Generalist investors are largely shunning gold stocks, despite the brisk run up in the price of gold bullion – stalling share prices and straining efforts to raise capital.
Since late 2011, when the price of bullion went into a multiyear tailspin, generalists – or sector-agnostic investors (as opposed to specialist mining funds) – have mostly abandoned gold stocks.
But even as the price of gold has climbed from US$1,050 an ounce in late 2015, to roughly US$1,580 currently, investors have by and large stayed away.
“Generalists are still largely underweight, or not involved in the gold sector,” James Bell, analyst with RBC Dominion Securities Inc., wrote in a recent note to clients.
While gold bullion is only about 17 per cent below its US$1,900 an ounce peak in 2011, gold stocks are trading nowhere near their highs. The Gold Miners Vaneck ETF, which tracks the shares of large gold-mining companies, is trading roughly 53 per cent below its 2011 apex.
The lack of generalist interest in gold stocks is a big problem for an industry that is so capital intensive. And with the shrinking of assets under management in specialist mining funds over the past decade, generalist money has only grown in importance as a capital source.
Part of the reason gold stocks are failing to generate much excitement is that it has been easier to make money in plain vanilla investments, such as the S&P 500, that traditionally entail taking on far less risk.
“The broader markets have been on such a bull run for so long that the speculative capital hasn’t really needed to look for a home,” said Justin Stevens, analyst with PI Financial.
In December, for example, Triple Flag Precious Metals Corp. cancelled attempts to raise $360-million in an initial public offering from investors, citing a weak market appetite.
At a recent mining conference in Toronto, David Smith, chief financial officer of Agnico Eagle Mines Ltd., said that while an extended multiyear bull run in gold would certainly help bring generalists back, companies themselves have to “behave a lot better.”
In the mid to late 2000s, the last time gold was in a protracted bull run, many companies, from Barrick Gold Corp., to Goldcorp Inc., to Kinross Gold Corp., made disastrous investment decisions. Those moves included overpaying for acquisitions, or forging ahead on marginal development projects – destroying tens of billions of value along the way.
Over the past five years, the industry has made strides to clean up its act. Companies have been more judicious in committing large sums to new projects. Takeover premiums have come way down. And there has been a concerted effort to put profits ahead of both production and reserve growth. However, it remains to be seen whether those inroads will be enough to win back investors.
“People don’t want to hear that,” Agnico’s Mr. Smith said, of any investment pitch that sacrifices growth for profit.
"People want the profitability, and they want you to grow your reserve life. But it's incredibly difficult to do both."
At the same mining conference, Jay Kellerman, partner and head of the mining group at Stikeman Elliott, said that one of the biggest problems a gold-mining company faces is that there are simply far too many others in the ecosystem. If there were fewer actors, more money would flow into those that remained, he argued. Record levels of M&A activity over the past 18 months has helped thin the ranks a little, but much more consolidation is needed to make a meaningful dent.
In the meantime, the only sure way for gold companies to attract investment from generalists is to not only be among the best performers in their own sector, they must compare favourably against any company, in any sector, argues Tony Makuch, chief executive officer of Kirkland Lake Gold Ltd.
“Forget about being a gold company,” Mr. Makuch said.
“We compete with everybody for investors. Home Depot, Walmart, Air Canada, Brookfield. That’s how we have to think, and that’s what we’re trying to do."