why gold stocks should be a part of your portfolio · circumstances. this presentation is not, and...
Post on 04-Jul-2020
0 Views
Preview:
TRANSCRIPT
WHY GOLD STOCKS SHOULD BE A PART OF YOUR PORTFOLIO
PAUL BURTON, Senior Equities Analyst, THOMSON REUTERS GFMS Academy Finance Global Resources Investing Conf Monday, October 15, 2012 Hong Kong
DISCLAIMER
The information and opinions contained in this presentation have been obtained
from sources believed to be reliable, but no representation, guarantee, condition
or warranty, express or implied, is made that such information is accurate or
complete and it should not be relied upon as such. Accordingly, Reuters Ltd
accepts no liability whatsoever to the people or organizations attending this
presentation, or to any third party, in connection with the information contained in,
or any opinion set out or inferred or implied in, this presentation. This presentation
does not purport to make any recommendation or provide investment advice to
the effect that any gold, silver, platinum or palladium related transaction is
appropriate for all investment objectives, financial situations or particular needs.
Prior to making any investment decisions investors should seek advice from their
advisers on whether any part of this presentation is appropriate to their specific
circumstances. This presentation is not, and should not be construed as, an offer
or solicitation to buy or sell gold, silver, platinum or palladium or any gold, silver,
platinum or palladium related products. Expressions of opinion are those of
Reuters Ltd only and are subject to change without notice.
AGENDA
1. Classes of gold stocks
2. What drives gold stocks?
3. Current market conditions
4. Investing strategies
5. Companies to watch
1. CLASSES OF GOLD
STOCKS
GOLD STOCKS - CLASSES
• Explorers: - Reconnaissance work, drilling or have
outlined a resource
• Developers: - Companies with projects undergoing a
feasibility study or being built
• Producers: - Majors
- Intermediates
- Juniors
- Categorised by market cap or annual
production
- Will often have exploration & development
projects in their portfolios
6D MODEL OF MINING
DETECTION
DISCOVERY
DEFINITION
DESIGN
DEVELOPMENT
DEPLETION
6D MODEL OF MINING
DETECTION – traces of gold in soils or geophysical anomalies on maps.
DISCOVERY – drill results with grades & widths. Some idea of potential.
DEFINITION I – Resource, so idea of size. Initial valuations
DEFINITION II - Pre-feas provides forecast costs & revenues to within +/-30%.
DESIGN – definitive feasibility study. High confidence in all technical input figures. Capital committed.
DEVELOPMENT – construction. Capital being spent.
DEPLETING – ultimate proof. Expect some technical teething problems on start up.
High Risk
Lower Risk
8
7
6
5
4
3
2
1
0
$10
9
DETECTION &
DISCOVERY
DEFINITION ,
DESIGN AND
DEVELOPMENT
DEPLETING
SH
AR
E P
RIC
E
HIGHER RISK LOWER RISK
LIFE CYCLE OF A MINING SHARE
Source: Adapted from US Global Funds
RISK MATRIX
Explorer
Major
producer
High
Low
Your Risk
Propensity
Low High
Company Risk
ROUGH GUIDE TO GOLD COMPANIES
DETECTION DISCOVERY DEFN I DEFN II DESIGN DEVEL DEPL
FUNDING Insiders
Friends
Insiders
Friends
Market
Market Market Market
Banks
Banks Banks
Cashflow
TECH
EXPERTISE
Geology Geology Geology Geology Engineering Engineering
Engineering
KEY
RESULTS
Targets Drill
results
Resource
increases
Resources
Reserves
Production
Costs
Plan
Timing
Capex
Costs
Funding
ECPM
contracts
Permits
Progress
Production
Cash costs
Cashflow
Growth
INVESTMENT
TACTICS
Invest
early
Warrants
Trade on
drill
results
Trade on
resources
Buy
Hold
Buy
Hold
Buy
Hold
Buy, Hold
Dividends
Take
profits
IMPORTANCE OF JUNIORS
Source: MinEx Consulting March 2010
2. WHAT DRIVES
GOLD STOCKS?
GOLD PRICE RISE
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
US$/oz 2010 2011
Average 1,225 1,572
Year-on-Year 26 % 28%
Source: Thomson Reuters GFMS
0
50
100
150
200
250
0 200 400 600 800 1000 1200 1400 1600 1800 2000
XA
U
PM gold fix US$/oz
R2 = 0.76
(for the period Jan 2000 – Oct 2012)
CORRELATION BETWEEN GOLD & GOLD STOCKS
Source: Thomson Reuters GFMS
CORRELATION DIFFERS FOR BULL & BEAR PHASES
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1
R2 = 0.94
R2 = 0.94
R2 = 0.79 3
2
R2 = 0.22
4
R2 = 0.62
5
Source: Thomson Reuters GFMS
GOLD v S&P (INDEXED)
0
100
200
300
400
500
600
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
S&P
Gold
R2 = 0.1
Source: Thomson Reuters GFMS
XAU v S&P (INDEXED)
0
50
100
150
200
250
300
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
S&P
XAU
R2 = 0.3
Source: Thomson Reuters GFMS
JUNIOR EXPLORERS
• The performance of junior
explorers is not linked to
the short-term gold price.
• Investors buy/sell
explorers based on
individual project results.
• In the longer term,
however, a strong gold
price attracts investors
that fund their exploration
programmes.
3. CURRENT
MARKET
CONDITIONS
95
100
105
110
115
Jan-12 Mar-12 May-12 Jul-12
Ind
ex
(3
rd J
an
ua
ry 2
01
2 =
10
0)
GOLD PRICES IN DIFFERENT CURRENCIES
INDEXED DAILY SERIES Indexed Daily Series
Euro
Dollar
Rand
Rupee
Source: Thomson Reuters GFMS
60
80
100
120
140
160
180
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12
In
de
x (
4th
Ja
nu
ary
20
11
= 1
00
)
US 10-yr Bond
DJIA
Copper
GOLD AND OTHER ASSETS & METALS INDEXED DAILY SERIES Indexed Daily Series
Gold
CRB
Source: Thomson Reuters GFMS
SUPPLY HEADLINES
Mine production hit new
record in 2011, up 4%. Flat so
far this year.
Scrap down slightly (despite
28% rise in gold price).
Official sector on supply side?
No! For the second time since
1988, central banks were net
buyers!
Producers hedged again in
2011 but de-hedging seen in
H1 12.
Source: Thomson Reuters GFMS
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2011 2012 (f)
Scrap
Mined
DEMAND HEADLINES
Jewellery has slumped and
after a partial recovery in
2010, up 16%, 2011 was
down slightly and H1 12 down
13%.
Official sector has swung to
demand side and jumped by
460% in 2011 and 34% in H1
12.
Physical bar investment up
strongly (36%) in 2011 but
down sharply this year.
Other investment putting in a
strong performance.
Source: Thomson Reuters GFMS
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2011 2012 (f)
net Investment
De-hedging
Bars
Official Sector
Other Fab
Jewellery
2012 PRICE OUTLOOK
• Investment will remain the main determinant of gold prices in 2012, although
other supply/demand factors will also be relevant, perhaps especially
support on the ‘price lows’ from official sector purchases.
• Overall supply is forecast to remain flat this year due limited growth in mine
production and lower scrap supply.
• Gold fabrication demand, excluding coins, is forecast to fall this year under
the pressure of high prices and a slowdown in global GDP growth.
• In the final third of this year an easing in monetary policy globally and a
weaker dollar will stimulate greater levels of gold investment and this new
wave of investor demand will drive prices higher.
60
160
260
360
460
560
660
00 01 02 03 04 05 06 07 08 09 10 11 12
Gold
XAU
GOLD V EQUITIES – LONG TERM
Source: Thomson Reuters GFMS
0
20
40
60
80
100
120
140
160
180
2010 2011 2012
Gold
GDXJ
GOLD v JUNIOR MINERS’ INDEX
Source: Thomson Reuters GFMS
WHY THE DISCREPENCY?
Uncertainty over gold’s bull run
Competition from gold ETFs
Redemptions for cash
Producers not delivering on
production & project budgets
Cost pressures for producers – real
margins are less than the cash cost
margins
Explorers - Risk appetite diminished
BUT SINCE MID-YEAR...
90
100
110
120
June July Aug Sept
Au PM
XAU
GDXJ
Source: Thomson Reuters GFMS
SINCE MID-YEAR GOLD STOCKS HAVE STARTED TO PERFORM...
Increase (1/6-
1/10)
GOLD +11%
XAU +16%
...and exhibit leverage again!
Source: Thomson Reuters GFMS
THE QUESTION OF LEVERAGE
The implied leverage for gold producers is the margin expansion when the gold price increases.
Example: If the gold price is $1,800/oz and costs are $800/oz, then margin is $1,000/oz.
If the gold price rises 10% to $1,980/oz, costs remain at $800/oz and the margin is $1,180/oz – an increase of 18%.
Gold shares also have upside reserve potential, which gold bullion doesn’t have
Gold equities’ beta to gold price since 2001.
4. INVESTING
STRATEGIES
GENERAL PRINCIPLES FOR INVESTING TODAY
• For explorers, those that : • Have quality projects
• Are well-financed
• Have experienced, proven management
• For producers, those that: • Husband precious shares
• Concentrate on ROE, eps, cfps
• Do not undertake M&A for the sake of getting bigger
• Margins are high so return capital to shareholders - dividends
KEY POINTS TO LOOK FOR IN A JUNIOR
MONEY
MANAGEMENT
LOCATION – Country/region
PROJECT
OWNERSHIP
TYPE (U/G, O/P)
RESOURCES (tonnes, grade)
LOCATION (camps, geology)
INFRASTRUCTURE
PERMITS
INVESTING STRATEGIES
DEPLETING - Producers will benefit first on a price rise
on increased profitability. Majors offer lowest risk and value.
DEVELOPMENT - Then interest will flow down
through the 6D model. Quality projects will be most sought
after.
DESIGN & DEFINITION - In terms of many
criteria gold stocks are relatively cheap and the next few
months represent a great buying opportunity.
DISCOVERY & DETECTION – Exploration
companies will continue to be driven by results but a sustained
gold price rally will bring investors back to this highly risky
sector and give opportunities for refinancing.
WHAT TO EXPECT (1)?
WHAT TO EXPECT (2)?
5. COMPANIES
TO WATCH
0
100
200
300
400
500
600
700
US
$/o
z
ENTERPRISE VALUE PER OZ FOR SELECTED
JUNIOR GOLD PRODUCERS
Source: Thomson Reuters GFMS
0
100
200
300
400
500
600
700
0 5 10 15 20 25 30 35 40
EV/o
z (U
S$)
M&I resources (Moz)
CRJ JAG GBG AVN
AR
Source: Thomson Reuters GFMS
ENTERPRISE VALUE PER OZ FOR
SELECTED JUNIOR GOLD PRODUCERS
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
0 20 40 60 80 100
EV
/pro
d o
z (
US
$)
Annual production (koz)
ENTERPRISE VALUE PER PROD OZ FOR
SELECTED JUNIOR GOLD PRODUCERS
Source: Thomson Reuters GFMS
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
0 500 1000 1500 2000 2500 3000
P/N
AV
Mkt cap (US$M)
GCM
CRJ GBG
EDV
DPM
P/NAV FOR SELECTED JUNIOR GOLD PRODUCERS
P JAG
Source: Thomson Reuters GFMS
0
100
200
300
400
500
600
700
ELD PAAS IMG SMB SLR EDV YRI PAF
VALUE OF OUNCES* IN M&A IN 2012
Average: US$111/oz
* M&I AuEq ounces Source: Thomson Reuters GFMS
0
200
400
600
800
1000
1200
1400
1600
1800
ELD PAAS SMB SLV EDV PAF
Wt average discount to spot gold = 65%
Implied long term gold price = US$1,153/oz
TOTAL VALUE PER OUNCE*
US
$/o
z
* M&I resources AuEq Source: Thomson Reuters GFMS
0
200
400
600
800
1000
1200
1400
MML KGI LGC DGC OSK ABGL
Purchase price for takeover targets?
US
$/o
z
Source: Thomson Reuters GFMS
THANK YOU
QUESTIONS?
Phase 1 – bull run 2001-2008
y = 0.2054x + 6.9223 R² = 0.9397
0
50
100
150
200
250
0 200 400 600 800 1000 1200
Axis
Tit
le
Axis Title
Phase 2 (08 bear)
y = 0.2155x - 63.374 R² = 0.216
0
20
40
60
80
100
120
140
160
180
600 650 700 750 800 850 900 950
Axis
Tit
le
Axis Title
Chart Title
Phase 3
y = 0.1169x + 35.572 R² = 0.7881
0
50
100
150
200
250
300
500 700 900 1100 1300 1500 1700 1900 2100
Axis
Tit
le
Axis Title
Chart Title
Phase 4
y = 0.2093x - 165.08 R² = 0.6222
100
120
140
160
180
200
220
240
1400 1450 1500 1550 1600 1650 1700 1750 1800 1850 1900
Axis
Tit
le
Axis Title
Chart Title
PHASE 5 JUNE 2012- PRESENT
y = 0.2185x - 196.59 R² = 0.9358
0
50
100
150
200
250
1500 1550 1600 1650 1700 1750 1800
Axis
Tit
le
Axis Title
Chart Title
THE STATE OF THE GOLD MINING INDUSTRY
• High gold price
• Gold production up for 3rd year
• Rising production costs
• Record exploration spending
• Huge number of exploration companies active but constraints on raising cash
• Poor market valuations for explorers & producers
If you believe the gold price will continue to be strong....
it’s a good time to find undervalued stocks!
2200
2300
2400
2500
2600
2700
2800
2900
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Thomson Reuters GFMS
To
nn
es
MINE PRODUCTION
16%
COSTS – THE REALITY
0
2
4
6
8
10
12
14
2250
2300
2350
2400
2450
2500
2550
2600
2650
2700
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
To
nn
es U
S$
B
LACK OF EXPLORATION
SUCCESS
Source: Thomson Reuters GFMS
top related