Issue link: http://resourceworld.uberflip.com/i/612354
62 www.resourceworld.com d e c e m b e r / j a n u a r y 2 0 1 6 e p i l o g u e D a v i d D u v a l T he real story in the gold market is not so much depressed prices but rather the lack of investor interest in gold mining equities. The disconnect between the physical metal and its publicly-traded producers has never been wider in my expe- rience. There are many reasons for this and it's safe to say a lot of the problems facing the gold industry today have been self-inflicted. In Canadian dollar terms, some gold producers are doing reasonably well while others are at best just surviving – many of them selling assets to reduce acquisi- tion (M&A) and expansion-related debt incurred during the last market boom. Most companies are focused on operational improvements to reduce production costs; while others are lowering unit production costs by the time-tested method of high grading their reserves. The payback for this practice will, of course, come later. The debt-ladened condition some of our largest mining companies find themselves in today is not without historical prec- edent. What's perhaps different is the fact that today's low interest rate environment has eased the impact of their debt burdens – at least temporarily. Any appreciable rise in interest rates could alter that delicate balance dramatically for heavily leveraged companies. That being said, it is, perhaps, a sad comment on the shortcomings of our industry's management that nega- tive behavior patterns seem to repeat themselves generation after generation. Alarmingly, in the most recent boom cycle, most companies failed to heed the lessons of the past, acquiring what they deemed to be quality assets at peak market prices just before the inevitable downturn. Some of the more blatant examples include the $7.1 billion purchase by Kinross of the Tasiast gold mine in Mauritania and Barrick's pur- chase of Equinox Minerals for a similar amount in 2011. Before the run up in gold prices, many of the world's largest gold producers sold production forward which to my mind seemed like betting against the business they were in. One could also argue that this policy not only abetted the creation of negative market sentiment for gold but reduced mining companies' appeal to investors. As an example, in 2009 Newmont Mining's stock rose four times as fast as Barrick's because it was unhedged. Today, with all the negative sentiment towards gold, more than a few people are pondering the industry's future. In actual fact, it's sometimes hard to make sense of the industry these days when prices are dictated in the futures market and physical supply doesn't seem to come into play. In a "normal" world this would seem to contra- dict basic laws of supply and demand. Major producers generally lead the recovery in the gold market because they have production leverage to higher gold prices which, in reality, makes perfect sense. This will likely be the case again. Also, companies are focusing on reducing their debt loads which, in Barrick's case, is close to $13 billion, a hefty drag on the company's share price. So the recovery among the majors might be a tad more selective than in years past. The junior miners are another story. First of all, there are arguably far too many junior listings versus the capital available to finance them. Flow-through financing, a critical source of capital for junior explor- ers for decades, has virtually dried up although companies with more advanced staged projects have another option: flow- through share donation (FTSDF). PearTree Securities' Norman Brownstein describes the FTSDF option as follows: "A donor first subscribes for flow-through shares issued by a junior mining company, which are immediately donated to a char- ity of his or her choice. These shares are then sold on behalf of the charity to insti- tutional and/or offshore investors for cash. The mining company issuing the shares will receive a premium to the market price of the shares while the end investor will typically purchase the shares at a discount to the market price." Because the share purchases are moti- vated by philanthropy, they generally command higher prices and are often placed with strategic investors that are patient and are looking for potential longer term gains on high quality Canadian min- ing projects with production potential. For more grass-roots, speculative exploration companies, the situation is considerably more complicated. Gone are the days when discoveries such as Hemlo and Voisey's Bay would cap- ture the imagination of the public, opening a window for companies to raise capital. One also has to wonder about the retail interest in speculative exploration plays given the strong investment bias towards technology by today's tech-savvy younger generation and by brokerage companies whose bread and butter in years past was fueled by the minerals industry. In Canada, there hasn't been a market- moving grassroots discovery since the early 1990s which is alarming to say the least. High overheads, a stifling regula- tory climate, and long lead times from discovery to commercial production (over a decade in most cases) have all dampened investor interest in speculative exploration plays. Something's got to give. n Depressed gold stocks represent an anomaly in today's marketplace