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Last week, the annual Denver Gold Forum was organized, which typically is one of the highest-regarded mining conferences of the Western hemisphere. It’s also a high-end conference as investors only are allowed to attend it after filling in an application form. As this is quite a big difference with the PDAC show in Toronto in March where people would get in just to get a free pencil, the sounds coming out of the Denver Gold Show are usually very interesting, as it’s a ‘big boys’ conference.
The mid-tier producers understand the situation is bad
We spoke with several attendees of this conference, and the general consensus is that this was a ‘dull’ conference without any enthousiasm on the floor. Whereas most of the mining companies were pushing for growth just three years ago, the sentiment has completely changed. The main focus of the Denver Gold Forum this year was the emphasis on cost reduction and cleaning up the balance sheets which still are very messy from the blood bath during the past few years. According to an analyst we spoke to, not every company’s plans are credible or actionable and only a few (mid-tiers) stood out from the pack. It’s interesting to see that it’s mainly the mid-tier producers who are effectively trying to tackle the problem, whilst the more senior producers are still trying to survive based on their brand name rather than taking effective actions.
The royalty/streaming model is dead – a race to the bottom
Another complaint we picked up is the increased difficulty for royalty companies and precious metals streamers to generate deals which benefit their own shareholders. Five years ago, there were just a handful of streaming/royalty companies, but today there are more than 10 in North America alone. This means that the pie of available projects needs to be divided over much more market participants, and we have the impression there’s a race to the bottom going on. This could be highlighted by the recent deal whereby Franco Nevada and Sandstorm Gold teamed up to purchase a streaming deal on a gold project in Burkina Faso. According to the terms of the agreement, the payback period for the initial investment will be in excess of five years at the current gold price, where after the annual return will be lower than 10%. This means that the total IRR of this investment will be between 5 and 10%, unless this specific project will double the production rate, which isn’t very likely.
Whereas Silver Wheaton, Franco Nevada and other Royal Gold’s were able to close significantly accretive deals in the past, the returns for new streaming deals are relatively marginal, and we think the overcrowded royalty/streaming market will ultimately lead to mergers in the sector or it will eventually kill itself in its race to the bottom.
The consequences of a bad conference
It wasn’t just a boring conference, it had some serious consequences as well. A trader whose primary market place is the TSX Venture Exchange says that during (and after) the conference, his firm decided to pull bids out of the market. And that’s exactly the reason why we saw a gradual decline of the TSX Venture index (see next image) even though there were no volume spikes. The average daily volumes were relatively normal (that is, within 1.5 times the 3 month average), but because the bid-side was extremely thin, stocks started to slide right away with last Monday as apotheosis when the index showed a 3% drop with most mining companies falling 5% or more.
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Source: Stockcharts
This has undermined the investor confidence further and we expect the market to remain quite shaky in the next few weeks. Unfortunately the tax loss selling season is also around the corner, and the combination of these factors could result in the mining sector going into a prolonged hibernation. The TSX-V is now at the lowest point since the beginning of this year, and the stronger US Dollar and weakening gold price aren’t really pointing in the direction of a sudden change.
However, as the TSX Venture Exchange has now dropped exactly 10% since the beginning of this month, we can now officially classify the recent trading as a ‘correction’. The only thing which gives us some hope and acts as a (dimmed) light at the end of the tunnel is the RSI, which currently stands at just 16, indicating the TSX V is in an ‘oversold’ territory. As the gold price is also just 3% above a double bottom, the fix might be in.
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Source: Stockcharts
If the gold price doesn’t fall below the level of its double-bottom, a rebound of the gold price and an oversold TSX Venture Index might be combined to create a ‘perfect storm’. The next few weeks will be very important to see if those important levels will hold.
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