Top experts and select companies traveled to Colorado last week for a pair
of conferences focused on the survivors in the natural resource mining
sector. The Gold
Report reached out to some of the discerning voices there and asked
whether the barrage of headlines from the Federal Reserve and China impacted
the mood, and what companies they would be following up on when they returned
to their offices. While the Precious Metals Summit was geared toward
development-stage companies and the Denver Gold Forum was mostly populated by
large, producing mining companies, everyone seemed fixated on survival. For those
of us watching from home, experts we talked to were kind enough to name some
of the standout companies they saw in boothland.
Chen Lin, author of the investing newsletter What Is
Chen Buying? What Is Chen Selling?, saw the smaller crowds this year as
a benefit because he was able to arrange one-on-one meetings with management
and he liked what he heard. "Generally, it was quite positive. A lot of
gold mining companies based in Australia, Canada and Mexico where the U.S.
dollar buys more, are really putting their acts together, keeping their heads
down and high grading for success. They are generating cash flow and paying
back debt. A lot of companies actually are debt free or close to debt free.
They will be the survivors. I was pleasantly surprised," he said.
Lin had some dire predictions about the impact of companies that still
have very high leverage, particularly the majors with share prices that are,
in many cases, half of what they were a year ago. "If a company cannot
generate real free cash flow and gold drops below $1,000 an ounce
($1,000/oz), we may see a lot of bankruptcies. If a major gold company goes
under, that's a great time to buy the survivors," he said.
Headline Impacts—Positive, Negative and Non-Events
Lin is worried about the direction of gold in light of the news coming out
of China. "An Asian crisis might lead to people selling gold. They have
been known to sell extra kidneys. That is how desperate they are. When you
have nothing to sell, you sell gold. That's extremely bearish because the
Chinese own a lot of gold. The other scenario is that people looking for an
alternative to the yuan may flock to gold. That's obviously very bullish. The
bottom line is nobody knows what direction gold is going in the near term
even though we all believe in the long run, gold will do very well. I suggest
to my subscribers to be careful. Keep some powder dry. There are still a lot
of opportunities in the gold mining companies," he said.
The other headline that shook the crowd at Beaver Creek was the Volkswagen
emissions cheating scandal. "People were outraged by the pollution
cheating and this could lead many to stay away from diesel," Lin
theorized. "If people switch to gasoline, especially in Europe, where
diesel cars can comprise 50% of the market, that will lead to an increase in
demand away from platinum used in catalytic converters for diesel engines to
palladium used in catalytic converters for gas engines. This is a fundamental
shift that could take a few years. Already there is not enough palladium
supply to meet demand because weak prices have squeezed producers of all the
platinum group metals and some are close to shutting down."
Lin's choice for taking advantage of this special situation opportunity is
Stillwater
Mining Co. (SWC:NYSE). "Its palladium-platinum ratio is almost 4:1,
which means it produces four palladium ounces for every one platinum ounce.
It is based in the U.S., a safe jurisdiction. It has a very good balance
sheet, a lot of cash, and it's a low-cost producer, very big and respected in
business. I think that company probably can take advantage of this
downturn," he said.
Lin was not worried about the Federal Reserve non-interest rate hike.
"I think it's built into the price. Gold went up, but it has been
volatile. It's the uncertainty that bothers the market more that the actual
decision, and that has an impact on the gold market."
Bhandari was worried about the psychological impact of government monetary
policies. "Fiat currency encourages short-termism. It seriously hurts
not only the morality of the society, but also of the investors. Money
manager bonuses are mostly geared toward quarterly performances. The result
is that most people look at trends and headlines to make money, rather than
by focusing on value—no wonder our economies are stagnating. Despite this, in
the short term, as well as in the long term, the most confidence and most
upside comes from focusing on value," he said.
Companies Worth a Closer Look
Lin was on the lookout for ultra-low-cost producers with all-in
sustainable costs around $500/oz that could conceivably survive to become the
next Goldcorp
Inc. (G:TSX; GG:NYSE), consolidating the other promising stories.
One that fit that criteria was Pretium
Resources Inc. (PVG:TSX; PVG:NYSE). "Its all-in sustaining cost will
actually be below $500/oz once it builds the mine in 2017. That will be one
of the greatest mines in the world," Lin said.
Another one that caught Lin's eye was OceanaGold
Corp. (OGC:TSX; OGC:ASX), which is buying Romarco Minerals
Inc. (R:TSX). "This could be another low-cost producer with costs
around $500/oz when the Haile mine gets developed in 2017," he said.
"You know those companies will survive. They both have good balance
sheets. Development is almost fully funded. Those companies I feel
comfortable holding, although I still warn my subscribers they have to
prepare for the downside."
Bhandari took advantage of the chance to make new friends and revisit old
ones. "I was quite impressed with my meeting with Metals X Ltd.
(MLX:ASX). CEO and Executive Director Peter Cook explained his investment
philosophy to me in detail. This was not a usual sales pitch. He explained
why he likes to focus mostly on Australia, and expressed his deep
understanding of the culture there. He likes to start small, ensuring that
the project has high profit on a percentage basis rather than on an absolute
basis. While sacrificing some short-term profit, he prefers to minimize the
risks. I left feeling that he thinks like a businessman, rather than like a
bureaucrat or a mere professional manager. This was my first meeting with him
and I might change my views on the company as I look deeper over the next few
days."
Two other companies that Bhandari has followed for a few years are Amara Mining
Plc (AMA:LSE) and Caledonia Mining Corp. (CAL:TSX; CMCL:AIM; CALVF:OTCQX).
"Both of these companies are in Africa. They seem to have managed their
operations well. They have involved the locals in a win-win
relationship," Bhandari concluded.
For Robert Cohen, the conferences were a good way to stay up on what is
going on at the companies he follows. "Many attendees seemed impressed
by the Australian companies performing well on both an absolute and relative
basis in light of the Australian dollar weakness. This list of stand-out
Australian producers includes Northern Star Resources Ltd. (NST:ASX), St. Barbara
Ltd. (SBM:ASX) and Saracen Mineral Holdings Ltd. (SAR:ASX). Some of the West
African stories were a bit beaten-up on news of the unrest in Burkina Faso.
However, SEMAFO
Inc. (SMF:TSX; SMF:OMX) and Roxgold Inc.
(ROG:TSX.V) both represent good value in this market," he said.
Up-and-coming producers that are completing construction of their projects
might also represent good value between this year and next. Cohen called out Torex Gold
Resources Inc. (TXG:TSX) and Asanko Gold Inc.
(AKG:NYSE.MKT; AKG:TSX) as examples. Other smaller companies that had a
bit of chatter about them included Sabina Gold
& Silver Corp. (SBB:TSX; RXC:FSE; SGSVF:OTCPK), Avnel Gold
Mining Ltd. (AVK:TSX), Doray Minerals Ltd. (DRM:ASX), Gold Road
Resources Ltd. (GOR:ASX) and Kaminak Gold
Corp. (KAM:TSX.V).
Forward Looking Statements
Lin was heartened by the appearance of generalists at the conference who
have started looking at the gold mining sector again. "Gold mining was
the worst performer in the past four years. A lot of stocks went down 90–95%.
Those generalists must think it's time to rebalance, so they're looking at
the gold mining sector. When they pull the trigger is still an unknown, but
it is good to see the interest is still out there," he said.
Cook did not see the current situation as a marked bottom. "As I have
stated a number of times in Exploration Insights, capitulation is
coming one-by-one as investors and companies fall by the wayside as we trudge
across this desert. I don't expect a Capitulation Moment. One day we will
look back and see things are very slightly better. We are closer, but I think
there is a bit more pain to endure," he warned.
Cohen expected some capitulation in the markets ahead of tax season.
"But the markets are the markets—there is no such thing as the market
improving if everybody cries uncle. People have to understand that gold is a
currency, and most currencies in the world are in a downward trajectory
except the U.S. dollar. The only problem is that a lot of the global
liquidity in the markets originates from the U.S., so while gold stocks in
theory are a good idea for everybody outside of the U.S., the multiples
fluctuate with the sentiment driven out of the U.S. due to sheer size."
Bhandari was optimistic. "Among the junior mining companies, good,
well-managed companies have bifurcated and are showing life. They have
started to outperform. The lifestyle companies, whose managements don't know
how value is created, will die slowly. These will continue to fall, taking
the index down with them. But there is still a lot of money to be made by
investing in good companies."
Mazumdar was hoping for some more consolidation in the small-cap space of
the sort seen by Oban Mining Corp. (OBM:TSX). "This would allow for a
slower burn rate (lower G&A costs) to keep options alive on several
long-term gold exploration and/or development plays. The combined liquidity
and market cap would be more attractive for investors, as would the
diversification in the asset base," he said.