It's very difficult for a
bottom-up fund manager like myself to formulate a
Conclusive view on the macro trends affecting the sort of ebbs and flows into specific
industries, but
certainly, very cognizant of the fact that a lot of historical investors in gold seem to have allocated capital to
cryptocurrencies and to Bitcoin over the past few years
that's certainly been the preferred instrument for a lot of investors to bet against potential inflation or an erosion of the
value of fiat currencies these gold mining companies happen to be in large part headquartered in Canada and a lot of capital that would have
Historically formed toward coal mining company seems to have flown into sectors that have garnered much greater interest in Canada
Cannabis companies believe it or not being a case in point
and
in general
I would say that the management teams in the gold mining sector have given investors every reason not to invest in their companies
Right management tiers in this sector have an extraordinary track record of destroying capital
And that capital has been destroyed basically through
terrible
investments in in exploration projects but also
really destructive M&A over the past few years
so by way of example the whole sector right now has about
225 billion dollars in market value and most of the companies in the sector are public record it so for about
225 billion dollars you could buy every single gold mine in the world just about right
But the top 20 players in the sector alone have destroyed a hundred and fifty seven
Billion dollars worth of capital just only over the past ten years
this extraordinary
mismanagement track record is the biggest reason I can think of why investors have shunned this sector and
why they will likely continue to shun the sector unless
Important changes are made and we're investing in the sector to affect and to bring about change
Investors have allocated to the sector with I on average pretty terrible results historically right ever since 2006
I think the price of coal has almost doubled right and the average company has lost
50% of its equity value so investors would have been right to avoid the sector and that's what's gotten us to a point where
Valuations are near all-time lows the price to cash flow that the sector is trading at particularly in the mid
You know among the mid level miners that we look at
Valuations are currently at 30% on a price to cash flow basis of what they have been on average over the past 20 years
Why now you ask? There are two reasons one is in
2020 starting in 2020
Almost every major gold miner in the world will have entered a period of declining reserves and productions
Right, so you think all right well
Maybe they can offset this declining reserve and production through new discoveries. Well, here's fact number two
We're not finding new gold. Okay last year
We spent three times as much capex looking for new gold reserves around the world as we had spent in 95
Three times as much we found only 5% of the gold that we found in
1995 and the quality of the gold that we found was 50%
Measured in grams per tonne of what it was in 95. So the majors are running out of gold
They're not discovering any new gold. The only way for them to replace those reserves is through consolidation
And by the way, there's an extraordinarily powerful economic rationale for consolidation
in fact
there are many but here's one of the most powerful as a major gold miner you are trading at twice the
multiples on price to net asset value price to cash flow
Whatever metric you want to look at on average you trained in a hundred percent premium to the smaller players in the space. And so
Financially speaking
It certainly makes all the sense in the world to
consolidate the sector and then when you think about the fact that the smaller miners have lower margins because they're encumbered with a
Onerous and unnecessary cost structures all of which at the GNA level can can be done away with upon
Consolidation you look at an extraordinarily powerful
rationale for consolidation and we think that
Consolidation has to happen and has to begin to happen before 2020 last the majors in this space
continue to decrease in size
There are many companies in the sector that spent over almost and in some cases over a hundred percent of EBIT on GNA
Right and they traded half the multiples of their of the major players in this sector, right?
You remove GNA and many of these companies you double profits
If you look at the number of gold mining
companies in any given market cap range say maybe
One to five billion dollars you look at you
The the gold mining sector has three times as many companies in any given market cap range as producers of other
Metals in the world some of which have bigger end markets in terms of yearly sales, right?
And so this is a sector that it seems to us particularly
You know in the mid cap range of this space should have a third of the companies that it currently does
So you're looking at you know, many many dozens of transactions that need to happen
Just over the past ten years the top 20 companies in this sector have destroyed
157 billion dollars worth of capital
over the same time frame
They've made almost 130 billion dollars worth of cash and we're looking at pretty
stratospheric numbers and the way that that capital has been destroyed is by
Investing in new and greenfield projects that have yielded very little and in fact have yielded zero return on capital
Okay, and then here's another big problem with the sector, which I think is maybe the root problem
Is that the management teams in the sector have very low?
Ownerships of the companies that they lead right average insider ownership rate management top managers founders. What have you is about?
0.4%
Yeah, that's a fifth of the next lowest entire own
Industry that we're aware of which happens to be in the natural resources space as well
So these management teams really are an incentivized based on share price performance, but their yearly cash bonuses
which tend to be very generous or
Calculated based on how large their reserves of the companies are and how large the product is
The howlers reproduction profile is so what happens is when the price of gold goes up the share price of the company might go up
Their cash flow certainly go up the bankers through a lot of capital at these companies
They use their share price and their cash flow and that capital that's newly available to them to buy the biggest goldmine that they've been
Looking at buying that they've been interested in buying and adding to their collection of assets and for maybe a year they make a much
higher
compensation but when the price of gold then goes down their cash flows dry out their share prices decline and now they have leverage to
Contend with and they could potentially face liquidity problems, right?
So they sell the very asset that they had bought often for pennies on the dollar and you rinse and repeat this process
over a cycle you end up with an industry that even though fundamentally very
profitable at the operational level will through an extraordinarily
Non judicious allocation of capital and business development
Destroyed the kinds of capital that this industry has destroyed over time
You