The gold industry is headed for a more austere era of smaller scale, more commercially viable projects with quality taking priority over quantity, according to two leading gold fund managers.
Speaking to Citywire Global, Euro Stars A-rated manager Markus Bachmann of Craton Capital and Precious Capital’s Citywire A-rated manager Florian Siegfried stated a change is coming to operating practices in the sector.
Bachmann, who runs the Craton Capital Precious Metal Fund, said the wider financial crisis had started to impact mining firms, which were being forced to scale back larger projects and focus on profitability.
‘What was very feasible five or six years ago when these projects were planned may not happen, they are not as profitable now as the economy is much worse,’ said Bachmann.
‘I think when you look at bigger picture, there is a lot of re-rating of stocks on the cards across the market because of the lot of the issue the industry is going to be confronted with.’
Rather than sinking costs into developing their own production or boosting capital expenditure, Bachmann said capex is likely to fall to negative levels and instead predicts a rise in M&A and consolidation in the sector.
‘Larger companies are realising it is costing them twice as much as some of the juniors to produce the same ounce of gold and that is simply because they do it better.'
'They are more efficient and if we follow economic logic, it is unnecessary for the larger companies to do it when they could buy a firm which will do it better.’
Meanwhile, Siegfried, who runs the Precious Capital Global Mining and Metals fund, said he is concentrating his fund on producing mines and junior names, rather than large-caps or companies dependent on having a dominant market position.
‘We see potential particularly in the mid-tier stocks, which is where we want to be. A lot of them have the ability to adjust to the environment we see coming, which is the big scaling down in size, which favours those not investing $500 million into new projects.’
‘The interesting change is going to be where companies move with cash generation, it is not going to be about growth anymore, it is going to be about profitability. This means they are going to be smaller but more profitable.’
Siegfried recently added to his position in Canadian gold producers Kirkland Lake Gold and San Gold Producers. Both companies, Siegfried said, are examples of producing mines likely to benefit while firms dependent on exploration struggle.
‘We feel, at the moment, that producing mines have a much easier way for funding exploration projects and they are much more effective in spending cash. This is much more so than exploration companies, so we are avoiding some of these names.’
The Craton Capital Precious Metal Fund has returned 27.72% over the past three years. Its Citywire benchmark, FTSE AW/Mining TR, rose 21.54%.
Meanwhile, the Precious Capital Mining and Metals fund returned 40.85% over the same period against the same benchmark.