Investing in Precious Metals Miners
Part 3 – Gold Mining Industry Overview
Part of an ongoing discussion with Equinox Partners about investing in precious metals mining.
Equinox Partners is a team of ten professionals based in Connecticut with a 25 year track record, a pedigree that extends to the very inception of value investing, and a specialization in precious metals mining. Today, the firm manages $500m in gold and silver mining equities on behalf of institutional and high-net-worth families.
The universe of publicly traded precious metals mining companies is relatively deep, with over 500 to choose from with market capitalizations in excess of $10 million. However, this same assortment of companies is also relatively shallow. The cumulative market capitalization of all precious metals mining companies is roughly one-third of Apple’s $1.8 trillion market value. Said another way, one company that produces phones is worth 3x more than all the companies that produce over $200 billion of gold and silver annually, at today’s prices. Additionally, with the top 10 senior gold mining companies constituting an outsized share of the cumulative value of all gold miners, there are hundreds of smaller miners to choose from, some of which go unnoticed. In the opinion of Equinox Partners, this is where the majority of inefficiencies lies.
“The gold and silver mining industry is incredibly difficult to analyze. To start with, there are hundreds of companies, various stages of development, complex geological formations, and generally far-flung jurisdictions. And all of that is before you begin to value the company and understand the nuances of management teams and corporate governance. As a case in point, while precious metals mining companies primarily trade in Canada and Australia, their assets are scattered around the globe. So, while it’s nice to visit a corporate headquarters in Canada and read their glossy presentations, it is far more important to visit a company’s mine which, by the way, can very likely operate half the world away. This, in part, is what makes the sector so inaccessible to your average investor and even to sophisticated generalists,” said the firm’s Chief Investment Officer, Sean Fieler.
Compounding the difficulty of the sector is the sometimes counterintuitive and localized nature of the markets in which the mines operate. While both Canada and Australia are favorable mining jurisdictions, the individual regions within each nation can vary widely. That is to say, the social license to operate in British Columbia can be far different than that of Ontario. From this standpoint a top-down generalization of any given market can often come up short. Because mining companies operate within a small geographic footprint, local issues tend to matter more for the success of any given mine. This is unlike non-resource companies such as Apple that sell products globally, as various points of sale, and from numerous logistical and manufacturing hubs. This makes community relations in the mining industry in particular an essential ingredient for success. Finally, given the sometimes politically fraught nature of mining, NGOs and other outside groups can interfere with an otherwise well-run operation that has community buy in. Though gold is an attractive asset, extracting it is anything but.
Equinox Partners believes the multidimensional complexity of the precious metals mining industry is a key attribute of its attractiveness relative to other sectors. “As a value investor you have to be willing to go where others aren’t. With financial assets so incredibly overvalued, and gold as a consequence becoming more attractive, gold mining, in my opinion, offers one of the last few places in public markets where active and long-term stock pickers can generate great long-term results,” said Mr. Fieler.
For information, Daniel Schreck, Partner at Equinox Partners, at [email protected] or 646 833 2783.