent growth.
How would you compare the current situation for mining companies compared to the previous bull market?
We are not even close to a junior valuations boom, and mining stocks are nowhere near the level they should be given the quantitative easing that is taking place. It is interesting to compare the response to precious metals on the back of the global financial crisis. Governments have injected three times the amount of money during the pandemic than they did during the global financial crisis. Furthermore, the overall precious metals sector is incredibly healthy after years of restructuring compared to where it was in 2008. For the first time ever, precious metal miners are real businesses generating returns on capital investment and returns on equity that are comparable to the broader S&P 500. In fact, given the struggles faced by many subsectors in the index, miners should outperform mainstream equity markets.
What advice would you give to mining companies looking to attract generalist investors?
The mining industry’s reputation is still an issue for investors, as well as the perception that precious metals prices have peaked already. It will take a while to rebuild confidence with generalist investors. In order to deal with the reputational challenge, miners must stick to capital allocation programs predicated on US$1,200 dollars gold prices. For example, on a recent Kinross conference call on their new 3-year guidance, the company maintained strict and conservative guidelines and as a result really reinvigorated the company. In 2021, it will become more acceptable for reserve prices to move higher, but operators need to preserve a respectable margin for investors. It must be a priority to maintain EBITDA margins that insure there is sufficient free cash flow generated above project capital to allow for growing dividends.
Have you noticed any trends with respect to mining companies that have been performing well?
Interestingly, gold royalty and streaming companies have done exceptionally well when you would have thought investors would have cycled out of those safe investments towards riskier assets. This shows us that safety continues to be front and center for investors. That move towards risk seems to be further advanced in safer jurisdictions. For instance, the Australian gold market continues to do really well, as there is very strong retail support for discovery stage opportunities there. With step-ups in price, gold investors will begin to seek opportunities from undervalued assets in risky jurisdictions and portfolios will begin adding risk.
What are some of the frequent mistakes you see management teams make that raise red flags?
There are a myriad of red flags investors must be cognizant of. The most fundamental one is the construct of management. There has to be confidence in the team’s capability to achieve their objective: management teams that do not have the in-house expertise and rely on external sources to deliver project advancement increases risk for the investor. Overly-optimistic assumptions on delivery of key milestones in development and exploration are also a risk factor. Finally, investors have to remember that exploration stage companies carry geological risk, especially for pre-resource stories.
What do you think the mining landscape will look like by the end of 2021?
There is a very constructive outlook for mining. The support for precious metal prices will be predicated on the fact that we continue to be in low real rates as well as the threat of stagflation. From a base metals perspective, it will be a discussion of whether 18 months from now the pandemic will be behind us and there will be rebounding growth in Western and developing economies. If the current prices are from re-stocking in China, there is a question of whether or not we can expect price drops in 2021. The Chinese are very quiet about their restocking patterns and Western investors are often caught off-guard.
The electric vehicles’ story line will also be interesting because it is metal intensive. The fact of the matter is that hard assets will continue to be continuously desirous within the current context, which favors businesses of resource exploitation.