Market Update September 27

This past week we attended both the Precious Metals Summit in Beaver Creek and the Gold Forum Americas in Colorado Springs. We conducted over 40 1-on-1  meetings with precious metal companies over the two conferences along with great conversations outside of the meeting room. Below are our general takeaways and observations from our time in Colorado.

Market Sentiment

A consistent message across both conferences was nothing new, investor sentiment in the industry is extremely low despite strong gold prices. The ability to draw interest for companies amongst capital allocators is challenging at best. Many companies, especially developers and explorers who are not producing gold or silver, are seeing their share prices deflated to levels below their discovery costs per ounce.  Historically, we have found such low investor interest and valuation levels as excellent entry points for investors.

M&A Awaits

While the industry has seen a few larger deals this past year, such as Newmont acquiring Newcrest and B2 acquiring Sabina, smaller scale deals are non-existent. A number of intermediate-sized companies appear to be waiting to place bids for assets that may be divested by Newmont following completion of the Newcrest Merger.  Junior developers with known deposits advancing project builds or permitting are gathering interest from larger producers, but so far transacting deals appears to need the gold price to break through to new high ground.

Producers Strong Balance Sheets

Many of the mid-tier to larger cap gold companies have been able to leverage the relatively higher spot gold price into strong cash positions. As mentioned previously, these cash positions have not led to a wave of M&A of any significance. Instead, many have decided to continue brownfield exploration to replenish reserves during this “market low”, much to the dismay of some investors in the junior mining space. Compared to 15 years ago, gold producers as a whole have become much better stewards of capital.  Focusing on shareholder returns through dividends and share buybacks along with a more disciplined approach to M&A.  Reluctant to pay large premiums for assets for the sake of growth for growth’s sake, as they did in the last gold bull cycle (2001-2011).

Permitting Timelines

A consistent trade-off for new projects in the mining industry has been the decision of a tier one jurisdiction, such as Canada, that may take decades from discovery to permit, or West Africa, which can expedite the permitting process but provides perceived geopolitical risk. With several producers, we’ve seen the African discount in the market grow as investors look for reasons to sell, despite consistently out-producing their peers.

With tighter and tighter regulations in North America and Western Europe around mining, gold explorers and producers in Africa may be suited for a quicker re-rating when the sector turns into a bull market. These companies may be in pole position bring projects to production faster compared to their Northern American counterparts.

Risk-off Impacting Junior Mining Sector

Junior explorers and developers are feeling the pain of the higher rate environment more so than their larger cap counterparts as risk capital dries up.  In our opinion, we saw too many junior explorers promoting dusted off projects that didn’t make it in previous cycles that should be put out of their misery.  The consequence is diverting available capital away from worthwhile assets and proven management teams to assets that will unlikely have economic outcomes.

Environmental, Social, and Governance (ESG)

In the attempt to appeal to more generalists and institutions, ESG was highlighted by most of the mining companies that presented at the Denver Gold Forum. At OCM we remain most impressed with mining companies that deliver meaningful uplifting to the lives of those around mine sites in impoverished host countries through employment, education, business incubation and nutrition enhancement while being responsible environmental citizens. The mining industry has found it difficult to overcome negative perceptions of its past to gain the praise it deserves for its robust social and economic contributions.

Final Takeaways

We have been attending the Denver Gold Forum for 25 years, the sanguine mood of this year’s Forum would normally be accompanied by a low gold price environment rather than a gold price that a few months earlier set a record for the highest average monthly gold price (April).   While the gold space searches for answers as to why investors are shying away from precious metals equities, our experience tells us capital rotates and when perceived growth areas such as AI gain the market’s attention, precious metals equities tend to underperform.  That said, the set-up, in our opinion, is optimal for mining equities with sentiment toward the shares being what it is (contrarian indicator) with the gold price on the cusp of a break to new highs at the first hint the Fed is turning tail.

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