September’s Precious Metals Summit at Beaver Creek, followed hard by the Denver Gold Forum, brought a huge chunk of the gold mining and investing community to Colorado. The Gold Report Publisher Jason Mallin heard firsthand about companies that were adding value, and how investors planned to shift focus for the remainder of 2014. In this Gold Report roundup, we asked other experts in attendance for their takeaways from the proverbial mountaintop.
Despite a relatively low gold price, 2014 marked a banner year for the Precious Metals Summit in Beaver Creek, Colorado, observed The Gold Report Publisher Jason Mallin. It topped 2013 records for attendees and presenting companies by 20%. “Nonproducing companies are still confident they can bring projects online. By starting smaller or through a strategic acquisition, they are looking for cash flow as soon as possible,” Mallin observed. Meanwhile, at the Denver Gold Forum, the producing gold companies were focused on the bottom line. “The majors are reducing greenfield exploration expenses as they focus on maximizing cash flow from current production assets.”
Canaccord Genuity Analyst Joe Mazumdar noted a striking difference between the moods at the Precious Metals Summit and the Denver Gold Forum. Part of the emotional shift was timing. During the earlier conference, gold was trading at about $1,250 per ounce ($1,250/oz). By the time the Denver Gold Show closed its doors, gold had dropped 2% to $1,222/oz.
To put that in perspective, Mazumdar pointed out that gold is about flat year to date. But, more importantly, the Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.MKT) is up 10–11%. “Investors seem to feel it’s better to own the equity now than it is to own gold, which was not the case a couple of years ago,” he said. “When gold was going up to $1,900/oz in Q3/11, it far outperformed equities. Perhaps people didn‘t believe gold would hold, and therefore the stocks are overvalued. Today, the overall thesis is that gold may have bottomed, which makes the equities potentially attractive. We are even seeing a premium for projects that make sense, with management teams that can deliver the goods.”
Another reason for the difference in attitude could be the makeup of the companies attending the separate events, Mazumdar noted. The Precious Metals Summit is primarily composed of early- to advanced-stage exploration and development companies, whereas the Denver Gold Forum accommodates producing companies with larger market caps. Mazumdar found that well-funded development companies were in a much better position than companies having to produce at depressed commodity prices.
“Companies like Rubicon Minerals Corp. (RBY:NYSE.MKT; RMX:TSX), Roxgold Inc. (ROG:TSX.V), Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT), Torex Gold Resources Inc. (TXG:TSX), Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT) and, potentially very soon, Golden Queen Mining Co. Ltd. (GQM:TSX) aren’t as impacted by the gold price, as they can still generate catalysts with their current working capital. They are in good shape to advance and develop their respective projects,” Mazumdar said. These companies also have very little competition for labor, contractors and equipment, which has limited capital escalation.
“The lack of development in the sector overall is, in part, because the majority of juniors aren’t getting funded. Their projects are challenged at these gold price levels, and/or they lack the skill set to build and operate a mining project,” Mazumdar said. Also, the lack of a push for growth has restrained many producers from stressing their balance sheets with new projects.
“The companies that don’t have the money going into this kind of gold price environment will have to wait,” Mazumdar warned. “The question is, do they have enough working capital to keep the lights on?” And even if they do, Mazumdar thinks most investors are not looking for companies that can only keep the lights on. “We need to cover companies that can generate meaningful catalysts on worthwhile projects.”
Adrian Day, founder of the self-named asset management company, saw a similar shift in attitude. “The crowd at Beaver Creek seemed more optimistic—cautiously optimistic, but optimistic nonetheless,” he said. “Juniors, by definition, tend to be optimistic. But a lot of these companies raised money early in the year, when the price of gold was up, so they are positioned to move forward with projects and hope for a better gold price by the time they are in production.”
At the Denver Gold Forum, where the larger companies were clustered, it was much more somber. “The message from the podium was about pulling in the horns, cutting costs and cutting exploration,” Day said. “The challenge is that companies have to replace ounces, so if they aren’t finding more, they have to buy, and that leads to mergers and acquisitions (M&A). We have seen a little bit of M&A already, and I think that will lead to more as companies that were waiting are going to have to act quickly or lose their chances.”
Exploration Insights author Brent Cook agreed that the trend is to be bright-eyed at the beginning of a project. “Explorers are almost always more optimistic than the staid old large-cap producers. The explorers are in the early stages of proving a deposit and things usually look brighter at that point. The producers are focused on reducing costs, a very tough thing to do.”
Although a lot of stock prices have been beat down, Cook didn’t see a lot of bargains. “For the most part, the only people who see a lot of buying opportunities are those selling those opportunities.” Then he added, “There are, of course, exceptions.”
Cook also didn’t see a lot of possible mergers in the works at the bar. “Most projects will have a tough time at under $1,250/oz gold,” he said. “Producers lack the cash to buy or share price to make the deal. Some will happen, but overall there are just very few high margin deposits out there.”
Cook is looking forward to when prices improve “sometime in 2015.” But honestly, he said, “There is very little quality to buy. If the gold price rises substantially, then things look better. But that assumes input costs don’t rise in tandem, as they did over the previous 10 years.”