Miners are having a tough time getting funded, and although Canadian oil and gas has performed well over the last few quarters, some companies might be overvalued. No wonder investors are confused. In this interview with The Mining Report, Jason Mayer of Sprott Asset Management examines near- and long-term plays that look poised to deliver returns, and shares his criteria for selecting profitable investments in volatile resource markets.
The Mining Report: In February, you gave a speech at The Vancouver Club that acknowledged the impact of investor fatigue on the junior mining equity space. Seven months later, are investors starting to get excited again about the space?
Jason Mayer: Investors have been reacting in fits and starts, and everyone is still very cautious. I track a number of funds, and I watch how they perform on a day-to-day basis. What I have found interesting is that a number of resource funds in Canada continue to be underweight, particularly in gold equities. I notice they underperform on days that gold stocks have good moves. The generalists out there among the institutional money have little to no presence in various gold equities. For the most part, people have abandoned the space.
TMR: What will it take to get them excited again?
JM: They’ll want to see some upward trajectory. I don’t know if it’s going to be a couple of data points that confirm the arrival of an inflationary environment, or the cessation of this disinflationary environment that we’ve been in since 2009, but people would have to feel comfortable that the gold price isn’t going to resume the decline it experienced in 2013. There are still a number of analysts and commentators out there who are calling for gold in the $800–1,000/ounce ($800–1,000/oz) range.
TMR: Is it the seemingly never-ending rise of the blue chip stocks that makes people less likely to look at the juniors, whether energy or precious metals?
JM: I don’t know how much it has to do with that, but, certainly, the very strong U.S. dollar is influencing the gold price and precious metal equities. Everyone has their own opinion on what drives gold. Mine is pretty simple. I look at it as a currency investors can choose from among a number of currencies worldwide, the U.S. dollar being the primary driver of gold, because gold is typically quoted in U.S. dollars. The strength of the U.S. dollar has led people to doubt the need to hold either gold or gold-related equities in their portfolios.
TMR: What about the impact on energy stocks?
JM: We’ve had a pretty good run for a number of the energy companies here in Canada. In fact, our energy fund that is run by Eric Nuttall is up 40+%. That is an overall reflection of how the energy equities have done, both the exploration and production (E&P) companies and the service companies.
TMR: The lack of excitement has also impacted financing. You estimated that in 2011, miners raised $1 billion ($1B) in flow-through funds, and in 2012, that number was down to $700 million ($700M). In 2013, it was $350M. So far this year, it is even 15% lower than that. Why has it been so hard to raise money right now?
JM: When we look at it over a multiyear horizon, we’re at a 10-year low. The companies that have been hit the hardest are the miners. They’re the ones that have seen the appetite for flow-through decrease the most, certainly much more than energy companies, where the appetite for flow-through continues to remain pretty healthy.
The companies that have very high-quality projects have been able to access the capital markets and issue equity. In some cases, they have turned to royalties and, in very rare cases, private equity, but for the most part, the juniors are very challenged, especially the exploration companies. They’re hanging on by a thread. Essentially, a lot of their expenditures are really on just keeping the lights on, so they’re no longer advancing projects because the capital is just not available to them.
TMR: Will this lack of capital lead to more mergers and acquisitions?