Value investing

[Music] foreign [Music] in the mining sector I mean with the valuations that we're looking at now it seems that the obsession is gone and the reality has not arrived so uh with this panel this is a an essential panel for all mining events because it's a value investor panel and the other conveners are mining events don't do it either because they can't get the people on the panel or they don't have the audience for it anymore but the important thing about Mining Journal and Mining Journal uh research uh is that the Investments are made so we should share uh the overview of both the macro the legal and the exceptions of the projects but I can save you a subscription here uh by introducing uh the first Speaker uh Tom albanesi who really for for many years uh I call him a mining nerd but I mean at a very very level he is one of the best analysts I've ever come across that I can't afford him so we have to talk from time to time but Tom Tom value investors perspective where is the value yeah so I want to really comment on two spheres of that quickly the first is that my view is the entire sector is undervalued and I that is based upon a very simple premise that carbon is about problem electrification is necessity if you believe that carbon is a problem and electrification is a necessity then it the market will come to us so I think that that's going to be the tide that lifts all boats um and I think that there's a value throughout the sector for that absent some that you have to sort of be aware of but then importantly you got to look at okay the tide will lift some boats more than others which are the boats are going to be lifted up more than others and in many ways the thematics came out during the presentations today um I think that particularly because of the inflation price of gold Rising higher discount rates all those macro factors company investors have less confidence that a project that starts getting built today will be built on budget or on time uh we it's hard to get Drillers it's hard to get miners it's hard to get that pallet of steel or wood or whatever else you need your supply chain disruptions are still there who can't predict inflation is there going to be six percent or is it going to be 12 next year so so capex is basically a greater variable than it would be in the past so for me that means there's a Delta right now of value Delta between projects that are already built that have they're they're valued accordingly versus projects that still need to be built or they're being built that there's an element of risk associated with them so they're being undervalued and we saw that in presentations of great discoveries great opportunities but again they were they're all saying our valuations are very low and they were they were they were really really low because of that so I think that in terms of relative values those undeveloped projects or those projects that are being developed now have more room to lift as the all the boats are rising the second part I'd like to talk about is jurisdictional risk and in my view um I because of the geopolitical tensions because a lot of other things going on in the world my view is that the risk Delta between say oecd countries in the rest of the world is too narrow it doesn't actually reflect what's going on in in terms of the risks of those projects and as a consequence for that I think that if anything assuming projects are can get permitted in an oecd convention and then if anything oecd located projects are undervalued compared to projects and riskier jurisdictions so again where am I putting my investment book in North American projects that are sort of in development right now or they're halfway built right now for me that's that's that's those are the ones that have more leverage to the upside uh when at the same time all the boats get lifted yeah but Tom if you put those two things together the first point you're making is the critical need for Metals otherwise we can't deliver the clean energy transition but it's much broader than that it's the under investment by the mining majors in replacing their reserves but it's for the same reason it's for the same reason is that the investors are saying we want the money back and we're not going to give it to you so whether it's it look a a a a a venture investor thinking about a financing a discovery or it's the Rios or the bhps whether they what's the size of capital budget in both cases investors are saying we want our money back and we're not yet ready to give you basically free reign of your balance sheet metal change that has to change for us to solve this conjunum that we're in but right now and I would say that's added on top of that is the ESG agenda and I'll make some remarks at the end of the day about this because there is a a basic ESG contradiction out there on one hand ESG agenda does not want mines to be built does not want really anything to be built so they say stay away from the miners stay away from the other companies on the other hand the single biggest problem the ESG agenda has is climate change and they're almost sort of wishing that that goes away that there'll be enough recycling there'll be enough thrifting enough substitution but it won't so at some point in time those that that contradiction has to get self-solved too well you've given a pretty clear indication of how it's going to get solved if you're saying there's a key mining executive that the whole sector is undervalued in the development projects and that investors are not picking up the opportunity because they want their money tomorrow the opportunity is open for and by the way the mining companies the mining companies are not as investable as the Silicon Valley Bank because it's just not as woke it's just not as fashionable is that the right investment decision those that have invested in the Silicon Valley Bank had made the wrong investment decision hopefully they'll start investing in mining and make the right investment decision perhaps just to add on top of that with some stats the average portfolio manager has less than 0.5 percent of his portfolio allocated to gold and gold equities if you were to add up all the gold companies in the sector this would not even crack the top 35th ranking in terms of market cap so we need this sector to be a lot more relevant to be able to attract generalist funds that we talk about and this sector the irony of it has it's never been healthier than this today balance sheets are strong companies are talking about free cash flow yields which is something we never talked about 10 years ago gold price went to 2000 last year I didn't see any company green light marginal projects like was done 10 years ago companies are making discoveries and are putting them on time in construction on time and on budget so what this means is that as soon as a little bit of Interest goes into the space the money that can flow into it can materially lift the sector evaluations but I think it's obvious that uh mining companies uh with significant cash reserves and the big mining companies are basically profitable at the moment I don't understand why they are not uh getting off the chair and doing something about it and it would seem to me that uh Endeavor mining is uh is a company that in Africa could make a very material difference but you're going to spend the money at what stage I'm sorry I'm not looking for guidance I'm just saying at what stage does it become I think going back to the comments that I thought were great that Tom made investors want to see their money back and if you're in Risk jurisdictions they want to see that money back much quicker so at Endeavor we've been able to commission two mines in the last five years that had paybacks of less than two years irrs of over 20 percent at 1300 gold price and over the last decade over 10 years we met guidance every year on both production and costs so these are examples you know Endeavor now is a case study of a company that can operate well in West Africa and we're not alone especially during the covet phase inflationary phases we've seen many companies in West Africa continue to meet their production guidance and cause guidance and that hasn't been the case in other parts of the world so now it starts to be a question of how do you appraise risk on one hand in developed countries you have perhaps good projects but getting a permit might take you a decade whereas in West Africa we're able to go from Discovery to production including the permitting phase in less than seven years so nowhere else in the world in the world can you achieve this well you can all you're going to do is take over a company yes I agree but you know take Endeavor for example the mind that we're building now in Ivory Coast called lafigay we discovered this is three million ounces we spent less than 20 million dollars to discover this today it's a project that can produce for over 10 years at 200 per at uh 200 000 ounces per year at less than nine hundred dollars per ounce next case lift we've discovered a new greenfields project in Ivory Coast last year called tandai guala we spent less than 12 million dollars and found three million ounces within a 15-month drilling campaign so from zero to three million in 15 months if you're able to continuously do this and the geology in West Africa with a good team allows you to do this there's no need to go and you know like other companies that paid over a billion dollars for a three to four million ounce project in remotes part of you know certain developed countries well they weren't disciplined on their approach but from a value investor point of view I think it's time to turn to John and Clark because John's a generation ahead of Martino and he discovered uh the projects that other people have been acquiring Sir John from a fanatical geologist's point of view the the value in Africa from projects where is it what jurisdictions I'm forever getting annoyed at meetings where somebody said oh we did that in Tanzania well you're not working in Tanzania what's the law of the land where you are and when I'm if I go back to Days of looking for exploration portfolios a critical thing for me is do the politicians actually obey their own laws and you'd be surprised at some of the smaller less known maybe single-party States actually obey their own laws to the letter of the law and for me that's a place to go and look for business if the geology is right the geologists who've worked for me in the past say yeah this matches all of our criteria then I can see that I'm not wasting my company or their shareholders wealth by going out and looking for projects there hence and apps and resources going to Eritrea single-party States they never once broke their own law they never once lied to me in private all in public that's what I want out of business relationships with governments but I keep coming across people who think they can bend those and they're not the politicians usually it's actually people in business but from a point of view of projects uh what you've done all your life have you've gone in there early you've identified a jurisdiction you've established the relationships and then a large company comes in and develops it yeah and I mean take example of Gala yeah and Ghana was a pretty interesting one for me because in Ghana I actually worked for Shanti goldfields as a generalist but my job was to set up an africa-wide exploration portfolio for them build up the portfolio using the best Minds that we already had in the company and then once set up we'd go and find a real specialist who could then manage it properly my job was to build a portfolio get out there use our best minds and also look for properties that we could buy so we went out for Greenfield same as I've done with other stuff since and yes you're looking for somewhere where usually somebody's mind before might have been 200 years ago just um hello and um I've lost my set um but what we what what can also happen in a mining company's life um is it's searching out for portfolio and while it's looking at it it comes across opportunities that they you just can't ignore not just exploration but something that's an advanced state in which you as a as a company that can raise funds can go and build that the current owners can't and for that you actually to willing to pay a premium what is the premium unfortunately in the current market if it's a listed property the premium is something like 28 if it's a private company there's no limit on the premium that that can be paid for it I think that's a hindrance to be quite honest because some things are so undervalued that to just to pay 28 more is still undervaluing on both parties so there's a there's a bit of conundrum there that's not quite what you asked me about but uh um you're looking for Quality uh we found three three properties that somebody else already had that could get into production and in those cases we bought them we built them um the end effect of that in the business cycle is actually they the exploration guys had to drop properties because you can't run all the properties that you had before you became a Mind Builder and you've got to be willing to be quite critical over value politics Finance ESG before I get shut up one thing about ESG we've all done it I don't know how you can run a business without being focused on an ESG it's part of the Bedrock of being accepted in any place you want to do business if I go to do business anywhere other than Wales I'm a foreigner so I have to recognize as a foreigner being a guest worker I'd better conform I'd better look after local issues and be part of them but the great news for me that ESG has so much Focus now it's not good enough to just do it it's really important to talk about it tell the world what we're doing historically people like me have done it not told anybody and I like the fact that the young guys in the business they can actually capitalize on this and they can say we do this we have done it we will do it in the future and all kudos to them yeah John I think that's enough of a speech on as G but the critical thing really where John's coming from it's not the jurisdiction risk it's the establishment of the relationships in jurisdictions which can deliver and John Clark look him up and wish it peace and his left Venture is Eritrea where he's about 10 years excuse me the majors um now on this panel there's two distinguished uh panelists that haven't spoken yet uh Christopher Eccleston uh strategist a whole garden of research and controversial entity has agreed to five or six minutes maximum on the things that the other investors forget to look for the ill-considered Trifles of value investment they're not Trifles my enthusiasm at the moment is um is for for the weird and the wonderful um as people know I'm I'm a fan of um offbeat medals and things like that but I look at the whole universe of of uh stocks of medals and minerals that are out there and I see interesting things happening in big Metals uh you know for me one of the most exciting things potentially is uh the spin-off of uh Valley's nickel assets to recreate something like the inko of days gone by because the global market has been crying out for a nickel champion and that nickel Champion disappeared over 10 years ago and nickel has been lost in the wilderness since then I'm not as a medal but as as having a company that you could get a direct exposure to Major products uh with a competent management which I don't believe the value provided and re seeing that in the in the public sphere is is potentially a great thing and I think that'll be the South 32 of of the next 10 years in the room and that's the most leveraged one through nickel development projects that was listed oh yeah but we've got existing production at Valley's nickel asset and potentially you know they might be in a choir of Canada nickel but you need to have a big beast in the nickel space and we haven't had that and potentially we are but you know going off peace um you know I'm an enormous fan of Argentina as people know um and I we heard Alex upper Nick this morning uh come out and say that uh he thought that uh Salter and someone were the best jurisdictions in the Americas love that comment um because I would agree with that another area that people have not been looking at for more than 10 years after there was a lot of um burnt fingers is the stands uh the stands have fallen off the radar and I think the stands are ready for rehabilitation um and not enough people are looking at those areas and they should not be left to be the Happy Hunting Ground of uh of the Chinese um and then you've got you know little countries as as John said here you know Rwanda um it's it's like an excellent place I'm in great geology in a um a very accessible um location with with them um you know a regime that uh is is mining friendly um and you know you can hunt around in the oecd as was mentioned before for for good jurisdictions and many of them just aren't um then they're not helpful they're putting uh stones in the road and yet um you know some of these oecd jurisdictions don't have the medals that you want if we're talking about 10 the US virtually has no tin Canada has hardly got any tin uh and yet you go to Africa and you can find countries they like Rwanda that have great team resources and if you want tin you're gonna have to go to Rwanda you're going to have to go to Bolivia you have to deal with it um and it's not good enough to just sort of like dismiss Eva Morales even Morales is gone I'm gonna do you need to work with the new regime there as much as one can but um one should not discount uh medals minerals or the jurisdictions that may not be on the um at the top of the Fraser Institute rankings um because companies that are down the freezer Institute rankings rise and the ones that are at the top go down and we've seen that over the the decades and it will continue to happen yeah but Christopher what's I've got one what's inevitable is that the major companies are going to have to go to jurisdictions they didn't want to go to because they've got agreements to supply metals and what happens if you have to say to teaching crook when they ask you well we've only got another three or four years left tson crook won 10 and 20-year Supply agreements so I'm afraid that the mining companies are going to be obliged to follow the value investors in their lifetime so that we will actually make money out of some of these Investments but speaking about making money Dominic um you uh have a lot of subscribers that are following on your every word and what do you see from the value investment point of view where do you think the value is in the resource sector not in entertainment well the I do have a lot of subscribers to my newsletter and a lot of them are very frustrated and it's because I've um Unearthed what I considered to be a couple of good value mining plays and what were good value mining plays are now extremely good value mining plays because they're 20 or 30 percent lower than they were a year ago and so you know value keeps on getting more valuable and the problem that a lot of people have and I think a problem that mining itself has is the fact that a lot of investors haven't it's all very well said people are impatient they want to double their money by tomorrow but that kind of thing does happen in in you know cryptocurrencies or whatever it but it it in mining you know if you take the Long View but a lot of people they look at what they bought a year ago and it's 30 down uh a year later you know how do they have to go is it gonna go down another 30 next year or do they take the tax tax loss and you know people are more forgiving and and they understand that you know the broader metals um often Drive the the price of mining companies but but you know bear markets Drive Away investors and we're in a bear market and it just seems to get worse and worse and worse and so I I don't know what the solution is because the narrative will change and then suddenly everyone will want a mining company and some of these Junior companies all double or triple in a matter of months but how long do we have to wait for that to happen and coming back to your point Tom your very first point that you made um I I'm a big believer in narratives and stories Drive investment and the story that you described of if we want to realize this green carbon-free future then we're going to need to mine about three times as metal as as much metal as we currently mine I can't I think an electric vehicle has four times as much metal as in it as a as a normal car something like that and copper tin lithium all these things and yet now that that story is is is you know I heard Nigel farage articulating that very same story the other day it's a well-told story and yet Metals prices continue to sort of Flatline and decline slightly and the mining companies underperform the metals so it either that story is false and Net Zero is never going to happen or but that story has been told it's out there and yet the price the metals prices haven't reacted so I don't know what needs to happen to change narrative I I wonder if there's going to be some you know I'm terribly excited about all these developments in AI artificial intelligence that are going on and you know I've just been talking to people upstairs we got chat GPT to write a mining report we got chat gbt to write a job description I got chat gbt to write a letter of condolence to somebody you can use it and it's going to be incredibly disruptive to the workforce but the bottom line is you you can get chat gbt to analyze mining data perhaps or artificial intelligence if you can't get chat GPT to build you a mine and we we are in this world where all the value is is digital and anything analog is is is not just a burden it's a liability and and until something changes and suddenly people actually go we need real stuff I I we've got problems and it's pretty obvious what's going to happen is that when the majors cannot uh develop the next phase of a mine when it's 70 years old or something they've got to buy something that's three quarters developed how long do we have to wait though well I've been waiting about 10 years if I if I may go back 25 years because if you those are the room that remember um in the in the mid mid 90s we were going through a bit of a asian-led investment cycle boom uh the tiger the tiger economies and then that that ended with basically the Asian crisis and about 97-98 and as a consequence of that the industry got very conservative between 98 and about 2004 2005. even though in the early 2000s there was all this evidence that China was going to be coming to the foreign people we so you heard the stories China's coming but I think the industry saw this was a repeat of the Asian crisis it's investment-led it's not gonna it's not going to have legs on it so that so the industry did not invest until basically we had a demand shock which was about 2006 2005 through 2007 all of a sudden demands picked up there wasn't any mines there um basically the the the the the the capital hadn't been put in so it led to a basic investment boom from about 2007 onwards from there and at that time there was an inventory of mines and projects so actually it created a an oversupply in that situation um I think we could be seeing the same type of thing here we we see decarbonization is going to be Metals intensive but we've been burned before so we're hesitant we're skeptical about that until it really comes and when it hits we're going to be struggling to sort of catch up to it we won't have the same inventory in place like we would have had back in 2005. and so it will be harder to get that that going what what's going to be happening is that the majors are going to have to bring in the minds that the Juniors and the others cannot bring in themselves I I I was reflecting I was reflecting I was I was reflect on the fact that I was going to have that I was writing my my closing comments at lunch today but that um the quality of the presentations and the pitches were really good today and 15 years ago the majors would have been all over these companies and they're not now so they're not ready yet but but they will they'll they by necessity they will have to get ready it will require patience for that but I do see this is somewhat of a repeat of what happened 25 years ago yeah but you can't invest in Exploration now if you're not going to be in production for 20 years you're going to have to invest in something that's got up to about year 18 and then you can bring it in much quicker because you've got the capital these pool companies with development projects that are waiting for a stock broker to write them a check they're pretty unhappy and Martino's going to take them over or something like that that if we continue to find them exactly but you know well you heard from the royalty panel they're wait that's that's then they're feeding around because yeah if the worry is that the royalty companies are going to profit out of this because I mean I mean David hark will sit up here and says looks around the rooms as we've got two billion available what have you guys got which is um so there is capital out there it's just not the traditional sources no but the world is changing and from a value Investor's point of view you've got to be in projects that meet the criteria you've got to have the geology you've got to have the jurisdiction you got to have management which that which is what Mining Journal funds the hardest to assess how do you evaluate management and then you've got to have the thing that I lack which is timing yeah you need all of them but but there are a company one more Factor you need is patience and you got that so but you have to have yeah okay how much patience though that's the problem because I'm looking at companies that have all the things that you've described rod and their around 30 35 from where they were last year but you opened with that remark can you come up with a conclusion to it no I'm a beaten up I'm beaten up in a bear Market well then you're going to be taken over at the wrong price well I give you a bit more Optimist I mean you typically see first a re-rate in larger companies then it goes into mid tiers those you know smaller producers developers and eventually the Explorers uh and on the gold side from what we've been seeing and Endeavor over the last few months has been refreshing because we have been getting inbounds of you know generalists that weren't previously looking at the space and I just want to bounce on Tom's comments I mean I think the junior space is doing a great job pitching their stories better than they used to be I mean before it was just you know cross-sections and you didn't know what was happening especially for you know someone that's not so familiar with the space I think where the Gap is now is the larger companies are not speaking the same language as the generalist funds you open up our gold mining presentation today you're still talking all this gold mining again all in sustaining costs you're talking sustaining topics non-sustaining growth capex at the end of the day what's the free cash flow yield what's the leverage ratio give me some real tangible numbers that I can compare to other sectors yeah yeah what I what I liked in some of the presentations today was that besides just the npv which even though it's too low a discount rate I liked everyone was using uh npv per capital dollar and I think that's something that you wouldn't have seen a couple years ago you wouldn't have seen the last cycle that that is reinforcing the fact that people the mining companies are actually the Juniors the developers are more focused on how to bring in capital light development Solutions I saw presentations where you know they'd rather than build their own Mill you know beg borrow and steal to use somebody else's meal these are I think the right type of decisions the right kind of thinking fit for purpose for this cycle she may be investors think they're using the wrong metrics because it's not working out for them uh Christopher what what have we fail to uh cover here that really is important foreign you're a strategist we're just investors you know I've been a uh I was a conference in in Riyadh in January and they were talking about how they could evolve a Middle East and Mining sector I said you know part of the thing is finding the deposits and and then working them up in the traditional way that we're used to but the other half is actually creating an investor base and I I see that we still have an investor base in retail and um in retail in Australia and Canada but in the UK the retail base has decayed a lot since Big Bang in the 1980s through the annihilation of a retail stock Brokers and we've also seen in the US where uh you know there used to be as many as five or eight companies in the in the Dow Jones index that used to be mining companies or associated with materials and they've all disappeared over time and so basically the U.S retail investor base has become alienated from investing in mining stocks and um you know we can't just rely upon institutions uh to invest into these things there needs to be an education process of um of the retail investors in the UK um you know I think that we're pushing on an Open Door there potentially um but uh we need to find a way to to re-engage retail in these two large markets and I would also include Continental Europe in that where virtually no Continental um investors invest in um in mining stocks except for the the few random you know gold bugs in in Germany and and Switzerland um you're not getting the investors into these big um big stories because the more they're invested in them the more they may pushback against the type of um you're not oecd and high governmental sort of anti-mining initiatives because they're under this um inflation uh reduction act in the U.S everyone's saying oh yeah it's great we're going to have all these Midstream and and downstream Industries uh but we don't want to have any of the mining um but how does that work out is the dirty part of the equation going to be in some third world nation um and then you're going to bring the products back and they're going to be refined in the US and turned into uh EV uh batteries um no these countries are now saying as we've seen in Indonesia the DRC various other countries saying oh no no we want the the processing here and we actually want the the mega factories the gigafactories pardon me here as well we don't want them in the in the U.S Midwest so if the US is not prepared to allow the mining then it's hopefully not going to end up with a gig of factories either I think one of the reasons why we're going to struggle to ignore night retail interest in this country and Mining generally is that a lot of people who work in mining invest their money in mining because it's an industry they understand and Mining is an industry that people actually operate in here in the UK is you know we used to be the mining capital of the world and we used to supply the workforce to all the world's minds and that still happens in Canada and Australia but it doesn't happen here well it's happening with China now sure the world is working for China let me finish and um so the issue is until we start building and operating and running mines in this country I think we're going to struggle to create the mindset that also invests in mining thank you okay uh John last word yeah last word last word for me um there's one thing that I tried to do Post brexit not brexit sorry when we when we had the gold mining collapse in the late 90s it began with a B but it wasn't vexid it was BX um he's running a small Junior in those days but probably very similar to then a small Junior today and I had the right idea which clearly was a waste of time but that if only two or three of us got together and put together a portfolio from our good assets we could look after our shareholders and we could raise funds but together we would sink and guess what no management team wants to share its its work with somebody else's and we all sunk so I think there's a bit of a message there that maybe we could do more in the Junior market if the Junior market actually coalesced a little bit and looked after their shareholders over and I got one so at the end of the day you're positive and basically the panel uh all sees the case uh for investing in resource projects particularly when they're developed but we're frustrated that the investor base doesn't so I value investors take it seriously look up all the Mining Journal stuff and uh follow Dominic Frisby follow Christopher Eccleston and follow the majors that's my advice and the miners bring things in on budget and on time and speaking of time you're out of it you're out of it so thank you very much

Channel: Mining Journal

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Length: 37min 13sec (2233 seconds)

Published: Thu Apr 20 2023