Gold Investment Symposium - Paul Burton - Thomson Reuters

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Title: Are mining stocks worth their weight in gold?

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Gold Investment Symposium - Paul Burton - Thomson Reuters

  1. 1. ARE MINING STOCKS WORTH THEIRWEIGHT IN GOLD?PAUL BURTON,Senior Equities Analyst,THOMSON REUTERS GFMSThe Gold Investment SymposiumTuesday, October 23, 2012Sydney
  2. 2. 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.
  3. 3. AGENDA 1. Classes of gold stocks 2. What drives gold stocks? 3. Current market conditions 4. Investing strategies 5. Companies to watch
  4. 4. 1. CLASSES OF GOLDSTOCKS
  5. 5. 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
  6. 6. 6D MODEL OF MINING DETECTION DISCOVERY DEFINITION DESIGN DEVELOPMENT DEPLETION
  7. 7. 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.
  8. 8. LIFE CYCLE OF A MINING SHARE $10 HIGHER RISK LOWER RISK 9 8 SHARE PRICE 7 6 5 4 3 2 1 0 DETECTION & DEFINITION , DEPLETING DISCOVERY DESIGN AND DEVELOPMENT Source: Adapted from US Global Funds
  9. 9. RISK MATRIX High Explorer Your Risk Propensity Major producer Low Low High Company Risk
  10. 10. ROUGH GUIDE TO GOLD COMPANIES DETECTION DISCOVERY DEFN I DEFN II DESIGN DEVEL DEPLFUNDING Insiders Insiders Market Market Market Banks Banks Friends Friends Banks Cashflow MarketTECH Geology Geology Geology Geology Engineering Engineering EngineeringEXPERTISEKEY Targets Drill Resource Resources Plan Funding ProductionRESULTS results increases Reserves Timing ECPM Cash costs Production Capex contracts Cashflow Costs Costs Permits Growth ProgressINVESTMENT Invest Trade on Trade on Buy Buy Buy Buy, HoldTACTICS early drill resources Hold Hold Hold Dividends Warrants results Take profits
  11. 11. IMPORTANCE OF JUNIORSSource: MinEx Consulting March 2010
  12. 12. 2. WHAT DRIVESGOLD STOCKS?
  13. 13. GOLD PRICE RISE 2000 US$/oz 2010 2011 1800 1600 Average 1,225 1,572 1400 Year-on-Year 26 % 28% 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Thomson Reuters GFMS
  14. 14. CORRELATION BETWEEN GOLD & GOLD STOCKS 250 R2 = 0.76 (for the period Jan 2000 – Oct 2012) 200 150XAU 100 50 0 0 200 400 600 800 1000 1200 1400 1600 1800 2000 PM gold fix US$/oz Source: Thomson Reuters GFMS
  15. 15. CORRELATION DIFFERS FOR BULL &BEAR PHASES 2000 R2 = 0.94 1800 5 1600 R2 = 0.79 3 1400 1200 4 1000 R2 = 0.94 R2 = 0.62 800 1 600 2 400 R2 = 0.22 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Thomson Reuters GFMS
  16. 16. GOLD v S&P (INDEXED) 600 500 R2 = 0.1 400 300 S&P Gold 200 100 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Thomson Reuters GFMS
  17. 17. XAU v S&P (INDEXED) 300 250 R2 = 0.3 200 150 S&P XAU 100 50 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Thomson Reuters GFMS
  18. 18. 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.
  19. 19. 3. CURRENTMARKETCONDITIONS
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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.
  25. 25. GOLD V EQUITIES – LONG TERM660560460360 Gold XAU260160 60 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: Thomson Reuters GFMS
  26. 26. GOLD v JUNIOR MINERS’ INDEX180160140120100 Gold 80 GDXJ 60 40 20 0 2010 2011 2012 Source: Thomson Reuters GFMS
  27. 27. 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
  28. 28. BUT SINCE MID-YEAR... 120 110 Au PM XAU 100 GDXJ 90 June July Aug Sept Source: Thomson Reuters GFMS
  29. 29. SINCE MID-YEAR GOLD STOCKS HAVESTARTED TO PERFORM... Increase (1/6- 1/10) GOLD +11% XAU +16% ...and exhibit leverage again! Source: Thomson Reuters GFMS
  30. 30. 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 $1,180/oz – an increase of 18%. Gold shares also have upside reserve potential, which gold bullion doesn’t have
  31. 31. Gold equities’ beta to gold price since 2001.
  32. 32. 4. INVESTINGSTRATEGIES
  33. 33. GENERAL PRINCIPLES FOR INVESTINGTODAY • For explorers, those that : • Have experienced, proven management • Have quality projects • Are well-financed • • For producers, those that: • Husband precious shares • Concentrate on ROE, eps, cfps •Do not undertake M&A for the sake of getting bigger •Margins are high so return capital to shareholders - dividends
  34. 34. KEY POINTS TO LOOK FOR IN A JUNIOR  MANAGEMENT  MONEY  LOCATION – Country/region  PROJECT  OWNERSHIP  TYPE (U/G, O/P)  RESOURCES (tonnes, grade)  LOCATION (camps, geology)  INFRASTRUCTURE  PERMITS
  35. 35. INVESTING STRATEGIESDEPLETING - Producers will benefit first on a price riseon increased profitability. Majors offer lowest risk and value.DEVELOPMENT - Then interest will flow downthrough the 6D model. Quality projects will be most soughtafter.DESIGN & DEFINITION - In terms of manycriteria gold stocks are relatively cheap and the next fewmonths represent a great buying opportunity.DISCOVERY & DETECTION – Explorationcompanies will continue to be driven by results but a sustainedgold price rally will bring investors back to this highly riskysector and give opportunities for refinancing.
  36. 36. WHAT TO EXPECT (1)?
  37. 37. WHAT TO EXPECT (2)?
  38. 38. 5. COMPANIESTO WATCH
  39. 39. ENTERPRISE VALUE PER OZ FOR SELECTEDJUNIOR GOLD PRODUCERS 700 600 500 400US$/oz 300 200 100 0 Source: Thomson Reuters GFMS
  40. 40. ENTERPRISE VALUE PER OZ FORSELECTED JUNIOR GOLD PRODUCERS 700 600 500 EV/oz (US$) 400 300 200 AR 100 AVN CRJ JAG GBG 0 0 5 10 15 20 25 30 35 40 M&I resources (Moz) Source: Thomson Reuters GFMS
  41. 41. ENTERPRISE VALUE PER PROD OZ FORSELECTED JUNIOR GOLD PRODUCERS 20000 18000 16000 14000EV/prod oz (US$) 12000 10000 8000 6000 4000 2000 0 0 20 40 60 80 100 Annual production (koz) Source: Thomson Reuters GFMS
  42. 42. P/NAV FOR SELECTED JUNIOR GOLD PRODUCERS 4.00 3.50 3.00 2.50P/NAV 2.00 1.50 1.00 EDV CRJ GBG 0.50 JAG DPM P 0.00 GCM 0 500 1000 1500 2000 2500 3000 Mkt cap (US$M) Source: Thomson Reuters GFMS
  43. 43. VALUE OF OUNCES* IN M&A IN 2012700600 Average: US$111/oz500400300200100 0 ELD PAAS IMG SMB SLR EDV YRI PAF * M&I AuEq ounces Source: Thomson Reuters GFMS
  44. 44. TOTAL VALUE PER OUNCE* Wt average discount to spot gold = 65% 1800 Implied long term gold price = US$1,153/oz 1600 1400US$/oz 1200 1000 800 600 400 200 0 ELD PAAS SMB SLV EDV PAF * M&I resources AuEq Source: Thomson Reuters GFMS
  45. 45. Purchase price for takeover targets? 1400 1200 1000US$/oz 800 600 400 200 0 MML KGI LGC DGC OSK ABGL Source: Thomson Reuters GFMS
  46. 46. THANK YOUQUESTIONS?
  47. 47. Phase 1 – bull run 2001-2008 250 y = 0.2054x + 6.9223 R² = 0.9397 200 150 Axis Title 100 50 0 0 200 400 600 800 1000 1200 Axis Title
  48. 48. Phase 2 (08 bear) Chart Title 180 160 140 y = 0.2155x - 63.374 R² = 0.216 120 Axis Title 100 80 60 40 20 0 600 650 700 750 800 850 900 950 Axis Title
  49. 49. Phase 3 Chart Title 300 y = 0.1169x + 35.572 250 R² = 0.7881 200 Axis Title 150 100 50 0 500 700 900 1100 1300 1500 1700 1900 2100 Axis Title
  50. 50. Phase 4 Chart Title 240 220 y = 0.2093x - 165.08 R² = 0.6222 200 Axis Title 180 160 140 120 100 1400 1450 1500 1550 1600 1650 1700 1750 1800 1850 1900 Axis Title
  51. 51. PHASE 5 JUNE 2012- PRESENT Chart Title 250 y = 0.2185x - 196.59 R² = 0.9358 200 150 Axis Title 100 50 0 1500 1550 1600 1650 1700 1750 1800 Axis Title
  52. 52. THE STATE OF THE GOLD MININGINDUSTRY • High gold price • Gold production up for 3rd year • Rising production costs • Record exploration spending • Huge number of exploration companies active but constraints on raising cash • Poor market valuations for explorers & producers If you believe the gold price will continue to be strong.... it’s a good time to find undervalued stocks!
  53. 53. MINE PRODUCTION 2900 2800 2700 16%Tonnes 2600 2500 2400 2300 2200 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Thomson Reuters GFMS
  54. 54. COSTS – THE REALITY
  55. 55. LACK OF EXPLORATION SUCCESS 2700 14 2650 12 2600 10 US$ BTonnes 2550 2500 8 2450 6 2400 4 2350 2 2300 2250 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Thomson Reuters GFMS

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