Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 6

Fun at a gold conference, but it’s not all glistering

It’s entirely appropriate that the famous phrase from Shakespeare’s The Merchant of Venice, “All that glisters is not gold”, is most often misquoted as “glitters”. Gold is a confusing subject, especially for an investor trying to predict its future price. It produces no income, costs a lot to mine, store and insure, and yet many see it as an essential part of a diversified portfolio. It’s certainly had a good run in the last 10 years:

So I spent two days at a gold and other minerals symposium to learn more.

Oscar Wilde said, “The optimist sees the doughnut; the pessimist sees the hole.” If you sit through a couple of dozen presentations by the CEOs of junior mining companies, especially gold prospectors, at a resources conference, the only thing you hear about are the doughnuts. The holes are confined to massive craters in remote locations. There’s a wonderful optimism that the next big strike is just a bulldozer gouge away, and you have to admire the conga line of unbridled, fund-raising enthusiasm. Perhaps you need the self-confidence of Lady Gaga, the zeal of Pink and the resilience of Mick Jagger to dig a kilometre underground in a desert 500 kilometres from the nearest town.

They make it sound so exciting, and it’s little wonder these prospectors and miners love their industry. The maps show Botswana and Namibia and Brazil and Indonesia and Mongolia. Take a jet to a South American capital city, hop on a helicopter, fly over rainforest, and there’s a scarred clearing covered in mining equipment. Not for the new breed an opal mine in Coober Pedy or gold prospect in Hill End. Let’s make it complicated, let’s bring in some sovereign risk and an uneducated native workforce. And did you know that the Government of Congo is very friendly to foreign miners, with special tax incentives, relaxed safety laws and environmental concessions. Just don’t mention the dengue fever.

The hoopla is palpable, even from the explorers who have little more than the rights to prospect over an island off Indonesia without a single sod yet turned. This guy has been going to Zambia three times a year for a decade. There’s the diamond company that has just hit a single gem-quality stone which will fetch half a million dollars. There’s the lithium producer salivating at the growth of electric vehicles needing lithium batteries for the next few decades. And if you think the case for investing in gold is strong with government defacing fiat money, then the silver story is even better.

But just as you want to rush out of the room and buy some shares in this sure thing at five cents, you find out they did a capital raising last week at three cents. That’s half the current price! So you wait for the next presenter. This one is the lowest cost producer in Africa. Didn’t someone else say that this morning? And did you know Indian households hold more gold than the US Government and all European Governments combined? The seven billion people in the world will soon be nine billion, and their demands for food will met by super phosphates. But this phosphate company just did a capital raising, and its shares are worth less than the cash backing? It’s crazy, how can that be?

Then you notice something strange. This conference is ‘the number one event series for mining investment and capital raising’, with representatives from dozens of junior resource stocks, mining equipment companies, consultants and mining magazines. There must be more trade magazines in mining than show business. But where are the folks from BHP, Rio or Fortescue? Wait a minute. Even more serious, where are the investors? The big resource funds are not here, because they want to buy in chunks of $10 million but not own more than 5% of the stock, so no point listening to a company with a market cap of $20 million, regardless of how good the story is. The fund managers are saying: come back to me when you’re out of training wheels. Most resource companies are tiny, using the ASX as a place to raise a few million dollars to finance the sinking of some holes before the money and the ideas run out.

It’s charming how all the CEOs flick past the disclaimer at the start of their talks, then proceed to go so close to giving investment advice that any ASIC official would blush. One CEO tells us it’s time to invest in uranium because, thanks to Fukushima and earthquakes and tsunamis, prices have never been lower. Then the next guy says it’s great to invest in gold because, thanks to global uncertainty and Indian weddings, prices will go through the roof. One chart has a long-term $30,000 an ounce forecast. Obviously, anyone who lives in a Zambian jungle half his life and feels more comfortable in a safari suit is hardly likely to worry about a bit of exaggeration in a Powerpoint presentation. And everyone may be ‘the next Sirius Resources’, which almost ran out of cash and saw its share price fall to five cents, only to fly to $3 on the back of a major nickel-copper discovery.

The only large miner to make a presentation was Hancock Prospecting, and it was hard not to be impressed by the sheer audacity of the project. Its Roy Hill development in the Pilbara is a brave leap of faith. Hancocks is a private company so it’s not so beholden to equity markets, but it still needs to raise the debt. They intend building a 440 kilometre heavy rail line to the coast from the site in the Pilbara, with rail construction camps along the way and an airstrip at the mine. It depends on the iron ore price for the next 20 years, in a market that does not have much idea what it will be next month. Good job Gina is the fifth wealthiest woman in the world.

Then amid this optimism and faith, along comes somebody to spoil the party. Andy Xie was Chief Economist for Asia Pacific at Morgan Stanley from 1997 to 2006, and now is one of China’s leading independent economists. He calls the controlled economy of China “the biggest misallocation of capital in history.” Government officials whose first priority is keeping their jobs tell factory owners that they must continue to produce their goods to maintain local jobs. If there is no demand for the product in such a controlled system, the government buys the output and stockpiles it. A large proportion of government revenue comes from land, and so people keep building even though there now almost 10 billion square metres of buildings finished or nearing completion with no occupants. Xie says ongoing urbanisation is a fiction because rural villagers do not have the money to live in the cities, and in any case, most rural land is free so why would they move. He sums up the claims on economic growth by saying that all aggregated numbers in China are made up. He even says much of the demand for steel in China comes from building new steel mills. Government stimulus is simply building more capacity nobody wants.

Most of the resource projects presented at the conference are facing far more of the hole than the doughnut. As one presenter said, there are 250 gold companies listed on the ASX. You can guarantee that the one you choose to buy will be the one that goes broke.

Even if Andy Xie is wrong and China continues to grow strongly for another 20 years, then the vast majority of these juniors will never be another Sirius Resources. Sirius is the brightest star in the night sky, but down on earth, the money raised on many projects will just be used to make the holes bigger.

 

3 Comments
John Peters
March 16, 2013

Graham at first I thought this was your Facebook page - documenting your travels. Having been involved in investing and helping start a couple of minnow resources companies, I believe the old adage that "management can ruin a company in six months" applies not only to large operating companies but is even more relevant to these small investments. While many of the minnows have "potentially" good resources not many of them make it to the big time.

I recently invested a small amount of money into two such plays and one is still to get to listing after wasting the best part of $3m it raised (my money included) while the other (Atrum Coal - ASX code ATU) has had a stellar performance floating at $0-20 in August 12 and now trading over $0-75. I largely contribute this performance to two of their executive team (James Chisholm and Russell Moran) who have established an excellent track record of identifying undervalued resources assets and sourcing sufficient capital to demonstrate to the wider investment community their underlying value.

Having sat through conferences like the one you mentioned, it strikes me that its all about the "holes in the ground" and very little about the people that will show the true value. This really should be the emphasis.

Stephen Barbarich
March 15, 2013

Pleasingly unbiased article on gold and other resources at a time when it is hard to find such articles. Thanks!

Rob Martin
March 15, 2013

Loved the article Graham!

 

Leave a Comment:

     

RELATED ARTICLES

The attacking defender: position for downturns with private debt

John Malloy: why time is now for emerging markets

The asymmetric value of gold for Australian investors

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Superannuation

The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.

Property

RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.

Shares

4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.

Shares

Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.

Shares

Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.

Superannuation

Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.