why gold stocks should be a part of your portfolio · why gold stocks should be a part of your...

WHY GOLD STOCKS SHOULD BE A PART OF YOUR PORTFOLIO

PAUL BURTON, Senior Equities Analyst, THOMSON REUTERS GFMS Academy Finance Global Resources Investing Conf Friday, October 19, 2012 Singapore

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.

AGENDA

1. Classes of gold stocks

2. What drives gold stocks?

3. Current market conditions

4. Investing strategies

5. Companies to watch

1. CLASSES OF GOLD

STOCKS

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

6D MODEL OF MINING

DETECTION

DISCOVERY

DEFINITION

DESIGN

DEVELOPMENT

DEPLETION

6D MODEL OF MINING

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.

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

High Risk

Lower Risk

8

7

6

5

4

3

2

1

0

$10

9

DETECTION &

DISCOVERY

DEFINITION ,

DESIGN AND

DEVELOPMENT

DEPLETING

SH

AR

E P

RIC

E

HIGHER RISK LOWER RISK

LIFE CYCLE OF A MINING SHARE

Source: Adapted from US Global Funds

RISK MATRIX

Explorer

Major

producer

High

Low

Your Risk

Propensity

Low High

Company Risk

ROUGH GUIDE TO GOLD COMPANIES

DETECTION DISCOVERY DEFN I DEFN II DESIGN DEVEL DEPL

FUNDING Insiders

Friends

Insiders

Friends

Market

Market Market Market

Banks

Banks Banks

Cashflow

TECH

EXPERTISE

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

IMPORTANCE OF JUNIORS

Source: MinEx Consulting March 2010

2. WHAT DRIVES

GOLD STOCKS?

GOLD PRICE RISE

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

US$/oz 2010 2011

Average 1,225 1,572

Year-on-Year 26 % 28%

Source: Thomson Reuters GFMS

0

50

100

150

200

250

0 200 400 600 800 1000 1200 1400 1600 1800 2000

XA

U

PM gold fix US$/oz

R2 = 0.76

(for the period Jan 2000 – Oct 2012)

CORRELATION BETWEEN GOLD & GOLD STOCKS


CORRELATION DIFFERS FOR BULL & BEAR PHASES

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1

R2 = 0.94

R2 = 0.94

R2 = 0.79 3

2

R2 = 0.22

4

R2 = 0.62

5


GOLD v S&P (INDEXED)

0

100

200

300

400

500

600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

S&P

Gold

R2 = 0.1


XAU v S&P (INDEXED)

0

50

100

150

200

250

300

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

S&P

XAU

R2 = 0.3


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.

3. CURRENT

MARKET

CONDITIONS

95

100

105

110

115

Jan-12 Mar-12 May-12 Jul-12

Ind

ex

(3

rd J

an

ua

ry 2

01

2 =

10

0)

GOLD PRICES IN DIFFERENT CURRENCIES

INDEXED DAILY SERIES Indexed Daily Series

Euro

Dollar

Rand

Rupee


60

80

100

120

140

160

180

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12

Ind

ex

(4

th J

an

ua

ry 2

01

1 =

10

0)

US 10-yr Bond

DJIA

Copper

GOLD AND OTHER ASSETS & METALS INDEXED DAILY SERIES Indexed Daily Series

Gold

CRB


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.


0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2011 2012 (f)

Scrap

Mined

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.


0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2011 2012 (f)

net Investment

De-hedging

Bars

Official Sector

Other Fab

Jewellery

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.

60

160

260

360

460

560

660

00 01 02 03 04 05 06 07 08 09 10 11 12

Gold

XAU

GOLD V EQUITIES – LONG TERM


0

20

40

60

80

100

120

140

160

180

2010 2011 2012

Gold

GDXJ

GOLD v JUNIOR MINERS’ INDEX


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

BUT SINCE MID-YEAR...

90

100

110

120

June July Aug Sept

Au PM

XAU

GDXJ


SINCE MID-YEAR GOLD STOCKS HAVE STARTED TO PERFORM...

Increase (1/6-

1/10)

GOLD +11%

XAU +16%

...and exhibit leverage again!


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

Gold equities’ beta to gold price since 2001.

4. INVESTING

STRATEGIES

GENERAL PRINCIPLES FOR INVESTING TODAY

• For explorers, those that :

• Have experienced, proven management

• Have quality projects

• Are well-financed

•

• 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

KEY POINTS TO LOOK FOR IN A JUNIOR

MANAGEMENT

MONEY

LOCATION – Country/region

PROJECT

OWNERSHIP

TYPE (U/G, O/P)

RESOURCES (tonnes, grade)

LOCATION (camps, geology)

INFRASTRUCTURE

PERMITS

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.

WHAT TO EXPECT (1)?

WHAT TO EXPECT (2)?

0

100

200

300

400

500

600

700

US

$/o

z

ENTERPRISE VALUE PER OZ FOR SELECTED

JUNIOR GOLD PRODUCERS


0

100

200

300

400

500

600

700

0 5 10 15 20 25 30 35 40

EV/o

z (U

S$)

M&I resources (Moz)

CRJ JAG GBG AVN

AR


ENTERPRISE VALUE PER OZ FOR

SELECTED JUNIOR GOLD PRODUCERS

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

0 20 40 60 80 100

EV

/pro

d o

z (

US

$)

Annual production (koz)

ENTERPRISE VALUE PER PROD OZ FOR

SELECTED JUNIOR GOLD PRODUCERS


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

0 500 1000 1500 2000 2500 3000

P/N

AV

Mkt cap (US$M)

GCM

CRJ GBG

EDV

DPM

P/NAV FOR SELECTED JUNIOR GOLD PRODUCERS

P JAG


0

100

200

300

400

500

600

700

ELD PAAS IMG SMB SLR EDV YRI PAF

VALUE OF OUNCES* IN M&A IN 2012

Average: US$111/oz

* M&I AuEq ounces Source: Thomson Reuters GFMS

0

200

400

600

800

1000

1200

1400

1600

1800

ELD PAAS SMB SLV EDV PAF

Wt average discount to spot gold = 65%

Implied long term gold price = US$1,153/oz

TOTAL VALUE PER OUNCE*

US

$/o

z

* M&I resources AuEq Source: Thomson Reuters GFMS

0

200

400

600

800

1000

1200

1400

MML KGI LGC DGC OSK ABGL

Purchase price for takeover targets?

US

$/o

z


THANK YOU

QUESTIONS?

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