Bullion beats shares as gold companies underperform

THE CONFERENCE CALLER: Investors who bought physical gold bullion in 2006 instead of buying shares in gold companies at the same time did the right thing according to Evolution Mining (ASX: EVN) executive chairman Jake Klein.

Speaking on Day Two of the 2012 Gold Investment Symposium at Sydney’s Luna Park, Klein said that although that is how the statistics stand he believes it shouldn’t be the case.


Source: Jake Klein presentation

Over the past five years, shares of gold mining companies have massively under-performed, a problem Klein said that the industry needs to address.

The rhetorical question he asked was, why it was gold shares have performed so badly – especially when they offer better leverage to the gold price.

“In a rising gold price environment, gold shares should out-performed gold bullion,” Klein said.

One mechanism Klein suggested is weighing gold stocks down is the combination of resource nationalism and political risk, which he said has fundamentally been mispriced by the market.

“People have gone off and invested in companies, which have gone off to these new frontiers,” He said.

“The rules have changed to the point where the ownership of the assets has been put in jeopardy and investors [in some cases] have lost 70 to 80 per cent of their money in one blind-siding sweep.”

An emerging trend in the mining world is the desire of governments of the perceived-to-be ‘hot’ mining destinations to want to change the rules.

The current state of world economies has incubated an environment, from which the obvious result will be, and has been, a rising gold price.

It is in an environment such as this, one where government debt may be spiralling out of control, which also gives rise to resource nationalism, resulting in increased tax takes from these governments.


“As you venture into more and more difficult jurisdictions, it is going to be more difficult to bring those profits home to your shareholders,” Klein said.

As hard as Australia has tried over recent times to portray itself in probably the worst possible light it could to global investors in the last couple of years, the country has most likely reached the point where there can’t be too much more bad news to release to the international community.

However, the damage has been done, so much so many of these countries, which are now proposing their own versions of a super profits taxes, quote Australia.

“I do think we are at the end of that and that Australia has been over-sold in terms of [being a bad] mining destination, because at the end of the day, this is a good place to mine in,” Klein said.

“We are a vast highly-mineralised, lowly-populated, resource-friendly country and we need to get out there selling that to international investors.”

Klein made reference to a statistic involving the top five gold companies and the predictions they have made in regard to production over the past five years.

He related having heard that if the growth profiles presented by the top gold companies over this time had come to fruition those five companies would be producing  60 per cent more gold than what they are today.

The implications of such a statement bring rise to the question of whether companies are over-optimistic about their chances or whether they should be a bit more realistic about what they are able to achieve.

The importance of such discrepancies should not be lost on shareholders and capital providers; although past history tells us they are still willing to give these companies to develop their respective projects.

“It is an industry that has, remarkably, been able to raise money,” Klein said.

“We keep putting our hand out and investors have kept giving it to us.

“I think investors want to see, and appropriately, want to see, a new-found discipline from the mining industry.”

All this should evolve, according to Klein, as political risk in Australia begins to be much more accurately priced.

“Australia will be re-rated much more favourably,” Klein said.

“I would suggest that every gold fund in the world is underweight in exposure to the Australian gold industry.

“I think capital discipline will be a key focus – capital will be less-freely available and we will have to spend it more wisely and we will be held more accountable for that allocation of capital.”

His considerations probably hold some validity given the bad news emanating from Australia has passed, without – at this stage – too much detriment to the industry.

Companies operating in Australia never have to state their refusal to participate in corrupt practices, which suggests they never have to deal with such systems in the first place.

Neither do we see the desire, or need, for our government to order the shooting of striking union-led mine workers for refusing to return to work, however much some operators may wish to see this procedure introduced.