A bulldozer moves rubble as villagers search for tiny flecks of gold contained in discarded waste rock from the North Mara mine in the district of Nyangoto, Tanzania, in 2010.Trevor Snapp/Bloomberg
If what Deutsche Bank's analysts saw at the Denver Gold Forum is true, the gold industry is still not fully accepting of how much the washout in bullion prices in the last couple years has changed the business.
Analyst Jorge Beristain reported back to investors from the key conference in a note titled "Waiting for Godot," suggesting that companies are still not ready to do what they need to do to adapt.
"A key conclusion is perhaps gold and silver prices have not stayed low enough for long enough to change behaviours and, in a sense, managements may still be 'waiting' to be bailed out by a higher price environment."
Mr. Beristain said he heard often that weak prices would last another 12 to 18 months. He said management teams said they were ready to cope with those hard times. He also noted that few were ready to change their pay structure to acknowledge that maybe all miners had not done a great job running their companies.
"Few articulated a change in pay structures that linked bonuses to future stock price performance or any mention of 'clawbacks' for bad capital deployment decisions."
He also heard some things that suggest junior miners have not quite realized the full impact of what low prices and bad decisions by senior miners mean for their valuations. In other words, they may not be as cheap as they think.
"Despite billions of dollars of write-downs taken by the industry, Executives of junior miners continue to derive their project NPVs (net present values) at 5.0 per cent discount rates (and use this to illustrate their 'undervaluation'), although we have seen a shift in focus more to IRR (internal rate of return) or pay-back metrics to justify capex decisions from larger companies."
On the financing front, "we detected a greater willingness of companies to consider alternative financing." Royalty and streaming financing were often discussed "suggesting the financing market for precious projects continues to be tight." There were signs of private equity as a "a buyer of last resort, particularly for distressed projects, while hedging remains taboo."
The result of this prevalence of "wait for higher prices" thinking is that Mr. Beristain said no particular company jumped out as providing a real reason to buy it now when prices are soft.
"Few company-specific ideas emerged from the Forum that provided a compelling investment case differentiating one miner from another. While producers have cut spending sufficient to 'manage' through the current environment, their main capital upside remains leverage to a higher commodity price."