Should you be buying miners right now?
Tom Bulford Dec 13, 2012
"Brutal", "challenging" and "anaemic". These were just three of the words used to describe the funding climate for the mining industry at this year’s Mines and Money conference in Islington. One private investor reckoned "this is the end".
The sector is in disgrace. It has failed to deliver on so many promises that it can no longer expect to find support from the investment community. As one attendee I spoke with put it, the conference should be called: “mines... but not money”.
This is not just sour grapes. One presenter had some numbers to back it up. After studying the records of the quoted mining sector, he found that when companies promise that their mines will be in production within 12 months, the actual time interval has proved to be 20 months.
And when he analysed the percentage of mining projects that had been completed on time and on budget, he found that the number was zero. It is a damning indictment, and even allowing for the fact that projects are complicated, it suggests that mining bosses have deliberately pulled the wool over the eyes of financiers. No wonder the latter are digging in their heels.
Profits lagging behind gold price
Mark Bristow, chief executive of Randgold Resources, was scathing of gold miners – his own company excepted of course. The top eight gold producers, he told his audience, have spent 40% of their market capitalisation in the last few years without managing to increase production. Rather than going out and developing new projects they have simply taken the opportunity offered by the high gold price to dig ore of decreasing grade.
At these lower grades, more and more ore needs to be dug to extract the same amount of gold. With rising labour and energy bills contributing to a 37% sector increase in costs over the last two years alone, it is no wonder that the profitability of gold mining companies has lagged way behind the rising gold price.
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Despite this disagreeable evidence, there were plenty of optimists. Lawrence Roulston, a geologist and editor of Resource Opportunities, said that he had never seen such a dichotomy between the value in the sector and investors’ enthusiasm (or lack of it). Anthony Desir, of Sami Funds, felt that 2012 was probably the nadir and that 2013 should be better.
With the political leadership of the USA and China now determined, we can now look forward with a little more certainty, subject of course to the European situation staying under control. And financiers including John Harrison, Chairman of RBC Ambrian, said that there is still money out there that companies can tap but “they need to take a long run” view. If companies communicate regularly with investors they will receive a fair hearing. If they just rock up and ask for money, they won’t.
The means of funding are changing
One of the most positive speakers at the event was Nolan Watson of Sandstorm, which provides finance to the industry in the form of ‘streaming’. This is a form of financing that has really taken off in recent years and can certainly make sense in the right circumstances.
With ‘streaming’, Sandstorm buys a specified percentage of a mine’s production at a fixed cash cost for the life of the mine. It then makes its money by selling this contracted supply on the spot market. This is similar to the finance that is provided in return for royalty payments or off-take agreements – something that Anglo Pacific (APF) has been practising with great success for years.
While mining companies should not give up too much future income in return for cash today, these types of arrangement do at least provide an alternative to dilutive equity funding or to a reliance on the tender mercies of the banks.
As usual, the picture is not entirely black or white. Some projects will be funded. Others will not. Sentiment is depressed and as Li Yusheng, an analyst from Beijing put it: “generally speaking, it will be difficult for the global economy to get warm quickly”. But as sentiment swings, there will be opportunities for miners to get the funding they need. I would not give up on the sector at all. After all, when sentiment is at its worst, the investing opportunity is normally at its best.
• This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
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