TORONTO (miningweekly.com) – Opportunities for equity investors seeking to achieve gains from the next upcycle, particularly in the gold space, as the bottom in the market is reached, are growing, IBK Capital president and CEO Michael White told attendees at the recent Cambridge House Toronto Resource Investment Conference. 

“We believe that we’re at the bottom, although it’s sometimes difficult to appreciate this because of all the noise, [owing to] the bombardment in headlines we receive every day,” he said, adding that while it was important to keep up with current affairs, "you should always keep your eyes on the bigger picture”.

For White, a bigger picture can be found in gold equities. “I can’t tell you when gold equities will turn up, but I know it will happen. This sector is cyclical; it goes up, it goes down, then it goes back up. I know that to be true, I just can’t time it.

“Still, how do I satisfy myself that we’re at the bottom? How do I satisfy myself that the downside is limited or derisked and that there is an upside? Well, I start by looking at things like the S&P-TSX Global Gold Index. When we assess this from 2005 to 2014, it looks like we’re at the bottom," he said.

White also recommended looking at exploration and considering the valuations of mergers and acquisitions. These represented a price paid for ounces in the ground over time and, through analysis, he said, it became apparent that a bottom was reached in 2013.

“You can also examine current market conditions in terms of the value an ounce in the ground for exploration companies. For the companies we follow, the median is now around $10/oz, But the rule of thumb over time is about $50/oz, so this feels like a bottom as well,” White noted.

DOWN, BUT NOT OUT

Gold prices would be backstopped by physical demand, which remained robust, and would be assisted by tightening supply as marginal operators were forced to reduce output or shutter their mines.

“Depending on who you speak with, the current cost to produce an ounce of gold is between $1 100/oz and $1 300/oz. So gold prices are now flirting with the average cost to produce an ounce and that’s a good thing [because] physical uptake is spurred when gold is down and considered cheap,” White pointed out, stating that, in recent history, jewellers, bar purchases and central banks propped up physical demand when prices declined.

In addition, gold was a highly-liquid market, yet most of the liquidity came from the gold derivatives market, which was about 100 times the size of the physical market; however, the derivatives market needed the ongoing production of physical ounces in order to function, he said. “Think of it like this. The ounces to be produced are already spoken for but, if they aren’t produced, then they have to be bought.”

Meanwhile, other asset classes were doing well but were becoming expensive, which could act as another gold support. White suggested examining other sectors where people could deploy cash and "you can see they appear to be doing well, such as real estate, energy, finance and technology". But, he said, over time they were no longer cheap and that was a good thing, as "we want other sectors to be arguably expensive", causing money to start flowing into the gold sector, which was arguably cheap.

He said looking at the spreads between junk bonds and government bonds, it was clear that they were tightening. This was illustrated by the record corporate US bond issues.

“You can see there’s a thirst for yield and a flight into any type of yield product, which is causing the spread to compress.

“Well that’s another positive for gold. For as long as rates are low and for as long as this money wants to flow into yields, then these other sectors will continue to become more expensive. Inversely, the gold sector will continue to look cheaper,” he explained.

White noted that he would want to buy into a sector when it was at the bottom, when it was arguably oversold, adding that he would not want to enter sectors that were overbought and, right now,  he felt  "pretty comfortable”.

BUY RIGHT

But, before considering gold equities, White urged investors to begin by assessing the company’s market worth based on the value an ounce in the ground. “As I’ve mentioned, the median today is $10/oz when the rule of thumb is $50/oz. So consider that a lift, because we seek to buy at $10 and then, hopefully, sell at $50,” he said.

Additionally, there were companies trading below the average, at numbers like $2.50/oz or $3/oz, he highlighted, explaining that if they could deploy the capital they raised by way of private placements and could get their ounces rerated in the context of the current market, "then that’s another lift”.

White also considered “the three Ps” – people, project and price. “You’ve got to like the people in terms of exploration and development and you’ve got to like the project in terms of its resources or, if they don’t have the resources fully delineated yet, what the prospects might be," he said, adding that it was also important to like the jurisdiction, knowing that it was safe and bound by the rule of law.

“You also have to judge the project’s feasibility. Does the company you seek to invest in – or the company that will take them over, or merge or [enter into a] joint venture with them – have the ability to extract those ounces in the ground?” White asked.

Finally, there was price, which, he mentioned, fit in with what he had already stressed. "If you can find them, you want to buy into companies that are cheap within the context of their peers." Therefore, he concluded that it was a good time to be investing in gold equities and buying at the bottom.