Can a gold company be all things to all kinds of gold investors? Let's hear what Goldcorp Inc. CEO Chuck Jeannes had to say at this week's Denver Gold Forum.
"I think there's a couple camps out there. One would be the group that continues to believe very much in gold, and in the near term, thinks gold is going up, and is very much focused on our leverage to the gold price," Mr. Jeannes said in kicking off Goldcorp's investor presentation. "I think Goldcorp is a very good choice for that camp of investor. We've got growing production this year, our costs are declining, we have zero limitations on our exposure to gold price, no hedging, no streams on gold assets, so we give you that exposure.
"The biggest and second camp of investors are those who continue to believe in gold, but are concerned about what the price is going to do in the near and medium term, so you want to minimize your risk of holding shares while you wait for the gold price to recover – and you don't know when that's going to happen," Mr. Jeannes continued. "For that class of investor, I think Goldcorp is a really safe choice. We're generating free cash flow even at the current prices and below, and we have one of the strongest balance sheets in the business with the only BBB+ rating."
Well played, Mr. Jeannes, well played. But there really are two kinds of gold companies for these two kinds of investors. And Goldcorp, with all the attributes of safety Mr. Jeannes describes, belongs in the latter camp. They're the companies (Agnico Eagle Mines is another) that had the luxury of spending a significant chunk of their investor presentations in Denver this week on the quality of their properties and their production numbers.
Mr. Jeannes politely calls the other companies' profile levered to the gold price, but they're the ones we can also say are burdened by peak-era borrowings. These companies have to spend most of their presentations talking about the properties they've sold, the debt they've retired, the costs they've cut. (Hello, Barrick Gold.)
As gold has continued its slump from 2011 highs, it's these levered companies who've hurt investors the most, and who may continue to do so if gold keeps kicking around its bottoms. Of course, for the investors in that first camp – looking for a sharp, near-term rebound – the worst performers are the best options.
"There is an irony in this sector," Adrian Day, a keynote speaker, said. "When you have a very strong market, particularly at the beginning of a very strong market, sometimes what we might objectively think of as the worst companies, the ones with the highest debt levels, the ones with the most marginal properties, are precisely the stocks that do the best," said the CEO and chairman of Maryland-based Adrian Day Asset Management, a long-time advocate of precious metals stocks. "And so, you can be a pair trader and buy something that's a very good company and sell short a very bad company. And if you have a very strong move in gold, you suddenly find that your bad company has outperformed the good one."
Of course, no one wants to be seen as a bad company, and the presentations this week in Denver showed a refreshing realism. As we've detailed, the message from miners over the years has taken a journey from the "gold bug" days when equity investors cared more about the price of bullion than the performance of the companies pulling gold from the ground. As ordinary investors began to buy into the sector, miners began to talk about return on capital cash flow, and dividends.
That was at $1,700 (U.S.) per ounce. At Friday's close of $1,145.60, down $8.20, companies have instead honed their message to pitch investors on their survival instincts. "Disciplined" was an exceptionally popular adjective in the presentations, such as Newcrest Mining Ltd.'s reference to itself as "disciplined cost managers."
A trip to the table that held the old-fashioned printouts of company presentations revealed that Alacer Gold Corp. is a "low-cost producer with growth," while the Sierra Metals Inc. handout says it's a "low-cost producer with exciting growth potential." Right next to it, Dundee Precious Metals Inc. is "building a low-cost gold producer," which suggests it may not be quite low-cost just yet. (Royalty company Franco-Nevada, which paces the industry in shareholder return, stuck a thumb in everyone's eyes with the title "the gold investment that works," i.e., all the others don't work all that well.)
Keynote speeches at the Denver Gold Forum have often featured aggressive bulls on gold prices such as Franco-Nevada's Pierre Lassonde (2012) or Martin Murenbeeld, the chief economist of Dundee Capital Markets (2014). This year the forum brought Jeffrey Christian, managing partner of commodity-focused CPM Group.
Mr. Christian is a long-term bull – he sees gold prices moving "sharply higher" in the long term, with strong demand from investors and central banks as mine production falls. But for the next two years, he says, there may be "relatively weak" gold prices, with no financial or economic crises stimulating demand and continuing mine production. By the numbers: the CPM forecast sees gold prices remaining below $1,300 an ounce through 2019.
Meanwhile, the new reality is also creeping into company presentations. Where miners, as recently as a year ago, seemed reluctant to present scenarios where gold traded consistently below $1,200, Barrick presented a slide this week showing what it would do not only at $1,000 an ounce, but also $900. (Measures such as part or full suspensions of production at non-core mines, more head count cuts and changes in stripping and processing.) To be clear, Barrick is not predicting $900 gold, just selling itself as a survivor if things get worse. But are the people who believe that listening? Let's return to Mr. Jeannes:
"I suppose there's a third class of investor out there who thinks gold is going down and is staying down," he said. "I'm not too worried about that guy, because they're not [at the Denver Gold Forum] this year anyway. I think that would account for the [8 per cent] lower year-on-year attendance."
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Going for gold? Go for the worst
As gold has continued its slump from 2011 highs, it's the debt-heavy companies who've hurt investors the most, and who may continue to do so if gold keeps kicking around its bottoms. But for the investors looking for a sharp, near-term rebound — the worst performers are the best options.