Panelists
Willem Middelkoop, CEO & Founder, Commodity Discovery Fund
Jonathan Guy, Senior Analyst, Mining Equities, Berenberg
Angelos Damaskos, CEO, Sector Investor Managers
Adam Thompson:
Today we’re discussing gold, gold mining equities, and the prospect for African mining companies. Willem, your fund is focused on discovery-stage investments. How do you interpret the industry-wide need for bringing more exploration development projects online against the difficult backdrop of declining grades in production within the global gold market?
Willem Middelkoop:
I always sell our funds to new investors by pointing out that we could enter a perfect storm scenario in which there’s a new bull market. This bear market started in 2011, so it’s taken a full decade to get here.
With a new bull market beginning, there is huge demand for metals. But not enough new discoveries have been made in the last decade. There has been underinvestment in our space, and that means that we see more and more tightness developing in many metals.
Adam Thompson:
Would you say this increased investor appetite is coming at it from a sweet spot of other asset classes underperforming? Is it an attraction to global gold mining equities, or are they just looking for exposure to a bit of gold?
Willem Middelkoop:
The most powerful aspect is that people don’t get any returns now on savings deposits. More and more people are starting to understand that and so they look for a place to invest.
While commodities were unwanted over the last few years, more people are seeing that they could be the next big thing or a revaluation of part of their portfolio.
Adam Thompson:
Are you finding that there are fewer companies, or are new companies springing up because of the bull market?
Willem Middelkoop:
We focus on the very early exploration and discovery phases. We have seen quite a number of new world-class discoveries, especially in Australia, by the likes of Greatland Gold, De Grey Mining, and Chalice Gold. I think too many of our peers are focused only on North America. I’ve seen some remarkable drill results in the first weeks of 2021, so I think we’ll have some amazing wins again this year.
Adam Thompson:
Jonathan, you speak with a lot of investors. Do you see more liquidity looking for a home in the gold mining sector at the moment?
Jonathan Guy:
Interest peaked in the middle of last year for gold and silver. Perhaps we’ve seen something of a rotation into the base metals in recent months as people move from that straightforward trade when things were as bad as they possibly could be, as they were at the beginning of the pandemic, to people focusing on a recovery.
The focus we’ve seen in London is more at the large cap end of the market. Investors are looking for large liquid stocks that offer quality exposure to good operators. We’ve seen a number of companies taking standard listings on the LSE in the last few months in response to that, like Yamana and Wheaton Precious Metals. Endeavor Mining has also said that they’ll move to a listing here, which will enable them to get some index inclusion.
Adam Thompson:
Is it more a case of London investors not having that exposure to the juniors as much, or maybe it’s they’re just a little bit more cautious at the moment?
Jonathan Guy:
Institutional experience in London is much more geared into large stocks, whether it be the diversified miners or now some of the larger gold miners listing here. And there is less experience, less technical experience, and less technical understanding of junior miners in exploration. So, while you can see a decent retail following for some of the juniors, it is a harder market for pure exploration because there is less technical understanding of this market from a geological and mining perspective, and because there isn’t a big domestic mining industry, which you obviously have in Canada, in the US, and in Australia. There’s less embedded understanding in the market of those early stage, technically driven stories.
Adam Thompson:
Do you see that changing at all, or is that just the nature of the market?
Jonathan Guy:
There’s an element of chicken and egg. If investors can see that they can make money out of something then they will be open to investing in it. And if there’s money to be had in London, then companies will look at listing here.
I think there has always been a bit of a feeling in London, certainly at the junior end of the market, that we end up with those who couldn’t raise capital either in Australia or North America. We’re not getting the first look, but rather the second or third look at stories. And I think that perhaps it makes it more challenging for some of the junior stories. But in the end, a good story will always find capital.
Adam Thompson:
Angelos, are you receiving more calls from investors who are reinvigorating their interest in precious metals?
Angelos Damaskos:
We are coming out of a very long protracted bear market, where a lot of people suffered material losses from 2011 until the middle of 2019. The first leg of the gold market is typically powered by speculator specialist investors, people who know the sector, who understand the companies, are able to position capital quickly, and are able to endure a very rapid rerating of share prices. And this happened largely over the course of last year. After the pandemic-induced correction in March, we saw a massive re-rating of the mining equities, the precious metal mining equities, gold and silver equities, towards the end of the year. But after October, we saw some consolidation.
Interestingly enough, since the turn of this year, we have seen enormous increase in inquiries for more general type of investments. And this is how I would describe the positioning of our fund, that we are trying to populate it with companies that will provide the medium-term growth in production.
And I think it’s a particularly prevalent problem among the mid cap producers at the moment, that they are short of mine life, and they many of them are facing declining average grades of mining material. So, as they are now flush with cash, they have generated enormous free cash flow with the higher gold and silver prices in the last year or so, they are looking for ways to expand the growth in a portfolio. Now, this is not going to come from new exploration, because this typically takes from seven to 10 years to bring a new discovery to production, therefore we think that there’s going to be a lot more corporate activity.
Adam Thompson:
It sounds like there’s a lot more bandwidth for gold, and the gold price will move upwards.
Angelos Damaskos:
I’ve never seen such supportive conditions for precious metals in my career. We have this unprecedented wave of financial stimuli being thrown at the economy by governments, and the dramatic loss in GDP that we suffered over the last year. Ultimately, a lot of that liquidity is creating bubbles in the market. At the same time, investors realize that with all this liquidity being pumped into the system, the main currencies in the world are going to be debased. Whether that is due to straight feeding through to everyday price inflation, or through the sort of stealth inflation that we see in various asset classes. But ultimately, money is losing purchasing power. And at the same time, we experience historic lows of interest rates, and the central bankers will be unwilling to raise interest rates anytime soon for fear of damaging a fragile economy.
These are the classic conditions to propel precious metals higher in value, a lot of liquidity that potentially could creep into inflation, and persistently low interest rates. I think gold is going to go significantly higher, to about US$2,500, and in fairly short order. And we can already see today that silver is up over 10%. Silver is naturally much more volatile than gold. It has a propensity to outperform in a bull market cycle, so this is what we are experiencing now.
Adam Thompson:
Willem, you’re bullish on the sector, but do you agree that we’ve got a long way to run on precious metals prices?
Willem Middelkoop:
I’m quite sure we have the perfect conditions now to have a huge bull market in gold, since all currencies are debased.
We’ve already crossed the all-time high of US$2,011. We had a nice technical correction now. Once we break through US$2,100, which I think will happen within the next six months, it will be a quick run towards US$2,500, or even US$3,000. Central banks have communicated they want to see inflation. They want to make up for lost inflation and so are moving towards 4-5% inflation. The outlook for the gold industry is better than ever.
Adam Thompson:
Jonathan, do you have a view in terms of gold price outlook?
Jonathan Guy:
I take a more cautious view on the gold price outlook while agreeing with the overall thesis. I think that there is going to be exceptional monetary policy out over the medium term, and that will be very supportive for gold and silver prices and hard assets more generally. I think governments’ balance sheets are in a reasonably awful state, and they’re not going to get any better anytime soon, and that is good for hard assets across the board.
Gold mining equities are in a much better state than they were at the end of the last cycle. There hasn’t been the type of over-priced speculative M&A that we saw, so where there has been M&A, it’s generally been sensible. Northern Star’s merge is entirely sensible. Where we saw Barrick and Newmont combining their assets in Nevada, that was entirely sensible. I think we’re seeing pragmatic M&A at the moment, rather than over-priced M&A. Most people have balance sheets in a pretty good state. People are moving from net debt positions to net cash positions.
Adam Thompson:
Do you think there are still a lot of undervalued companies out there?
Jonathan Guy:
It depends on where you’re looking. I think certainly, some of the Australian equities had a very strong run up early on, and were perhaps looking a little bit expensive. Investors were saying, “What we want is pure gold price exposure. We don’t want any political risk, we don’t want any security risk, and we don’t want any regulatory risk.” So, investing in a well-run Australian gold mining business was a very pure way to play that gold trade, obviously supported by a weak Australian dollar.
Angelos Damaskos:
I think the broad sector, including majors and juniors as a whole, is still a little undervalued in relation to where the stock prices are trading. It is surprising that investors have been unwilling to assign a full valuation to the sector given the trend in metal prices. But the undervaluation is far more pronounced in the smaller capitalization segment of the sector because people have been reluctant to allocate risk into that sector. The smaller cap segment is always more risky, much more volatile. It certainly is less liquid.
As we continue the development of this cycle, and with the recent consolidation in prices, it gives the opportunity to a greater spectrum of investors to step in and look at the sector, and perhaps increase their allocations, and hopefully rerate the valuations to where they should be in relation to the stock prices.
Adam Thompson:
How can retail investors influence markets? What does that then do for the junior mining company that’s exposed to this extreme volatility?
Willem Middelkoop:
If you put this in historical perspective, once a large part of the general public starts to speculate on the stock market, that has always coincided with the last phase of a very long bull market. I’ve always said we could end up in a very scary bull market which could lead to a severe downturn or even crisis.
We’ve seen so many of these examples in history. And what we see now with the younger generation storming the stock exchanges in a revolutionary way, it’s almost like an attack on the Winter Palace in St. Petersburg in 1917, but with digital means.
Adam Thompson:
How does a stock picker make sense of what’s going on at the moment? Do you ride this out? Are there opportunities to be had?
I’ve never seen such supportive conditions for precious metals in my career
Jonathan Guy:
I think from a stock picking perspective, you don’t try and make sense of it, you just ride the momentum and work out who are the leverage silver plays, and ride them up off the back of it, if that’s what you want to do.
I don’t think this is fundamental investing because it’s being driven by short-term market moves rather than anything else. Really, we need to see where the metals are in three months or four months. And I think you can perhaps then start to take a view on whether to start moving long-term prices and long-term metal asset value assumptions that you would make in terms of value in companies.
Adam Thompson:
Looking at Africa’s resource potential and the amount of reserves that this huge continent holds, do you see a future for more gold mining, and greater discoveries?
Jonathan Guy:
If you look at West Africa, if you look at the Congo, if you look at Egypt or Tanzania in East Africa, Africa is front and centre, one of the most important places for the gold mining industry at the moment, and it’s going to be, moving forward. The problem is, can you maintain fiscal and regulatory and security regimes that allow you to build and operate mines? These aren’t the easiest places to go, but they still have gold. If you want to explore, then absolutely that’s where you’ve got to be.
Willem Middelkoop:
We focus on the discovery side. And if I look at the discoveries being made in the last 12 to 24 months a few names come to mind. Roscan has a great project predicted. Osino in Namibia. Sama Resources does nickel in Côte d’Ivoire. So there are some interesting situations which we follow closely, and more M&A can be expected there.
There are a few countries with security risks, but on average, the security and political situation is stabilizing. So, I think you should look at the West African and other African projects and companies as an investor.
Angelos Damaskos:
Africa is a great continent for commodities, and much exploration success has been achieved in Africa over the centuries, but not every country provides a fairly comfortable and safe background for mining investment, so we tend to concentrate on the more stable jurisdictions, such as Ghana and Côte d’Ivoire, and countries that offer more stability and better understanding of the regulatory regime, and also better rule of law.
We are very careful with the jurisdictional risk in our investments. The majority of our exposure is North America, followed by Australia. And then the next bigger component is Latin America, particularly Mexico for silver investment. Africa is the smallest exposure in our portfolio, and we are being quite selective in terms of the quality of the project, the quality of the teams, as well as the quality of the jurisdiction.
Africa is a continent that is maturing, and governments and politicians understand that mining is a very important component of economies, and they ought to support it.
