While the gold price itself is important, what’s even more important are the fundamental factors driving this bull market over the past decade and how best individual families and investors can position themselves to capture this growth.
In my family office, we invest in mining assets, focusing on co-investing directly into assets on a global basis. We seek to develop, publicly list or maintaining these assets private as recurring streams of long-term income when EBITDA margins are above 30 – 35% per annum. Our view is that over the coming one to five years the most interesting commodities to invest in will be coking coal and iron ore, while in the next one to 10 years we’re focused on developing copper and gold assets in Africa and Latin America, alongside other private co-investors and institutional investors. As a general policy, we’re long on coking coal, iron ore, copper and gold in the coming decade and are short on government paper (with the exception of the Renminbi).
The reason we’re prioritising gold over the coming decade is a result of our access to proprietary deal flow in this space as well as the obvious factors that support this commodity’s fundamentals: rising concerns over inflation; rising geopolitical risk; fears over dollar weakness as the currency is debased through excessive money supplies in the form of stimulus packages; and more importantly the rising difficulty in finding sizable economically mineable deposits of gold. All of this is without even taking into consideration the effect of growing Chinese demand for gold as a substitute for US Treasuries and individual retail demand for jewelry in China. Another factor supporting the case for gold is the fact its value is recognised across the globe and traded in a continuous market. Although gold plays little role in economic growth and is produced for accumulation not consumption, gold
is the only financial medium of exchange that is not someone else’s liability.
As was pointed out by Cheuvreux and others in the past:
\> Gold is one of the two most important commodities (with crude oil) on the planet, but its role as the ultimate store of value and method of payment has been forgotten by many investors. The perception of gold has been affected by the last remnants of a Gold Standard being as long ago as 1971, a 20-year bear market and persistent central bank selling. In a scenario of financial stability and fiscal prudence, gold’s monetary role retreats into the background, but even then it never goes away. In today’s world of massive deficit spending, inflating currencies (i.e. excessive growth in the money supply) and financial imbalances, gold’s monetary role is reasserting itself.
\> Gold acts as an early warning of potential crisis such as rising inflationary/deflationary pressures and general confidence in paper currency, especially the US dollar (USD). A strongly rising gold price could have severe consequences for US monetary policy and the USD. History suggests gold always wins against an inflating paper currency (i.e. one subject to excessive supply growth).
\> Gold and gold mining stocks are poised for an unprecedented rise in prices and profile. Investors in equities need to assess the implications for their portfolios. Global and hedge funds may be better placed to respond since they can purchase overseas-listed gold and precious metal stocks, exchange-traded funds (ETFs) based on gold, or gold bullion itself. It’s surprising to think that in 2006 the largest “pure play” gold company in Europe, Peter Hambro Mining PLC, had a market capitalisation of just USD$1.5 billion. Even investors who were able to invest in overseas stocks might have been surprised to find that in that same year, the market capitalization of the 10 largest gold stocks on world stock markets, was equivalent to only 30% and 40% of the market capitalisations of GE and BP respectively.
Peter Hambro’s son, Evy Hambro, who now manages the £2.8 Billion ($4.5 Billion USD) Gold & General Fund for BlackRock, said gold production has largely been flat over the past decade, while the costs of bringing a new mine on stream have risen. According to Hambro that alone supports the current gold price while the inflation-adjusted price for gold, to keep pace with purchasing power, is over USD 2,000 an ounce.
A few junior gold companies that we’re particularly impressed with and know the management of include:
i. Sino Prosper State Gold Resources Holdings
(HKse:0766), a Hong Kong-listed company which a year ago was in essence a shell company that had an agreement to buy a mine in Inner Mongolia, along with five prospective deposits in China’s north-eastern tip. The firm was valued on the Hong Kong stock exchange at HK$400m (Approx $50M USD). Since then the price of gold has spiked, the mine was bought and turned out to be larger than expected. Sino Prosper’s valuation is currently near HK$3.5 billion
(Approx $450M USD) and it has become a beacon for other minerals firms in Asia.
The rise of the Hong Kong market in the commodities world is also significant as it’s becoming the go-to place for large scale natural resource companies to list as a result of the depth of its capital markets and the interest Asian investors have in this space. For this reason UC Rusal
(the largest Aluminum producer) listed last year in Hong Kong and now the Brazilian miner Vale, the world’s largest producer of iron ore, is planning its listing for fiscal 2011. Hong Kong’s IPO market has had seven mining and natural-resources firms go public this year, raising HK$36 billion ($4.6 billion) in the process. Another 13 listed in 2009, making it one of the biggest IPO markets in the world and raising HK$58 billion. A further 10-15 firms are
due to list over the next year and the sums raised will almost certainly be bigger than before thanks to Hong Kong’s investor attitude, an appetite for raw materials and inexorably rising commodities prices.
ii. Continental Gold
(TsX:cNl), a Toronto-listed company with its assets in Colombia. This is an advance-stage gold exploration outfit with small scale production having started with its flagship Buriticá project. The Company’s extensive portfolio of gold projects includes more than 200,000 hectares of highly-prospective ground in areas of historical gold production in Colombia. The founding team of Continental has historically held or discovered some of the largest gold deposits in the country. Since listing in April 2010, the company’s stock has risen from $1.85 per share to $9.74 as of November 24, 2010.
Colombia on a wider scale is one of the most attractive global markets to invest in mining as a result of its new-found economic and political stability. In addition there has been an exponential increase in security in the country over the past decade under the leadership of President Uribe who helped tame the infamous drug wars and drug trade in Colombia. As a result of this past instability, Colombia was left untouched for the past two decades and now is home to some of the most important discoveries in the world, culminating more recently with large-bracket investors such as Eike Batista from Brazil placing a $1.2 billion bid for Colombian gold explorer Ventana Gold.
iii. Colossus Minerals
(TsX:csi), a Toronto-listed company with its flagship project, Serra Pelada in Brazil home to the famed gold-platinum-palladium deposit, where at one point the largest gold rush in Latin America took place. This mine where over 100,000 workers dug out gold had its pit walls collapse and after two decades is being re-developed through the use of modern technology. Serra Pelada was the first mine I knew by name and Colossus is a company that I worked with by previously helping them acquire other assets in Latin America through our relationships in the Region. In the past two years the company’s stock has shot up from a low of $0.50 to market value of November 24, 2010 of $8.12.
It’s our belief that replicating the success and exponential growth of the above firms is possible and that the best way to pursue this is through a careful understanding
of underlying projects, management teams and the environment in which these gold companies exist. Family offices interested in co-investing with us in this space are welcome to reach-out.
