Gold as a commodity had an interesting 2021. While we didn’t see a repeat of gains made in 2020, the price has more-or-less held steady. How do things bode for the rest of the year, in your view?
It is anticipated that there will be material escalation in the price of gold at a velocity that could well outpace what we saw in 2020. I see a compelling alignment of factors that, while individually would provide strong arguments for price escalation, collectively present a highly persuasive case for gold demand. These factors (in-brief) include:
- Ongoing evidence of non-transitory inflation driven by monetary expansion. This is clearly the dominant narrative at this time and I ascribe to the view that investors will ultimately turn back (if only in part) to traditional hedges such as gold to protect against fiat depreciation
- Evolving macroeconomic and geo-political risks to the downside for broader equity markets. Risks include the ongoing military conflict in Ukraine, the European energy crisis, a potential China property-led downturn and continued COVID-19 disruption. These are just a few factors that could derail markets in the short-term
- Positive positioning on the demand side emerging. Renewed Central Bank purchases coupled with net ETF inflows have been observed in the last several months
Last year was a bumper year for exploration budgets. Do you think this will be repeated in 2022 for gold explorers?
Yes I do believe that further risk capital will flow into gold exploration in 2022 – primarily out of necessity for supply to meet future demand in an inflationary environment. Existing reserves and resources are being depleted at an accelerating rate and are insufficiently replaced due to both deteriorating ore grades globally and a lack of capital expenditure. Moreover, a general lack of funding available to the junior gold sector in previous years has contributed to languishing exploration which should encourage augmented exploration budgets throughout 2022 and beyond.
It is also worth observing that during periods of rapid gold price appreciation (e.g. during the post-GFC recovery period in 2009-2010), junior gold equities outperformed their large cap peers. I would expect, therefore, in such periods of buoyant price performance that financing available for exploration should become more abundantly accessible to explorers.
What do you look for when investing in small-cap gold miners?
The focus at present is on early stage explorers and developers who are, in general, more insulated to inflationary costs while retaining the upside exposure to rising gold prices. Many small or micro-cap gold names have either limited or non-existent sell-side research and so the process, therefore, requires emphasis on the geological and/or engineering risks that may be exposed to investors.
Ultimately, we are seeking to support the discovery and/or development of scale systems where extraction is possible with reasonable capital intensity. It would be typical to screen for economic grades, clean metallurgy, and amenability to simple mining and processing methods. Management teams that exhibit strong governance (both corporate and ESG) practices and capital discipline are also factors that we look for. As an overlay, we also review opportunities through the lens of potential M&A and other event driven special situations – and as such seek to evaluate the potential attractiveness of properties to mid-cap and large-cap business development teams.
A general lack of funding available to the junior gold sector in previous years has contributed to languishing exploration
How do you see ESG issues affecting gold investor sentiment?
There are constant challenges observed from investors and potential investors who prima facie regard mining as being environmentally disruptive or harmful and therefore inconsistent with their mandate parameters. We generally observe, however, the gold mining industry as having made gradual improvements to its ESG credentials over time.
As a set of industry standards, the World Gold Council’s Responsible Gold Mining Principles calls for compliance by members on a number of ESG related fronts, ranging from environmental management, community engagement through to labour equality. Going forward, it is expected that many gold explorers, developers, and producers will increasingly align their ESG policies to be consistent with the World Gold Council’s framework.
Furthermore, it is anticipated that our investors will increasingly demand that we (and other funds alike) continue to scrutinize ESG related issues as part of the investment screening process.
What are some of the most exciting gold mining jurisdictions at present?
Naturally, forming a view on sovereign risk forms part of the investment process and discretion would be given to geographically balance the portfolio in accordance with sentiment as necessary.
At present, I see value in West Africa where our fund has taken meaningful exposure to jurisdictions such as Côte d’Ivoire. The risk-reward proposition at current valuations is believed to be attractive in many parts of the African continent at this time. Similarly, under the radar gold systems in various jurisdictions across South East Asia and Asia Pacific could become interesting in the medium term once gold sentiment definitively turns and competition for assets escalates.
That being said, it is believed that in the near term, low-risk sovereign exposure to well-established mining camps in Canada and Western Australia could be the early beneficiaries of buying demand once generalist funds rotate into safe-haven gold exposure.
How about M&A activity in the gold sector – both among the majors and juniors. Is this something we’ll see more of this year?
While a number of M&A deals have already been announced or concluded in the gold space over the last 12 months, the sector is not yet close to the levels of deal activity as expected. Increased M&A in the precious metals space will likely take place going forward for various reasons:
- Senior gold producers have not deployed adequate capex towards exploration and resource/reserve expansion in recent years and will therefore be forced to buy replacement ounces
- Access to acquisition financing as a result of current balance sheet strength of acquirers has materially improved across virtually all funding markets including equity, debt, and convertibles
- The financial profiles of both senior and mid-cap mining companies, even at current gold prices, has improved markedly and has led to much more solid balance sheets and healthy free cash flow generation. This perceived fundamental strength, coupled with a disconnect in current market valuation for targets, could lead to higher deal volume in the coming quarters.
