WHY GOLD STOCKS SHOULD BE A PART OF YOUR PORTFOLIO

Transcription

1 WHY GOLD STOCKS SHOULD BE A PART OF YOUR PORTFOLIO PAUL BURTON, Senior Equities Analyst, THOMSON REUTERS GFMS Academy Finance Global Resources Investing Conf Monday, October 15, 2012 Hong Kong

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

4 1. CLASSES OF GOLD STOCKS

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. Lower Risk DEPLETING ultimate proof. Expect some technical teething problems on start up.

8 SHARE PRICE LIFE CYCLE OF A MINING SHARE $ HIGHER RISK LOWER RISK DETECTION & DISCOVERY DEFINITION, DESIGN AND DEVELOPMENT DEPLETING Source: Adapted from US Global Funds

9 RISK MATRIX High Explorer Your Risk Propensity Low Major producer Low Company Risk High

10 ROUGH GUIDE TO GOLD COMPANIES DETECTION DISCOVERY DEFN I DEFN II DESIGN DEVEL DEPL FUNDING TECH EXPERTISE Insiders Friends Insiders Friends Market Market Market Market Banks Banks Banks Cashflow Geology Geology Geology Geology Engineering Engineering Engineering KEY RESULTS Targets Drill results Resource increases Resources Reserves Production Costs Plan Timing Capex Costs Funding ECPM contracts Permits Progress Production Cash costs Cashflow Growth INVESTMENT TACTICS Invest early Warrants Trade on drill results Trade on resources Buy Hold Buy Hold Buy Hold Buy, Hold Dividends Take profits

11 IMPORTANCE OF JUNIORS Source: MinEx Consulting March 2010

12 2. WHAT DRIVES GOLD STOCKS?

13 GOLD PRICE RISE US$/oz Average 1,225 1,572 Year-on-Year 26 % 28% Source: Thomson Reuters GFMS

14 XAU CORRELATION BETWEEN GOLD & GOLD STOCKS R 2 = 0.76 (for the period Jan 2000 Oct 2012) PM gold fix US$/oz Source: Thomson Reuters GFMS

15 CORRELATION DIFFERS FOR BULL & BEAR PHASES R 2 = R 2 = R 2 = 0.22 R 2 = R 2 = Source: Thomson Reuters GFMS

16 GOLD v S&P (INDEXED) R 2 = S&P Gold Source: Thomson Reuters GFMS

17 XAU v S&P (INDEXED) R 2 = S&P XAU Source: Thomson Reuters GFMS

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 3. CURRENT MARKET CONDITIONS

20 Index (3rd January 2012 = 100) GOLD PRICES IN DIFFERENT CURRENCIES INDEXED DAILY SERIES Indexed Daily Series Euro Rupee 105 Rand 100 Dollar 95 Jan-12 Mar-12 May-12 Jul-12 Source: Thomson Reuters GFMS

21 Index (4th January 2011 = 100) GOLD AND OTHER ASSETS & METALS INDEXED DAILY SERIES Indexed Daily Series Gold US 10-yr Bond DJIA 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 far this year. Scrap down slightly (despite 28% rise in gold price). Official sector on supply side? No! For the second time since 1988, central banks were net buyers! Producers hedged again in 2011 but de-hedging seen in H1 12. Source: Thomson Reuters GFMS (f) Scrap Mined

23 DEMAND HEADLINES Jewellery has slumped and after a partial recovery in 2010, up 16%, 2011 was down slightly and H1 12 down 13%. Official sector has swung to demand side and jumped by 460% in 2011 and 34% in H1 12. Physical bar investment up strongly (36%) in 2011 but down sharply this year. Other investment putting in a strong performance (f) net Investment De-hedging Bars Official Sector Other Fab Jewellery 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.

25 GOLD V EQUITIES LONG TERM Gold XAU Source: Thomson Reuters GFMS

26 GOLD v JUNIOR MINERS INDEX Gold GDXJ Source: Thomson Reuters GFMS

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 Au PM XAU GDXJ 90 June July Aug Sept Source: Thomson Reuters GFMS

29 SINCE MID-YEAR GOLD STOCKS HAVE STARTED TO PERFORM... GOLD +11% XAU +16% Increase (1/6-1/10)...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

31 Gold equities beta to gold price since 2001.

32 4. INVESTING STRATEGIES

33 GENERAL PRINCIPLES FOR INVESTING TODAY For explorers, those that : Have quality projects Are well-financed Have experienced, proven management 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 MONEY MANAGEMENT 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.

36 WHAT TO EXPECT (1)?

37 WHAT TO EXPECT (2)?

38 5. COMPANIES TO WATCH

39 US$/oz ENTERPRISE VALUE PER OZ FOR SELECTED JUNIOR GOLD PRODUCERS Source: Thomson Reuters GFMS

40 EV/oz (US$) ENTERPRISE VALUE PER OZ FOR SELECTED JUNIOR GOLD PRODUCERS AR CRJ JAG GBG AVN M&I resources (Moz) Source: Thomson Reuters GFMS

41 EV/prod oz (US$) ENTERPRISE VALUE PER PROD OZ FOR SELECTED JUNIOR GOLD PRODUCERS Annual production (koz) Source: Thomson Reuters GFMS

42 P/NAV P/NAV FOR SELECTED JUNIOR GOLD PRODUCERS CRJ GBG EDV P JAG DPM GCM Mkt cap (US$M) Source: Thomson Reuters GFMS

43 VALUE OF OUNCES* IN M&A IN Average: US$111/oz ELD PAAS IMG SMB SLR EDV YRI PAF * M&I AuEq ounces Source: Thomson Reuters GFMS

44 TOTAL VALUE PER OUNCE* US$/oz Wt average discount to spot gold = 65% Implied long term gold price = US$1,153/oz ELD PAAS SMB SLV EDV PAF * M&I resources AuEq Source: Thomson Reuters GFMS

45 Purchase price for takeover targets? US$/oz MML KGI LGC DGC OSK ABGL Source: Thomson Reuters GFMS

46 THANK YOU QUESTIONS?

47 Axis Title Phase 1 bull run y = x R² = Axis Title

48 Axis Title Phase 2 (08 bear) Chart Title y = x R² = Axis Title

49 Axis Title Phase 3 Chart Title y = x R² = Axis Title

50 Axis Title Phase Chart Title 220 y = x R² = Axis Title

51 Axis Title PHASE 5 JUNE PRESENT 250 Chart Title 200 y = x R² = Axis Title

52 THE STATE OF THE GOLD MINING INDUSTRY High gold price Gold production up for 3 rd 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 Tonnes MINE PRODUCTION % Source: Thomson Reuters GFMS

54 COSTS THE REALITY

55 Tonnes LACK OF EXPLORATION SUCCESS US$ B Source: Thomson Reuters GFMS 0