Canaccord Genuity’s Steven Butler didn’t expect mining equities to fall as hard as they did after the gold price tumbled but believes the drop has created some welcome bargains. Gold Report interview
Author: Sally Lowder
Posted: Tuesday , 04 Oct 2011
PETALUMA, CA – The Gold Report: Gold is down $100/ounce (oz.) and I think investors want some salvo. Is this a buying opportunity?
Steven Butler: Yes, it is. We set a 12-month target at the end of July suggesting a peak of $1,750/oz. for gold and $45/oz. for silver. Gold shot up to $1,900/oz.-a little bit too far, too fast in August given the unchanged macro conditions. The world hasn’t changed dramatically in terms of all the macro conditions affecting Europe and the U.S.
We predicted that there could be a chance for gold to pull back, but we didn’t think that equities would pull back as much because they hadn’t followed the gold price as high. Yet, in many cases the equity pullback was harsher than what we saw in the gold price.
TGR: There’s certainly a whipsaw effect here.
SB: Today, the Global Gold Index is down about 5.3%. But some juniors are suffering even more. In some cases, there is extra pressure on stocks that had done relatively well earlier in the year.
TGR: How could this impact M&A activity?
SB: I do think that M&A will continue, although it’s been a bit dry for several months. There are some names in the sector that have “potential M&A” stamped on their foreheads. There has been a disconnect between where spot gold has gone and equities. Companies that used to trade on a premium to net asset value, or at least a premium spread to their junior counterparts, can’t easily afford to buy their junior counterparts because their share price multiple doesn’t allow it. Normally, M&A is always about the expensive senior paper buying the inexpensive junior paper. Companies can show accretion that way.
TGR: You just attended the Denver Gold Forum. Did you discover some junior stories there that were compelling?
SB: There are a lot of projects out there. There always have been a lot of projects out there. And, at these gold prices, there are that many more, aren’t there?
TGR: There are going to be more.
SB: There is certainly potential for very large resource growth. A lot of the companies are going to be booking over the next year or two. Some companies will push the dial up even further. If there continues to be a divergence between gold and gold equities, I think that value will surface in many of these names. They will drive resource reserve increases. They’ll either be lucky enough to build their own projects, or the M&A will eventually kick into gear and many of these stories will be recognized with an increased level of corporate activity because it has been a little too quiet.
TGR: There are so many compelling, medium-size projects with proven reserves that are essentially, for lack of a better expression, rotting on the vine.
There is a vacuum of experienced management that knows how to put projects into production because no one was going into mining in the 1980s. We don’t have a robust group of younger management that is experienced. Perhaps the lack of talent pool on some of these projects is why they aren’t getting developed. I don’t know if that is something you thought about or not.
SB: It’s a very relevant comment. After I completed my undergraduate geology degree in 1988, the class sizes at the university that I attended kept getting smaller and smaller.
It’s also proven to be a lot more difficult for the companies to raise capital, of course.
TGR: Permitting issues.
SB: Right, permitting and because they are going further and further abroad. I remember visiting a project in 1996 that didn’t see production until about 2008. We thought it would be in production much more quickly. Sometimes it takes a couple of cycles for these things to get going. It’s challenging, but the people element is a big deal. If you don’t have experience, you have to train up a new pool of employees.
One of the most competitive locations for labor has proven to be Australia, because of the number of new projects and so few people with operating experience, developing experience, or experience as millwrights or metallurgists. It’s not just lack of talent in the managerial positions, but back down at the operating level, too.
TGR: I have heard that some Australian companies are bringing in coal miners from Kentucky on three-week shifts.
TGR: That blows the mind. Steve, thank you so much. This has been great.
Steven Butler is managing director and senior precious metals analyst at Canaccord Genuity. He has spent over 17 years in mining research and has active coverage on 27 precious metals companies spanning the large cap and small cap space. Mr. Butler earned a BS in geology from Queen’s University in 1988 and an MBA from Dalhousie University in 1991.
Article published courtesy of The Gold Report – www.theaureport.com