OCM’s Gold Forum Americas Recap
Last week, we made our annual trek to the Gold Forum Americas 2024 (GFA) in Colorado Springs. We had a number of 1-on-1 meetings with executive teams of mining companies held in the OCM Gold Fund portfolio along with companies that we are doing due diligence on. Additionally, there were many great conversations outside of the meeting rooms on gold, gold miners, state of the industry, and opportunities. Below are our general takeaways and observations from GFA.
Gold Forum Americas 2024 Recap
The general mood at the conference was vastly improved over last year, but far from euphoric considering the record $2,600 gold price. In fact, the lack of investor enthusiasm was a topic widely discussed. What is it going to take to get investors attracted to the gold mining sector?
Our take on that question – There are a number of investors who piled into the precious metals sector following the 2008 GFC on the heels of the Fed’s extraordinary monetary policy response. The gold mining industry failed investors with poor capital allocation discipline, share dilution and a failure to capture expanding margins. Investors are rightfully saying “show me” before committing to the sector again.
In our opinion, in order to attract significant capital flows, mining companies need to show multiple quarters of expanding earnings and cash flow per share to exhibit the operating leverage that investors are seeking when buying shares in a precious metals miner. Based on our meetings with management, we believe the sector is poised to deliver expanding margins as operating cost inflation is well controlled at the moment.
Further to gold miners capturing operating leverage to a rising gold price, we hammered home in our meetings that mining companies can not be quick to lower mined cut-off grades to mine marginal ounces in order to prolong the life of orebodies for the sake of utilizing capital infrastructure. Otherwise, the gold mining business is a hamster wheel that will not deliver what investors are looking for. Most executive teams understood the message, while we received some push back from others (companies to avoid). Mark Bristow of Barrick acknowledged this was a problem in the last gold price cycle.
Another point of discussion in meetings was capital allocation. How are companies looking to allocate increased cash flows? We are on record of believing mining companies operate in a depleting resource business. Therefore, mining companies should be operating with the firm belief investors should be participating in the cash flows of each mine as it is built, understanding the priorities of paying back the capital to build a mine and the necessary capital needed to sustain and grow the business.
The upcoming 2-4 quarters will be a great test of the industry’s management teams discipline in regards to how they decide to distribute their capital due to the highest quarterly average gold price on record. We expect an increase in both dividends and stock buybacks in the coming quarters amongst senior to mid tier producers. Further, quality development assets will be the target of increased M&A activity.
Amongst the junior exploration companies, it is clear the funding window is only open for quality projects. This is a constructive and positive sign. The overall industry suffers when capital is misallocated to assets with little to no hope of ever becoming a minable deposit. No doubt there will be a time when moose pasture with a promoter captures a bid at the end of the cycle, it always does. That said, the fact it doesn’t presently speaks to the prospect of this gold cycle having further to run, in our opinion.
As you can see in the chart below, the sector has enjoyed positive returns year to date with little in the way of generalist investor participation.
Generalists Not In Picture
While the conference enjoyed increased attendance, generalists are still not in the picture. Feedback from several companies was that they did not have many meetings outside of precious metal and resource focus funds. Discussions with peers also revealed that fund flows are minimal to nonexistent in the sector.
This is reminiscent of the Incrementum chart we shared in our most recent post, which detailed that Western allocators continue to be underweight gold. They continue to be underweight gold, despite historical data that suggests there is an increased chance of risk-adjusted outperformance when having gold exposure to a portfolio.
The lack of generalists at the conference was a positive sign that we are still in the early innings of this precious metals equities bull market, in our opinion.
Newmont Overhang
Recently, Newmont divested their Havieron and Telfer assets to Greatland Gold. Since its massive merger with Australian miner Newcrest in 2023, Newmont has publicly proclaimed that they plan to offload several of their non “Tier 1” assets to the highest bidders.
Newmont still has several assets which have a flashing “for sale” sign across the front door. We’ve heard dozens of producing companies have been in negotiations for these assets that will add significant production value to smaller cap producers.
Also, in a brief fireside chat, Newmont’s COO said that the company plans to garner over $2B from the sale of assets. Some juniors may be waiting to hear if Newmont decides to deploy that capital into further M&A or into their own company in another fashion.
With so many valuable ounces on the table, many companies may be waiting to see what happens before taking further action.
Tier 1 Asset vs Tier 1 Jurisdiction
A common topic at the conference was the difference between having tier 1 assets (500,000 ounces/annual production) compared to being in a tier 1 jurisdiction. Many companies who operated within tier 1 jurisdictions played up their reliability of being able to operate in safe countries.
Companies with tier 1 assets that were not in tier 1 jurisdictions enjoyed discussing their ability to maintain minimal cost inflation and expedite projects due to easier permitting structures in comparison to many of their tier 1 jurisdiction peers.
While it’s not an original discussion, the discrepancy between the two philosophies will continue to grow as permitting timelines get longer and economic ounces become increasingly hard to find. At OCM, we are still strong believers in quality management teams, world class deposits, and strong capital structure.