Grade Is King for Gold Investors
Source: Geoff Candy, Mineweb (4/16/12)
"It seems gold investors have money to spend but are decidedly becoming more picky about what they choose to invest in and are seeking higher quality projects."
Gold miners may not have had the best run of late but, analysts remain positive about the prospects for the sector.
Speaking to Mineweb at the Precious Metals Summit in Geneva, Robert Cohen, Vice President and portfolio manager at GCIC, said that the current market is likely to separate the wheat from the chaff as investors become decidedly more picky about what they choose to invest in.
But, he says, "I'm still seeing equity issues over-subscribed for certain companies, so that tells you there is money out there seeking higher quality projects, in a way it translates into the old saying ‘grade is king'."
Understandably, given the current aversion to risk, Cohen says that projects with "a wider profit margin with more room for error," make the market more comfortable.
"When you're getting into the sub one gram open pit mines or sub five gram underground mines, then people worry about the profit margins, certainly in this market, but I think that will eventually alleviate."
Joseph Foster, portfolio manager for the Van Eck Gold Fund, agrees that there is a lot of pent up demand in the sector at the moment.
Speaking to Mineweb on the sidelines of the Precious Metals Summit in Geneva, Foster said, "I think a lot of money that would have come into these stocks is residing with gold ETFs and I think the market is waiting for a reason to buy gold stocks. The valuations are very attractive with these stocks and we just need a catalyst - another rise in the gold price, a move towards new highs would definitely do the trick, I think."
But, he adds, "We'd like to see these companies do a better job of meeting expectations, and if they can meet or, even better, beat expectations, I think that would go a long way towards attracting investors to the equities... the industry needs to prove that they can run their business. The profits are there - it's just a matter of rebuilding confidence in management."
For Foster, the key reason behind this decline in confidence is the manner with which costs, often beyond the control of management, have risen.
"The cost inflation has been relentless. So every time the company turns around costs have been rising faster than they expected and they've been behind the ball with projecting those costs and so for investors they're very profitable but not as profitable as expected and so that's reflected in their share prices."
Merger and acquisition activity in the sector has also been subdued, especially given the view that many of these companies are fairly well priced at the moment.
But, for Foster, this lack of M&A makes sense because of the poor price performance.
"Acquirers typically use their paper in an M&A transaction - and you don't want to be using your paper when it's under-valued. The other side of the deal is the target company who doesn't want to sell his company at such low valuations. So until we get a more positive stock environment, I don't think we're going to see a lot of M&A."
Cohen is of the opinion that M&A will stay steady. But, once again, grade is likely to be king.
"The senior companies are notorious for not finding grass root exploration discoveries, and they have to go shopping in the sector."
But, he says, it is likely that the projects with what he calls "slippery slope" economics will have a tough time finding a buyer.
"They probably want to find the projects that look pretty good at $1,000 gold and a little better at $2,000 gold [rather than those that look really good at $2,000 gold and really lousy at $1,000 gold.] They're looking for more of a flat slope that gives them a downside protection and some upside participation."