Season two of Sprott Gold Talk Radio kicked up with host Ed Coyne joined by senior portfolio manager Doug Groh for a deep dive on gold mining stocks.
Despite record debt levels and continuing evidence of persistent inflation, gold and gold equities spent most of 2021 in a holding pattern. Groh says, “I think looking back at this past year, some precious metals investors might have been disappointed that gold basically went sideways. But if you look at gold for the long term, it has done very well over the last number of years.” Groh notes that technical activities, such as the interest rate environment and the strength or weakness of the U.S. dollar, can have huge impacts on the performance of gold.
Groh sees gold as a long-term diversifier, and sees promising signs in gold equities. Equities were down, but despite that, companies actually did quite well. With strong cash flow and balanced ledgers, miners continue to show quality and reduce debt. “The first and foremost obvious place for them to create value is in their assets, the geology that they own or operate, the machines and the mill, and the facilities from which they’re producing gold. This is where the value comes from. As part of that, their strategy and how they realize value, their financial position, whether it’s their balance sheet or their cash flow or their ability to raise capital, are all important considerations in realizing value creation.”
Groh notes that mining companies have pivoted away from large-scale growth, taking on a more incremental tactical position that protects their balance sheets. He also discusses the rise in geopolitical risks over the last decade. “As countries want to recognize the value from their resources, they’re imposing more royalties or taxes or in some ways nationalization in some form or fashion. We have seen some of those episodes in the last year become a little bit more pronounced.”
Coyne and Groh also discuss the growing ESG movement and the impact it’s had on miners as they gear up to become more sustainable enterprises. The mining sector also has a lot of mergers and acquisitions, making it a space with enormous possibilities for investors. There are a surprising number of ways for firms to create value beyond just extracting gold, as the sale of property or assets could be leveraged to get cash flow when needed.
Groh concludes, “I’d leave you with the idea that as much as the daily gold price or precious metals price can be exciting, sometimes positively exciting and sometimes very disappointing, investors should recognize it’s the long term that becomes more important, really, to the investment process.”
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