In this earnings season, we’ve seen some success in our miners and royalty streamers.
With elevated gold/silver prices over the past year, many of these firms are reporting record earnings, cash flows and production.
Many firms are also crushing analyst estimates and their own production guidance.
It’s not surprising: metal prices rose quickly and were impossible to predict, so it’s not unusual to see these companies reporting success.
It’s a good time to pay attention to what these firms are doing.
Here’s why:
If a firm has a great quarter but they immediately squander the excess cash on a boneheaded acquisition or a shortsighted cap-ex move, you have to wonder how leadership will deal with a bad quarter…
If they can’t handle success, you won’t like how they handle failure.
What these companies do with good news can also signal where we are in the current bull market. At the end of a bull run, we tend to see the most foolish acquisitions, with companies falling in love with debt in order to finance them.
For our holdings, we’re seeing the right things.
Several of our royalty companies spent much of the last year using excess cash to pay down debt. Many of them are now completely debt free, sitting on massive cash hoards and with continued access to available credit.
These companies are ready for anything that comes next.
They have “F-you” money. They don’t have to take bad deals – or any deals. They have super low overhead, so they can be patient.
If metal prices drop lower, that’s okay. Their earnings will drop – but they’ll still be minting money.
For miners, the story is similar. You want to see wise use of excess cash – put to work in high probability projects with low all in sustaining costs.
During the end of the last bull-run in 2011, we saw the very possibility of $2k gold push some developers into some truly awful projects.
In 2010, Kinross Gold acquired Red Back Mining in an all stock deal worth $7.1 billion. It was such a disaster that the CEO was fired as the company lost $3.1 billion and the stock tumbled for years, falling over 80% between 2010 and 2016. It took a total of 15 years for the company to fully recover – finally getting back to 2010 levels just last year.
Another bad deal: in 2011 gold major Barrick Gold spent $7.2 billion buying a firm called Equinox Minerals. Less than two years later, Barrick was forced to write off a $4.2 billion loss on the deal. The company also went bankrupt…
Barrick and Kinross weren’t alone… by the beginning of 2013, the entire mining industry wrote down over $50 billion of losses.
Investors may have a short memory, but for the mining execs who lived through the 2011-2013 period, I can tell you: they remember.
They remember, and many of them are still scared straight.
Majors haven’t even started to take bite size acquisitions yet – let alone a multiple-billion dollar deal.
In fact, some majors are still doing balance sheet damage control from the bone-head moves they made in 2010-2011.
We simply are not seeing very many risky moves right now – and partly that’s because the metal prices soared so quickly that no one is feeling particularly interested in going out on a limb. They don’t have to… yet.
Today, we’re seeing a totally different market than we saw in 2011. Newmont Mining just reported earnings, posting a “surprise” beat of 30% over analyst estimates.
The company used its excess cash to whittle down its debt by $3.4 billion and is sitting on a cash hoard of $2.1 billion.
Far from leveraging up, Barrick is now considering a split of its operations into two companies in an effort to maximize value for properties in North America in one firm, and Africa/Asia in the other.
These gold majors are playing it cautious. They’re watching their costs – because they know that when gold prices soar, their oil, electricity, wages, equipment and taxes can’t be far behind.
The point is: mining companies are still scared of what happened in 2011-2013.
But I believe by the time this bull market is over, we’re going to see the same exact kind of foolishness that we saw in 2011. We’re just not there yet.
We’re still early…
Have a great weekend.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio