https://www.miningweekly.com

Improved valuations of mining companies expected this year

22nd January 2016

By: Mia Breytenbach

Creamer Media Deputy Editor: Features

  

Font size: - +

Although mining company valuations have decreased after an ongoing market correction over the past four years, investment firm Commodity Discovery Fund predicts a strong recovery this year, believing the fundamentals for precious metals to be favourable.

“History indicates that commodity markets can rebound strongly as a significant amount of ‘momentum’ money might decide it’s time to buy back positions and/or close shortages in the mining industry,” Commodity Discovery Fund founder Willem Middelkoop tells Mining Weekly.

He cites a similar situation after the Lehman crash, when financial services firm Lehman Brothers filed for bankruptcy in 2008 – the largest in the US – resulting in the valuation of gold miners increasing by 400%.
“I wouldn’t be surprised to see even larger gains, as a result of the current large under- valuation,” says Middelkoop, who will be a speaker on market investments at the Investing in African Mining Indaba’s Investment Discovery Forum this year.

The Mining Indaba will run from February 8 to 11 at the Cape Town International Convention Centre.

“The undervaluation currently in gold mining shares in general hasn’t been seen since the 1940s, when the US decided it needed to close down mines because it needed the miners as soldiers or to work for the defence industry,” Middelkoop further elucidates, believing this to bode well for the gold industry.

With many countries in the East accumulating as much physical gold as they can and with many Western countries in the process of repatriating gold, there could be a fight for these ounces, he suggests.

“This could easily lead to massive short covering and share price increases of 500% to 1 000% [above the] current levels,” Middelkoop says, adding that larger gains in the next decade, once real physical scarcity becomes apparent, will not surprise him.

Middelkoop believes that, once the market/commodity correction has lapsed, a significant amount of money will again be made available as investors search for returns. They will be more selective and critical, however, having learned from the previous commodities cycle.

“In the medium to longer term, the commodi- ties sector, particularly precious metals, could become ’all the rage’, as a perfect storm is brewing. Owing to evermore quantitative easing, declining discoveries and mine production, coupled with depleting above-ground stocks, the flight to hard assets will lead to some incredible price increases,” he avers.

However, little money is invested in exploration, owing to the current adverse market sentiment.

“Once the correction is over, this lack of exploration will have a negative consequence as demand rises and supply falls short,” Middelkoop warns, suggesting that before 2020, the world will face significant supply-demand issues in many metals.

Downplayed Acknowledgement
Middelkoop stresses that “hardly any investor is acknowledging the security of supply issue”.

“Copper, nickel, silver and zinc, but also diamonds and uranium . . . could show serious shortages in the next decade as urbanisation continues and a larger and wealthier middle class demands more services and luxury products.”

While the global market has not previously experienced any real shortages in any metal, Middelkoop believes that this is about to change, thereby necessitating increased awareness of this potential challenge.

Silver is a key example, he says, noting that mine production has lagged demand since the 1970s. “With surface silver stocks currently mostly depleted, investment demand for silver – already at more than 25% – could easily leap to higher levels.”

Moreover, with industrial use of the metal growing, this sector provides substantial opportunities for those companies able to find, develop and produce metals that will be in short supply, Middelkoop elaborates.

Investors will do well during a downturn if they can be selective in the quality of the projects for development, he says.

Middelkoop cites gold producer Randgold Resources’ strategy as favourable, thereby substantiating Commodity Discovery Fund’s investment in the company. Gold producer Asanko Gold, in which Commodity Discovery Fund has also invested, could similarly prove to do well in the next decade, as it combines a suitable project with proven management that has access to capital.

“However, we realise that good-quality projects are very hard to find and . . . need good management to be successful.”

Since Commodity Discovery Fund is one of the few resource funds that has had an inflow of capital every year since it started in 2008, Middelkoop believes that it is in a position to buy strong companies.

“Commodity Discovery Fund still invests in new world-class discoveries and in great development stories, but hesitates to invest during an unstable political climate. Africa is a case in point . . . with frequently recurring violent regime change.”

Middelkoop, nevertheless, notes that there will be more projects with insufficient grades to deliver the profits for which investors are looking.

“Rock hardness, water shortages and high electricity costs all contribute to the unviability of low-grade projects. In South Africa, in particular, the labour intensity of mining is causing the downfall of the sector, as demands for higher wages make mines unprofitable,” he states.

Edited by Tracy Hancock
Creamer Media Contributing Editor

Comments

The content you are trying to access is only available to subscribers.

If you are already a subscriber, you can Login Here.

If you are not a subscriber, you can subscribe now, by selecting one of the below options.

For more information or assistance, please contact us at subscriptions@creamermedia.co.za.

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION