Since 2006, the price of gold has nearly doubled, but the average gold miner’s market cap has been cut in half. James Rasteh, founder of Coast Capital LLC, goes into detail on how poor management, misallocation of capital, and declining discoveries of new gold reserves have affected the industry. This clip is excerpted from a video published on Real Vision on September 21, 2018 entitled, “Why Gold Miners Can Finally Shine.”
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How Gold Mining Companies Have Declined (w/James Rasteh)
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Transcript:
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JAMES RASTEH: It's very difficult for a bottom up fund manager like myself to formulate a conclusive view on the macro trends affecting the ebbs and flows into specific industries, but certainly, very cognizant of the fact that a lot of historical investors in gold seem to have allocated capital to cryptocurrencies, into Bitcoin over the past few years. That's really been the preferred instrument for a lot of investors to bet against potential inflation or erosion of the value of fiat currencies.These gold mining companies happened to be in large part headquartered in Canada, and a lot of capital that would have historically formed toward coal mining company seems to have flown into sectors that have garnered much greater interest in Canada- cannabis companies, believe it or not, being a case in point. And in general, I would say that the management teams in the gold mining sector have given investors every reason not to invest in their companies. Management teams in the sector have an extraordinary track record of destroying capital. And that capital has been destroyed, basically through terrible investments in exploration projects, but also really destructive M&A over the past few years. So, for example, the whole sector right now has about $225 billion in market value, and most of the companies in the sector are publicly quoted. So, for about $225 billion, you could buy every single gold mine in the world just about. But the top 20 players in the sector alone have destroyed $157 billion worth of capital just over the past 10 years. This extraordinary mismanagement track record is the biggest reason I can think of why investors have shunned this sector, and why they will likely continue to shut this sector unless important changes are made. And we're investing in the sector to affect and to bring about change. Investors have allocated to the sector with, on average, pretty terrible results historically. Since 2006, I think the price of gold is almost doubled and the average company has lost 50% of its equity value. So, investors would have been right to avoid this sector. And that's what's gotten us to a point where valuations are near all-time lows, the price to cash flow to the sector is trading at particularly in the mid- among the mid-level miners that we look at, valuations are currently at 30% on a price to cash flow basis of what they have been on average over the past 20 years. Why now you ask? Here are two reasons. One is in 2020, starting in 2020, almost every major gold miner in the world will have entered a period of declining reserves and productions. And so, you think, all right, well, maybe they can offset this declining reserve and production through new discoveries. Well, here's fact number two, we're not finding new golds. Last year, we spent three times as much CapEx looking for new gold reserves around the world as we had spent in '95, three times as much. We found only 5% of the gold that we found in 1995. And the quality of the gold that we found was 50% measured in grams per ton of what it was in '95.
1 авг 2019
