The Assay TV spoke to Warren Gilman, Founder and CEO of Queen’s Road Capital.
Queen’s Road Capital Investment Ltd. (QRC) is a leading financier to the global resource sector. The company is a resource-focused investment company, making investments in privately held and publicly traded resource companies. The company acquires and holds securities for both long-term capital appreciation and short-term gains, with a focus on convertible debt securities and resource projects in advanced development or production located in safe jurisdictions.
Mr. Gilman, a mining engineer, has more than 30 years of experience as a deal maker in the metals and mining sector. He was a founder of the Canadian Imperial Bank of Commerce (“CIBC”) Global Mining Team in Toronto in 1988. He subsequently led the team’s efforts out of Australia and Hong Kong. During his time with CIBC, Mr. Gilman was responsible for some of the largest equity capital markets financings in Canadian mining history. He served as advisor to the largest mining companies in the world including BHP, Rio Tinto, Anglo American, Noranda, Falconbridge, Meridian Gold, China Minmetals, Jinchuan and Zijin.
It’s interesting time the for the mining sector as it seems to be one of the sectors that is actually performing quite well through this period. Obviously there was a bit of a headline grab recently with Warren Buffett ditching the banks and buying into Barrick. What do you make of this? Is it a sign that generalists are starting to move into the mining market?
First of all, it is an interesting time. To put a more exclamatory point on it, it’s an astounding time. Who would have thought that the miners would have been a beneficiary of a collapse in global GDP, but here we are. Certainly it’s a fabulous time to be in the gold business. I don’t put a great amount of importance in Buffett’s investment into Barrick. At the end of the day, Buffet is effectively a fund manager these days and like all good fund managers, he’s just following the flows. There’s been a tremendous flow into gold and Barrick is the largest and most liquid, and therefore he should be buying Barrick.
I don’t know if there is relevance to the juxtaposition of selling banks and buying gold. I think that was more of a timing issue, but it is great for headlines. It certainly is underpinning the point that fund managers, generalists included, are starting to buy gold miners where they haven’t for the last 10 to 15 years, as we all know. So it’s a great thing for the gold miners and, from my perspective, the momentum on the gold side will continue. Obviously, the change in the interest rate environment since February and March has been a game changer for the gold macro environment and I expect that this momentum is going to continue for some time.
As we move towards the latter half of the year, do you think we’ll see more investors take note of the sector when you’ve only really got tech and miners who seem to be doing well?
This is absolutely going to be the case because commodity prices have rebounded spectacularly and the miners generally are doing very well. Obviously, the gold miners doing particularly well, but all miners generally are doing better than expected. So they are going to get a second look from investors.
There’s a bigger picture issue that we have to deal with though, and that is that the most successful players in the mining industry trade generally in the range of four to six times EBITDA, whereas the marginally successful, or even the very early stage development companies on the tech side, can trade at 50 to 100 times EBITDA. So the upside for generalist fund managers is still very much skewed towards tech and other industries that trade for better upside at much bigger multiples. At the end of the day, the mining industry will get a second look because it is doing well, but the bigger picture is that we have to change the generalist mindset and get them to believe that miners who own resources in the ground are worth much much more than they’re willing to pay them.
Do you have a take on the gold price and where it is going to go from here?
I think the change in interest rate environment is a game changer for the gold price. Interest rates won’t be rising any time soon, whereas a year ago I felt quite strongly that interest rates were on an exorable rising trend for the next several years, as we finally dug ourselves out of this low interest rate environment. Given the deficit funding that the planet has entered into due to the pandemic, that has changed entirely. The macro environment for gold has changed entirely, and my view on gold has done a 180 degree turn given this change of events, and so I’m quite bullish on the price of gold in the near to medium term.
It reminds me very much of the 1980s. I remember as a young fellow waking up every morning in 1980 and the gold price was on this tremendous move, 400 to 450 to 500 to 550, and then it started gapping up in 100 dollar increments. We went from 500 to 600 in a day, 700 to 800, and we’re in that type of environment again right now. Now that we’ve attained the $2,000 mark, I would not be at all surprised to wake up one morning and find that gold was up a 100 dollars to 2100 and then up another 100 dollars to 2200. We’re in uncharted territory here, so there is very little in the way of caps on where the price could go in the near term.
It has had a bit of a pullback in recent weeks. Is that to be expected, given the enormous run-up prior to that?
I think it’s just a consolidation, building a foundation around the 2000 level before we move higher. That’s probably a fair assessment.
Looking beyond gold, are there other commodities that you’re particularly interested in at the moment?
My style is more of a long-term investor and not a trader. So environments like this are great for your existing gold positions and maybe you want to sell into rallies, but when making new investments, I tend to have a bias towards things that are out of favor at the moment. My company Queen’s Road has made its first two investments, both of which are in the uranium sector, where I think prices are still quite depressed when one takes a long-term view of prices and supply demand dynamics of that market. So my focus is in areas like that that are still out of favor and not as hot as the current market. That’s where we’re looking for opportunities at the moment.
The uranium price has recovered some somewhat of late. What do you see as the key drivers in that sector?
It certainly has recovered quite a bit. After many years, we have finally benefited from producer discipline, which has not been evident since Fukushima. The fact that we have closed down McArthur and closed down Cigar, and finally got a very tangible move towards a price over a volume strategy by Kazatomprom, that has changed the market considerably. So the whole issue with respect to uranium is supply. Demand is robust, demand is growing, and there are more nuclear reactors on the planet today than ever in history. So when you look at the demand side of the equation, it is strong and growing and will be for decades to come. The great thing about the nuclear business is that there is a great deal of long-term visibility on the demand side.
The only issue stopping uranium prices from going higher are the major producers themselves. They have the power to make uranium prices move a lot higher, and we are starting to see that discipline kick in amongst the main uranium players. As long as those players remain disciplined, there is no question that prices will go higher because there is no new mine development today other than NexGen, which we are invested in, and which is economic at today’s levels. In order for any new mines, other than NexGen, to come back on stream, uranium prices have to be significantly higher. Not just 10 or 20%, but significantly higher for those new mines to be economic and provide a reasonable return. I believe that this is inevitable.
What are some of the challenges that the current situation puts up for making new investments at the moment?
This is something that I’m dealing with on a daily basis. I have the benefit of having been around in the industry for many decades. There aren’t many mines. Indeed, there aren’t many properties around the world in almost any commodity that I haven’t put my boots on over the course of that period of time. So to a certain extent, I’ve done a lot of pre- due diligence already. I’m already familiar with these projects. Although we have a policy to put boots on the ground at a new investment, there are a lot of projects that I don’t actually put physical boots on the ground. If I’ve already done it previously, I don’t necessarily have to go back. The last two projects that Queen’s Road has invested in have been a beneficiary of that in that we’ve been able to make those investments without effectively having to do any more physical due diligence, because I’ve been up to the Athabaska basin and been on those properties many times already.
There is no question that as this period drags on, new projects will come up, and new opportunities will develop. There will be opportunities that we will want to invest in where I have not had my boots on the ground and where I will want to actually see the project. That’s a bit of a challenge and we’re dealing with that now on a deal that I’m currently working on, and we’re trying to come to terms with how we can address this issue: can we actually get boots on the ground? How long would that take? If it’s just too long a time commitment, what can we do to mitigate our due diligence risk? Of course, this will mean even more thorough desktop due diligence, but it’s a very relevant point that not only affects my investment business, but is actually going to affect the global M&A market and make completing deals more and more difficult in the next year or so.
Do you think more investors will be looking at projects in jurisdictions where there is existing expertise on the ground that you can contract out to do the due diligence for you? This would favor projects in British Columbia, Western Australia. Would it prejudice projects that are in more remote locations?
That’s absolutely correct. It makes things that are near to home a lot easier to invest in, and therefore the investment horizon will be skewed and the M&A horizon will be skewed to those projects that are nearby and a bit more familiar. To a certain degree, it depends on your investment style. I have never hired a consultant. At the end of the day, the investment decisions are mine and therefore it’s my boots that need be on the ground. I can’t rely on the report of a consultant who I may or may not know.
If you’re a bigger company that has a consistent track record of relying on consultants, you’ll probably continue to do so, but I think you’re right. You’re going to stay reasonably close to home and try to reduce your risk as much as you can in that regard.