Gold Investment Symposium - Paul Burton - Thomson Reuters
1. ARE MINING STOCKS WORTH THEIR
WEIGHT IN GOLD?
PAUL BURTON,
Senior Equities Analyst,
THOMSON REUTERS GFMS
The Gold Investment Symposium
Tuesday, October 23, 2012
Sydney
2. 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.
3. AGENDA
1. Classes of gold stocks
2. What drives gold stocks?
3. Current market conditions
4. Investing strategies
5. Companies to watch
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. 6D MODEL OF MINING
DETECTION
DISCOVERY
DEFINITION
DESIGN
DEVELOPMENT
DEPLETION
7. 6D MODEL OF MINING
High 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 technical
Lower Risk teething problems on start up.
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. RISK MATRIX
High Explorer
Your Risk
Propensity
Major
producer
Low
Low High
Company Risk
10. ROUGH GUIDE TO GOLD COMPANIES
DETECTION DISCOVERY DEFN I DEFN II DESIGN DEVEL DEPL
FUNDING Insiders Insiders Market Market Market Banks Banks
Friends Friends Banks Cashflow
Market
TECH Geology Geology Geology Geology Engineering Engineering Engineering
EXPERTISE
KEY Targets Drill Resource Resources Plan Funding Production
RESULTS results increases Reserves Timing ECPM Cash costs
Production Capex contracts Cashflow
Costs Costs Permits Growth
Progress
INVESTMENT Invest Trade on Trade on Buy Buy Buy Buy, Hold
TACTICS early drill resources Hold Hold Hold Dividends
Warrants results Take
profits
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.
20. GOLD PRICES IN DIFFERENT CURRENCIES
INDEXED DAILY SERIES
Indexed Daily Series
115
Rupee
Index (3rd January 2012 = 100)
Euro
110
105
Rand
100
Dollar
95
Jan-12 Mar-12 May-12 Jul-12
Source: Thomson Reuters GFMS
21. GOLD AND OTHER ASSETS & METALS
INDEXED DAILY SERIES
Indexed Daily Series
180
Index (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. 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. 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. 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.
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. BUT SINCE MID-YEAR...
120
110
Au PM
XAU
100 GDXJ
90
June July Aug Sept
Source: Thomson Reuters GFMS
29. 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
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
33. GENERAL PRINCIPLES FOR INVESTING
TODAY
• 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. 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. 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.
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. 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. 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. 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. 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. 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!