|Gold junior financing troubles and a risk off environment |
Welsh Ocean Equities analyst, Chris Welsh, looks at some of the reasons behind the recent slump in junior miners and what we might expect for the rest of the year.
Interviewer: Geoff Candy
Posted: Wednesday , 16 May 2012
Download this interview
GEOFF CANDY: Welcome to this week's Gold Weekly podcast. Joining me on the line is Chris Welch - he's a mining analyst at Ocean Equities. Now despite the fairly robust prices for commodities we've seen lately, it's been a tough time of things, particularly on the junior side of the gold sector. Chris despite this, a lot of the mining companies claim that there is a lot of money out there - it's just sitting on the side-lines. Is that something that you'd go along with?
CHRIS WELCH: I think there is some money out there on the side-lines. A lot of the investors that we talk to are still keen. There are a lot of long-term players that can see the value, but you've got to really question what the impetus to go and spend at this point, especially buying things off the market. There's a lot of interest in private companies and that just attests to, people are still keen on the fundamentals of gold mining and exploration. But taking on market risk at this point is a bit of a dangerous game.
GEOFF CANDY: In terms of the market risk factors, is this predominantly the kind of macro political things that we're seeing, the various economic calamities and concerns both in the Europe and the US?
CHRIS WELCH: It's just uncertain times at this point - no one's got a really firm view on what's going on. Us in the mining equities game - we're sort of far from it, from an ability to say our view is to say we're sure Greece is going to do this or Spain is going to do that. So I think at this point everyone is just saying right well why am I taking this risk on, let's take this risk-off position, let's go for equities and commodities and currencies that we know are safer and we'll go back into the game when we know we can pick things up cheaper later on in the year.
GEOFF CANDY: Have you seen a concomitant lift in investment in the majors or has that not really come through either?
CHRIS WELCH: No I think it's just an entirely risk-off environment and people have - you can buy majors tomorrow at lower prices... majors have been coming out with decent operating comments for the last quarter or the last year - they're seeing selloff following the news. People are just holding off on new investments.
GEOFF CANDY: What about the mining companies themselves, because clearly the lower share prices would perhaps mean we're likely to see some M&A activity. But on the flipside of that, companies probably unwilling or unhappy about using their own equity to buy companies, given the lower share prices.
CHRIS WELCH: Exactly, we're a big proponent of following quality stocks. They've got to be the ones that are most likely to be acquired by people wanting to consolidate in the sector and we're seeing big trends that come together like companies acquiring projects with better grade or different synergies for different operating aspects - like Cluff Gold's recent acquisition of the Orezone's Sega Gold Project ("Sega") deposit - it's all being driven by people trying to improve their operations and make their operating margins more secure. But at this point in time, why would you spend your cheap equity on somebody else's... it's an interesting time. We should see further consolidation, but what's the driver - why would you take the cash off balance sheet at this point in time, which would make yourself an acquisition target. An interesting strategic play at this point.
GEOFF CANDY: One gets the sense that at one level everybody is waiting for a catalyst, be it a sharp spike in the gold price or some clear signal that either things are going to go really badly in the EU or things are going to perhaps improve. Is there any way of perhaps getting a sense of what that catalyst would be?
CHRIS WELCH: I'm going to say I don't really think it's a catalyst, I think it's just a risk off environment - people are waiting for the situation to get better. Generally for the global economy see the Chinese numbers, see numbers - we've had some good numbers out of Germany, so there is some stability. But we're just waiting for the global picture to improve and to get some certainty. So with mining equities, as you know they're a long term game. If you expect profits overnight you're going to get punished by the market, so if you pick in the good quality stocks, its one to hold.
GEOFF CANDY: That being said though, on the other side of things, in terms of this risk-off environment, it does become more difficult to raise financing, particularly for the exploration and the junior side of the market. Is that a concern that perhaps a lot of these companies don't have enough cash if this risk-off environment lasts longer than is expected.
CHRIS WELCH: Yes it is a concern - financing risk is a major concern for the juniors that have to raise capital costs that can be multiples of their current market cap, or in fact their market cap when the market was healthier in Q1. So it is a major concern but there are a lot of interesting alternatives, be they some gold stream, some selling royalties. So there are alternatives that are appearing a lot more attractive now. But in general I certainly agree that the financing risk is going to have a major factor, but I'm looking further down the line and saying great, well there are a lot of companies that aren't going to be able to finance getting into production, any sort of production effect that we were going to see from increased gold production in the near term probably isn't going to come on which would feed back into the positive economics for gold and gold investment.
GEOFF CANDY: I was speaking to Randy Smallwood at the European Gold Forum in Zurich a few weeks ago and he was saying it couldn't be better placed for a company such as Silver Wheaton which does involve itself in silver streaming and that kind of thing. Are we likely to see more companies getting into that space or just the ones that are there already perhaps benefitting more than they were expecting to?
CHRIS WELCH: I think the ones that are there already - like the Anglo Pacific type deals and the silver or gold stream companies like the Wheaton groups - they've got the first-mover advantage. They've were established , they've got track records. I think companies that want to go in and establish themselves as alternative investment, alternative financing routes are going to have a tough time to get the faith in the system. So the ones that are already there and working and efficient have got a good advantage.
GEOFF CANDY: In terms of the presentation of the junior mining stocks, we've seen over the last quarter or two, I suppose, an increasing awareness of dividends, particularly on the major side and we're seeing an increased clamour on the part of investors to see extra dividends coming into play. What is you view of this? We saw a comment out of Hathaway a few days ago saying, what they would like to see from the gold mining space is perhaps less focus on growth and more focus on earnings and dividends and so on and so forth. Is that a trend that you are likely see going forward?
CHRIS WELCH: I think you've got to look at the individual companies and you've got to ask the CEO of the company or the chairman - can you return above average growth for cash you've got on your balance sheet. If the answer is no, then you should be paying dividends. If there's a clear opportunity where reinvestment in the company would greatly benefit the shareholder, then they'd be remiss to pay out dividends for the sake of paying out dividends, or stock buybacks which are becoming more and more popular. So it depends on the individual case and we'd all like to see more profit in our own back pockets from the recent high commodity prices, but again, going back to the point of mining is a long term game, so there are a lot of companies out there with fantastic organic growth opportunities that they should investment in if we're right in gold is a long-term play and it's got a great future.
GEOFF CANDY: Coming back to the risk-off side of things, there's been a lot of talk about Africa particularly, and in terms of the regional risk that perhaps people are looking at and investors are looking at. Are we seeing areas overlooked that perhaps were once risky, that aren't as risky anymore?
CHRIS WELCH: Definitely - it's our own internal view at Ocean that over simplification of the African picture leads to the obscuring of great value plays. Yes things happen - in Mali with Mali being a great case which was unexpected and I think we've got back to a position where gold operations in Mali have been of very little effect. Randgold's numbers in their Malian operations were thankfully unaffected. So Africa has got such fantastic geology and its mineral wealth is fantastic so it's definitely an area where, if you want to be in gold then you have to have a certain portion of African gold stocks. And if you obscure African countries such as Liberia which had a slightly sketchy past, but in fact has a great future and has fantastic transparency in the mineral industry, then you're going to forget, you're going to leave a lot of good companies out of your portfolio. So yes, I think African risk is something that you have to spend a lot of time to understand and really get a good picture of what's happening on the ground. But I don't think it's as risky as many people believe.
GEOFF CANDY: Any view on what's likely to happen throughout the rest of this year in terms of gold equities or is it too difficult to predict?
CHRIS WELCH: I think in general we're going to go through the year. We're going to see some plus and minuses in the macroeconomic picture and dates like that, but generally as we go into the second half and into Q4 a lot of risk is hopefully going to be wheedled out of the market and we're going to get more clarity on where we're going to go in the global economic picture, which should feed back into stability in the commodities and the equities into the mining equities.