Gold Investment Symposium - Paul Burton - Thomson Reuters
ARE MINING STOCKS WORTH THEIRWEIGHT IN GOLD?PAUL BURTON,Senior Equities Analyst,THOMSON REUTERS GFMSThe Gold Investment SymposiumTuesday, October 23, 2012Sydney
DISCLAIMERThe information and opinions contained in this presentation have been obtainedfrom sources believed to be reliable, but no representation, guarantee, conditionor warranty, express or implied, is made that such information is accurate orcomplete and it should not be relied upon as such. Accordingly, Reuters Ltdaccepts no liability whatsoever to the people or organizations attending thispresentation, 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 presentationdoes not purport to make any recommendation or provide investment advice tothe effect that any gold, silver, platinum or palladium related transaction isappropriate for all investment objectives, financial situations or particular needs.Prior to making any investment decisions investors should seek advice from theiradvisers on whether any part of this presentation is appropriate to their specificcircumstances. This presentation is not, and should not be construed as, an offeror solicitation to buy or sell gold, silver, platinum or palladium or any gold, silver,platinum or palladium related products. Expressions of opinion are those ofReuters 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
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 MININGHigh Risk 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 technicalLower Risk teething problems on start up.
LIFE CYCLE OF A MINING SHARE $10 HIGHER RISK LOWER RISK 9 8 SHARE PRICE 7 6 5 4 3 2 1 0 DETECTION & DEFINITION , DEPLETING DISCOVERY DESIGN AND DEVELOPMENT Source: Adapted from US Global Funds
RISK MATRIX High Explorer Your Risk Propensity Major producer Low Low High Company Risk
ROUGH GUIDE TO GOLD COMPANIES DETECTION DISCOVERY DEFN I DEFN II DESIGN DEVEL DEPLFUNDING Insiders Insiders Market Market Market Banks Banks Friends Friends Banks Cashflow MarketTECH Geology Geology Geology Geology Engineering Engineering EngineeringEXPERTISEKEY Targets Drill Resource Resources Plan Funding ProductionRESULTS results increases Reserves Timing ECPM Cash costs Production Capex contracts Cashflow Costs Costs Permits Growth ProgressINVESTMENT Invest Trade on Trade on Buy Buy Buy Buy, HoldTACTICS early drill resources Hold Hold Hold Dividends Warrants results Take profits
IMPORTANCE OF JUNIORSSource: MinEx Consulting March 2010
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.
GOLD PRICES IN DIFFERENT CURRENCIES INDEXED DAILY SERIES Indexed Daily Series 115 RupeeIndex (3rd January 2012 = 100) Euro 110 105 Rand 100 Dollar 95 Jan-12 Mar-12 May-12 Jul-12 Source: Thomson Reuters GFMS
GOLD AND OTHER ASSETS & METALS INDEXED DAILY SERIES Indexed Daily Series 180Index (4th January 2011 = 100) 160 140 US 10-yr Gold Bond 120 DJIA 100 CRB 80 Copper 60 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 Source: Thomson Reuters GFMS
SUPPLY HEADLINES Mine production hit new record in 2011, up 4%. Flat so 5000 far this year. 4500 4000 Scrap down slightly (despite 3500 28% rise in gold price). 3000 Official sector on supply side? 2500 Scrap No! For the second time since 2000 Mined 1988, central banks were net 1500 1000 buyers! 500 Producers hedged again in 0 2011 but de-hedging seen in 2011 2012 (f) H1 12. Source: Thomson Reuters GFMS
DEMAND HEADLINES Jewellery has slumped and after a partial recovery in 5000 2010, up 16%, 2011 was 4500 down slightly and H1 12 down net Investment 4000 13%. 3500 De-hedging Official sector has swung to 3000 demand side and jumped by 2500 Bars 460% in 2011 and 34% in H1 2000 12. 1500 Official Sector Physical bar investment up 1000 strongly (36%) in 2011 but 500 Other Fab down sharply this year. 0 2011 2012 (f) Jewellery Other investment putting in a strong performance. Source: Thomson Reuters GFMS
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.
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... 120 110 Au PM XAU 100 GDXJ 90 June July Aug Sept 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
GENERAL PRINCIPLES FOR INVESTINGTODAY • For explorers, those that : • Have experienced, proven management • Have quality projects • Are well-financed • • 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 MANAGEMENT MONEY LOCATION – Country/region PROJECT OWNERSHIP TYPE (U/G, O/P) RESOURCES (tonnes, grade) LOCATION (camps, geology) INFRASTRUCTURE PERMITS
INVESTING STRATEGIESDEPLETING - Producers will benefit first on a price riseon increased profitability. Majors offer lowest risk and value.DEVELOPMENT - Then interest will flow downthrough the 6D model. Quality projects will be most soughtafter.DESIGN & DEFINITION - In terms of manycriteria gold stocks are relatively cheap and the next fewmonths represent a great buying opportunity.DISCOVERY & DETECTION – Explorationcompanies will continue to be driven by results but a sustainedgold price rally will bring investors back to this highly riskysector and give opportunities for refinancing.
Phase 1 – bull run 2001-2008 250 y = 0.2054x + 6.9223 R² = 0.9397 200 150 Axis Title 100 50 0 0 200 400 600 800 1000 1200 Axis Title
Phase 2 (08 bear) Chart Title 180 160 140 y = 0.2155x - 63.374 R² = 0.216 120 Axis Title 100 80 60 40 20 0 600 650 700 750 800 850 900 950 Axis Title
Phase 3 Chart Title 300 y = 0.1169x + 35.572 250 R² = 0.7881 200 Axis Title 150 100 50 0 500 700 900 1100 1300 1500 1700 1900 2100 Axis Title
Phase 4 Chart Title 240 220 y = 0.2093x - 165.08 R² = 0.6222 200 Axis Title 180 160 140 120 100 1400 1450 1500 1550 1600 1650 1700 1750 1800 1850 1900 Axis Title
PHASE 5 JUNE 2012- PRESENT Chart Title 250 y = 0.2185x - 196.59 R² = 0.9358 200 150 Axis Title 100 50 0 1500 1550 1600 1650 1700 1750 1800 Axis Title
THE STATE OF THE GOLD MININGINDUSTRY • 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!