Equity Research Release
Monday, September 16, 2019
Minerals Industry Report
Insights from the Precious Metals Summit
Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.
Refer to end of report for Analyst Certification & Disclosures
- Another successful conference. The Precious Metals Summit was held September 10-13 at the Beaver Creek Resort in Colorado. Nearly 1,100 persons attended with over 180 companies and 262 buy-side firms represented. Attendance surpassed last year’s participation. While the Precious Metals Summit leans toward junior mining companies, this analyst “struck-up” conversations with more than a few business development executives from larger players who were there to scout opportunities.
- Optimistic precious metals outlook. With gold and silver futures prices up 5% and 14.5%, respectively, since the end of June, the mood was cautiously optimistic. While management teams expect metals prices to be volatile, the consensus among participants we spoke with was that gold and silver still have room to move higher. While major producers seem to have garnered the most investor attention during the recent rally, generalist investor interest in the sector is returning. With sustained or rising prices, greater interest will likely filter down to the junior and intermediates.
- Emerging jurisdictions. We had several conversations with industry participants concerning mining jurisdictions that are increasingly becoming more attractive to outside investors due to changes in the political, regulatory and commerce climate.
- Royalty companies well-represented. While the equity capital markets remain challenging for micro and small-cap companies, royalty and streaming businesses remain an active source of capital. Royalty companies were well-represented at the conference. Beyond providing a source of capital for mining interests, royalty companies have increasingly become popular with investors due to lower direct operating risk and the ability to diversify among various mining jurisdictions, metals and operators. Importantly, investors appreciate the potential for growing dividends.
Precious Metals Summit Beaver Creek 2019
Noble Capital Markets was represented at the 2019 Precious Metals Summit held at the Beaver Creek Resort in Colorado. The conference provided an opportunity to meet with management teams in one-on-one settings and benefit from the conference programming which included panel discussions, interviews and presentations. An investor discussion featuring Neil Gregson (J.P. Morgan Asset Management) and Neil Adshead (Sprott Inc.) covered, among other things, the highs and lows of precious metals investing. A fireside chat between John Hathaway (Tocqueville Asset Management) and David Rosenberg (Gluskin Sheff) centered on the macroeconomic environment.
Outlook for the Remainder of 2019 and into 2020
During the third quarter through September 13, the VanEck Gold Miners ETF appreciated 4.2%, while the VanEck Vectors Junior Gold Miners ETF (GDXJ) appreciated 3.7%. Both peaked on September 4 and then declined through the remainder of September. Year-to-date, they are up 26.3% and 20.0%, respectively. Comparatively, the S&P 500 Index appreciated 2.8% and 20.0% during the same periods. During the third quarter, the futures price of gold and silver increased 5.2% and 14.5%, respectively. Futures suggest gold above $1,500 an ounce in 2020, with silver prices in the mid-$17 range. The gold/silver ratio was 85.3x as of September 13; down from 92.0x at the close of the second quarter and we still maintain our view that silver remains undervalued relative to gold and thus could represent greater long-term price appreciation potential.
A few of the key contributors to gold’s strength during the third quarter include a rather dovish posture from the Federal Reserve Open Markets Committee which lowered the target range for the federal funds rate by 25 basis points to 2.0% to 2.25% at its June meeting and the expectation that the Fed could further lower the target range. Accommodation by the Fed could send the dollar lower which would be supportive of precious metals although the fact that other central banks are lowering rates could mute or offset the impact on a relative basis versus other currencies. Second, trade concerns, particularly with China, helped sustain gold’s rally along with increasing geopolitical tensions, most notably with Iran.
In our view, monetary policy, geopolitical risk and trade, along with concerns about global economic growth and recession fears in the U.S., will most likely drive movements in gold for the remainder of the year. Underscoring concerns about economic growth and a more dovish posture by the U.S. Federal Reserve and other Central Banks may strengthen gold’s appeal. This is especially true given that real interest rates are negative in some countries. The possibility that more debt will yield negative real rates has implications for the values of global currency thus promoting precious metals’ role as a store of value.
According to the World Gold Council, gold demand was up 8% year-over year in the second quarter to 1,123 tonnes. For the first six months, demand increased to a three-year high of 2,181.7 tonnes due, in part, to demand from central banks. Second quarter central bank net purchases rose 47% on a year-over-year basis to 224.4 tonnes while during the first six months, total net purchases increased 57% on a year-over-year basis.
In our view, mining stocks are an attractive way to gain exposure to metals given their leverage to strengthening metals prices. Precious metals stocks may provide a hedge against volatility in the equity markets and offer diversification benefits.
Precious Metals Summit Scouting Report
The junior mining sector offers a source of projects, whether through joint ventures, outright sale or alternative arrangements, to intermediate and major production companies who have increasingly emphasized project identification and analytics. A common refrain in the industry is that one million ounces of reserves and resources is the minimum threshold to be of interest to mid-tier producers, while the minimum threshold for senior producers is three to five million ounces. Any thing lower is not considered to be a good use of time since they are seeking to replace at least a year's worth of production and are looking for projects that move the needle.
During the conference, we spoke with several representatives of senior producers that were in attendance, not to present or host one-on-one meetings, but to network with the managements of junior mining companies and scout promising projects. We heard time and again that good projects will get financed and others will have difficulty getting financed. While many of these representatives were responsible for scouting projects in specific geographic regions, the approach to evaluating projects was consistent. Resource potential, quality of resources, infrastructure access and mining jurisdiction were just a few of the items mentioned.
First Mover Advantage
During the conference, we spoke with managements whose companies operate across the globe. Investors in mining stocks pay close attention to the Fraser Institute Annual Survey of Mining Companies which rates mining jurisdictions globally based on their geologic attractiveness for minerals and metals and the extent to which government policies encourage or discourage exploration and investment. In the 2018 survey, the state of Nevada ranked as the most attractive jurisdiction in the world for mining investment, followed by Western Australia, Saskatchewan and Quebec. We pay attention to the survey to analyze which jurisdictions are moving up or down in rank. There are mineral rich jurisdictions in the world that rank favorably in geologic attractiveness for minerals and metals although government policies discourage or deter exploration and investment. We think investors could profit from paying attention to those that are experiencing structural improvement because first movers could reap the rewards of getting in early.
By way of example, we met with several mining companies operating in Ecuador, including Aurania Resources (TSX.V: ARU, Outperform), Lumina Gold (TSX.V: LUM, Not Rated) , Salazar Resources (TSX.V: SRL, Not Rated), SolGold (TSX: SOLG, Not Rated) and Adventus (TSX.V: ADZN, Not Rated). The management teams pointed to meaningful policy and regulatory changes that are supportive of the mining industry. Ecuador has received attention lately because the government has invested in infrastructure and enacted policies and regulations to encourage responsible mining as a means of diversifying and growing its economy. Although it still ranks relatively low according to the Fraser Institute Investment Attractiveness Index, its percentile ranking has improved each year from 2014 to 2018. While Ecuador still has work to do and it may take a while longer to further enhance its ranking, its efforts seem to be paying dividends as it has attracted the attention of major players such as Newcrest Mining Limited (ASX: NCM, Not Rated) and Lundin Gold (TSX: LUG, Not Rated).
Emerging Royalty Companies
A royalty is a right to receive a percentage or other measure of mineral production from a mining company. There are various types of royalties. A streaming agreement is a financial transaction where a metals producer sells forward the right to a percentage of its future life of mine production at a set price in exchange for a tax-deferred upfront payment. Royalty or streaming companies provide capital to help fund the development of mines in return for a life-of-mine royalty on production or under a streaming agreement. A few well-known streaming and royalty companies include Franco Nevada (TSX: FNV, Not Rated), Royal Gold (Nasdaq: RGLD, Not Rated) and Wheaton Precious Metals (TSX: WPM.CA, Not Rated). Because of growing investor interest in royalty and streaming companies, the universe of royalty and streaming companies has grown. During the conference, we met with executives of several, including EMX Royalty Corp (TSX.V: EMX, Not Rated), Maverix Metals (TSX: MMX, Not Rated), Ely Gold Royalties (TSX.V: ELY, Not Rated) and Sailfish Royalty Corp. (TSX.V: FISH, Not Rated). Some develop projects, sell it and retain a royalty. Others purchase and sell portfolios of royalties. Some pursue a combination of strategies. Beyond providing a source of capital for mining interests, royalty companies have increasingly become popular with investors due to lower direct operating risk and the ability to diversify among various mining jurisdictions. In addition, royalty companies often have lower operating cost structures due to relatively fewer employees. Importantly, investors appreciate the potential for growing dividends. During periods when capital markets are challenging, royalty and streaming companies are poised to benefit from providing alternative sources of funding. Given their attractiveness to investors, we believe the universe of royalty businesses will continue to grow. While it may become more competitive, smaller royalty companies may be able to pick up market share as producers seek to diversify their sources of funding and promote competition.
In our opinion, the requisite conditions appear to be in place to sustain the recent strength in precious metals prices. While major producers appear to have captured the most investor attention during the recent rally in silver and gold prices, we expect junior mining companies to catch up if metals prices continue to hold and/or increase. Once the industry is confident in a stable or rising commodity price outlook, we expect M&A activity to accelerate. Because we believe the odds favor the recent move in precious metals prices to hold or strengthen, now may be a good time to begin accumulating shares in select mining equities to increase exposure to precious metals and enhance portfolio diversity. Among the junior, intermediate and major mining names in our universe, we believe the following merit investor consideration and are rated Outperform: Aurania Resources Ltd. (TSX.V: ARU), Coeur Mining (NYSE: CDE), Great Panther Mining Limited (NYSE American: GPL), and Sierra Metals Inc. (NYSE American: SMTS).
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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE
Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ 'Best on the Street' Analyst and Forbes/StarMine's "Best Brokerage Analyst.”
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Report ID: 11091