What is the impact you’ve seen from COVID-19 on the Australian mining and investment industry?
The investment industry has been remarkably stable given the significance of the disruption from COVID-19. This has been bolstered by the industry’s continual interaction with itself and the market, and also the resilience the global markets have shown given the magnitude of the economic impact we are witnessing. Finance and investment are industries where there is typically a lot of social interaction, and with that comes a heavy emphasis on meeting face to face to judge reactions and demeanor. Meetings and networking have had to move entirely online, which is not at all ideal. Yet investment from the market appears healthy, even without the normal lubrication of lunches, drinks, and other functions.
Where do you see recovery coming from? What sort of stimulus measures are in place in Australia to help companies there?
It feels quite early to be judging this at this point. Australia is now coming off the immediate support (measures to minimize job loss) and is moving toward longer-term stimulus measures. We need to see how the economy copes once the lockdowns and restrictions have eased to the extent that normal spending could take place and support is wound back, to see what the world then looks like. I suspect there will be adjustments to come once the new normal is unveiled and at any rate many planned stimulus initiatives will be slow to start.
How have the equity markets responded this year?
In one word – surprisingly. The Australian market fell almost 40% between late February and early April and has now recovered by almost 40%. That is not a total recovery – the denominator differs in each case, so we are still about 13% below the highs that we saw prior to the COVID crash. The overall shape of the recovery is mirrored in many international equity markets, although the anomaly has been the US market, which sits about 4% above the pre-crash highs. Such a substantial bounce back, with very little knock-down weakness following the original crash, feels strange against the backdrop of a global pandemic that has had the most severe effect on employment since the Great Depression. It brought about a number of new extremes: the fastest ever market fall of that size (circa 40%) and also the most rapid recovery. March 2020 was the worst month for stock markets since 1987 and then April 2020 was the best month ever.
Recovery has not been universal though. The US market’s huge bounce has been strongly led by the enormous technology firms listed in the US. A lot of the rest of the market is still well below its February levels. It is a similar case in Australia too, although we have nowhere near the same tech weighting in our market.
Looking at specific commodities, gold has had a strong year this year. What sort of activity have you seen in this market in Australia and where do you see that headed?
The story in the Australian market has been the gold sector – those miners have done wonderfully well off the back of gold’s fundamentals – as much as COVID-19 has been a disaster for the world economy, this is something that gold trades strongly off of. This is actually quite significant, because whilst conditions for most miners have been gradually improving over the last few years, this movement has lacked a strong commodity lead. Gold started gaining ground in mid-2019, which was when the global outlook on interest rates shifted from “probably going up” to “not going up at all”. This was well underway when COVID struck but overlaying a fresh and sizeable round of monetary stimulus just compounds the fundamentals. If low real rates are good for gold, then the fundamentals we see now are outstanding.
This has spurred investment in miners and has also brought about substantial fresh market interest in exploration and seen the smaller companies in the gold space recapitalize and become very active. There has been success from this too – which has created a pretty positive overall investing experience for a lot of the money which has found its way into gold explorers, which will compound the interest in that part of the market. It bodes well for continued investor interest in gold miners and explorers, especially against the outlook for the metal.
What are some other commodities gaining investor interest this year?
There has not been any commodity activity that matches the run gold has had so far, that also has such a strong fundamental attached.
Iron ore has been strong, but that is in large part a consequence of the disasters in Brazil in recent years which have removed supply from the market, and this will unwind.
Nickel has captured investor interest but has not really had any strong movement yet. It is in a unique position of being a “traditional” metal in that it has well established markets for use in things like stainless steel, but it crosses over into “new world” discourse in that substantial nickel is expected to be consumed in batteries. So, investors see a new source of demand for nickel that could add to an already established market.
Silver has ridden on gold’s coattails to an extent – gold and silver tend to observe something of a correlation over the long term, so when gold goes a lot of people watch for silver to go too. The two metals do differ though – the main consumptive use for gold is jewelry and the metal used is hardly sequestered. Consequently, most gold produced is available for trade and the limiting effect of cost in use, or the cost to make a finished product does little to cap the price for gold. Because it is also an investment product, when gold increases in value it might actually increase demand rather than the other way around. Silver is consumed to a greater extent, and its cost does make a difference to how keenly it is consumed.
How are juniors getting funded in the current market?
Gold juniors have seen their fortunes reverse from previous years. Even as recently as 2019, raising money to explore for gold was challenging – the market was watchful and responsive but tended to wait and reward clear success. Here we are now in 2020 and the pricing of a lot of explorers makes me think success is already priced in – but you could only call that potential, because they are yet to find what they are priced for.
It is not that easy for most other juniors and explorers, and I have seen a number turn their gaze to gold as it no doubt helps raise money.
What sort of investments are Lion Selection Group currently focused on?
Lion is a long-term investor and looks for opportunities to build robust projects. We like gold, but that is because it’s an easy metal to separate and sell rather than the fundamentals. We have three key gold investments at present and are very happy with the fundamental for the metal, and our focus is seeing those three situations advance. Most of our value invested is tied up in these three situations.
Lion offers exposure to the pre-production end of mining which is notoriously challenging to pick successful companies from. Most of the projects which go around will take far longer to get to production, if they ever do. We find ourselves in a market that is rapidly adding value to the investments we have and has opened a window wide that will provide development funding, which will see them transform into producers that can be valued for the gold and cash they will produce.
The first of our current investments is a joint venture with a substantial Indonesian gold miner in a project that looks like it could contain 5-10Moz of gold. There is nothing like this in the junior space, and it looks like the sort of gold asset that could be the foundation of a mid-tier miner. We have had investors follow Lion to cherry pick from the portfolio in the past, but it’s not possible with this one – the only exposure available on the ASX is via Lion.
The second is a significant equity holding in Nusantara Resources, also in Indonesia, and also with a high-quality Indonesian partner that is looking to build a gold mine on a 1.5Moz Reserve. I know the equity market takes a careful approach to Indonesia, but this overlooks the right way to get established and the benefits that exist once that is done properly. With the right partner you can access mining expertise in Indonesia as well as the Asian debt markets for funding, which are much deeper than the Australian debt market and consequently often comes with a lower rate. Indonesian gold projects tend to get bigger, and electrification of much of the archipelago provides power at 10c/kwhr. You just can’t find projects with a mine life and cost profile like this in places like WA, and if a partner invests alongside you it sends a powerful message that they are more than ok with the risks many other investors perceive.
The third is a high-grade open pit gold mine at development stage in Mongolia. It was discovered in late 2015 and will be built next year. Mongolia has only had a short exploration history and this company has the feel of being in a district. It has attracted the interest of Eric Sprott, so regardless of what I think it has ticked others’ boxes too!
What are some of the main criteria you look for in mining companies when considering an investment?
The key ingredients are people and project. I like to see people who have invested their own cash – which I would add is different to just holding shares. I like projects that do not need a leap of faith to see minerals extracted and sold, hence gold projects tend to progress a long way through our processes. If we are working somewhere like Indonesia or Mongolia, then it is essential to have people who know their way around.
Any plans moving forward that you want to share?
To see three brand new gold mines developed within the Lion Selection Group portfolio.