Darwin's Developers Jolt Gold Market Back Into Life
Issue 53, August 2013
A sign on London’s Albert Bridge tells troops to break step; were they to march across in unison, the concerted lateral effect would cause the bridge to sway. As each adjusted their balance, the effect would become more pronounced. Eventually, the entire platoon would simply topple into the Thames.
So it is with financial markets, according to economist Hyon Song Shin. When investors are compelled to act in unison, individually rational responses become collectively ruinous.
The phenomenon is very much at large in the mining markets. As commodity prices have lagged equity indices, investors have withdrawn money from mining funds, forcing fund managers to sell stock. Redemption driven sales have only pushed prices lower, forcing further redemptions and sales.
Liberia-focused Hummingbird Resources, which hosts 3.8m gold ounces, is a case in point. Both BlackRock and JPMorgan have sold down holdings at record lows in recent months. “The whole market has been absolutely, universally slaughtered,” says Hummingbird founder Dan Betts. “I guess it comes down to a view on the gold price. The market’s saying it doesn’t believe any projects will get built.”
In late May however, Canadian billionaire Ned Goodman decisively broke step, building a 15 per cent stake via Dundee Corp, pre-empting a rally in the gold price that has more than doubled Hummingbird from its July low. “They are specialists and know what they’re doing,” says Betts. “I think we’ve got big shoulders to lean on.”
“Hummingbird is a classic example of stock and ultimately money moving from weak to very strong hands,” Rick Rule, chairman of Sprott US Holdings, tells Global Mining Observer. “You’ve had a group of five or six companies that have truly done a superb job in West Africa in the last two years, being punished relentlessly.”
Besides Hummingbird, Rule cites Mali-focused Papillon Resources and Liberia’s Aureus Mining, which analysts at Clarus Securities group alongside Ghana-focused PMI Gold as being one of “Darwin’s Developers”, companies with sizable deposits and cash close to their market caps.
“Everybody knows that the game in West Africa is grade,” Rule says. “There are companies that have delivered grade and they’ve been thrown-out, just as though they’ve had some remote, low-grade deep sulphide.”
Earlier this month, Hummingbird reported grades of 7.7 grams per tonne at its Tuzon deposit only 3m from surface. In-fill drilling is currently aimed at modelling the highest grade ore, front-loading the project’s payback. Cash of $19m accounts for half its market cap.
“We’re funded and we’ve just got to crack on with the job,” says Betts. He views each additional 0.1 of a gram as an additional $4 per tonne in revenue. “You’re not going to save that through power of met recovery. It’s a massive factor onto your bottom line.”
Goodman has meanwhile explained his modus operandi as buying inflation proof assets, calling gold miners “dirt cheap.” Canadian mining entrepreneur Frank Giustra similarly describes them as the most hated asset.
“People’s expectations of the future are set by their experience in the immediate past,” adds Rule. “In a bull market, you come off a position that you’ve had a double in and you confuse a bull market with brains: you’re smart, the sector’s grand and all of your perceptions have been validated, so you invest very aggressively. Even your mistakes of course sometimes make you money. In bear markets, the opposite is true.”
The expression of this tumult has been redemptions, forcing institutional investors to hold cash whether or not they believe companies are cheap, so as to fund orderly outflows.
As the market has turned in recent weeks, aided by an uptick in gold, the process has appeared to deplete itself. “There are signs of life in the sector,” notes James Kwantes at World of Mining. “Gold is on the move and bottom-feeding speculators are active as quality juniors move off the bottom.”
Does the entry of investors such as Goodman therefore signify a bottom or merely a bounce? “The junior market is bifurcating,” says Rule. “The better juniors have probably bottomed. The problem is, there are fifteen hundred companies in the sector that are completely valueless. Those companies need to approach their intrinsic value, which is of course zero.”
As Darwin’s Developers rise with the gold price, the overall market may therefore have its steepest declines ahead. “An ugly market cycle like this usually ends with 2 weeks or so of really spasmodic capitulation selling,” Rule concludes. “The bull market we’ve had was very long and very frothy. Exorcising the sins of seven years of excess is going to take some time.”
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