I noticed today that Variant Perception has put out a blog which suggests that investors look at silver instead of gold. The rationale is very solid. Gold has had a good run, and many gold miners are looking a tad expensive. Silver is a more leveraged play on the growing sense that we may be approaching a storm.
I’m a long term bear on precious metals but I have a feeling that as we move to the next phase of QE and monetary experimentation, gold and silver will look more attractive. IF, and its a big if, we do lunge into a recession I’m worried that unless fiscal policy is strongly expansionary we could collectively be in trouble at the global level. I also think that the populists, especially of the Left, will get a boost.
So, that makes precious metals more attractive. But the cash flow characteristics of gold aren’t appealing. No dividend and a pure momentum fear play. Gold miners are more interesting if only because more than a few of the miners make strong profits and pay a decent, growing dividend. But that brings another challenge. Political risk. Many of the most interesting, low cost, efficient mines are in places I’d be very wary about. For me if you want both strong company fundamentals AND good political risk there really is only one geography worth looking at – Australia.
Back in July the Asian equity team at SocGen put out a fascinating paper highlighting this space. Here’s their rationale:
“Australian miners among the most profitable globally Even as the equity market has been less discriminating between the gold miners so far with even the loss-making and low profitability stocks in China and elsewhere having risen by more than 25% on average, we think it is increasingly important to focus on quality henceforth, given the inherent leverage element and the idiosyncratic risks associated with investing in gold equities.
Within Asia Pacific, the large listed pure-play gold miners are mostly concentrated in Australia and China. Not just within Asia, Australia gold miners rank high on profitability, leverage and shareholder return metrics (more details on financial metrics in Appendix 1) within global players. Unlike other global peers, the most distinct feature of the Australian miners has been the cash-rich balance sheet with four out of the top six miners having net cash on their balance sheet. A crude metric of the margin is the difference between All-In sustainable cost (AISC) and the spot prices. The AISC of the Australian miners range from US$500/oz to US$835/oz, leading to a higher spread. Low-interest costs, operating leverage with the rise in gold prices, lower energy and wage costs and a depreciating AUD, resulting in a higher realization of Gold prices, have further contributed to the rise in margins.”
As for the screen for equities:
1) A constituent of AS30XGLD Index
2) Market cap. > US$1bn
3) Net debt / EBITDA < 1
4) High profitability as measured by ROE > 20 or improving margins with EBITDA margins /
ROE higher than last five-year average
And the stocks?
Here’s the five identified by the SG report.
After having a good dig around in this list, my own sense is that Regis Resources looks the most interesting – currently on my watchlist.