“Natural Selection” at Work in Exploration Sector: Steven Poulton, Altus Strategies
As the mining sector makes its way through a prolonged period of attrition, both individual and institutional investors in the sector continue to suffer losses to their natural resources portfolio.
I recently spoke with Steven Poulton, Chief Executive of ALTUS Strategies in the UK. ALTUS is the investment manager to London listed Altus Resource Capital, which invests in junior resource equities while Altus Global Gold focuses on the mid cap producers. Altus also incubates and manages its own exploration deals across Africa.
“While there is fantastic value out there we have to remain incredibly discerning in terms of which companies we invest in right now” Steven begins. With tumbling prices for mining shares over the past 18 months, he believes we’re now looking at a scenario where a market capitulation is playing out, which will lead to a general decline in the number of investors and companies operating in the sector.
“It is natural selection – amongst both companies and shareholders. Generally, we expect that those investors who had unrealistic valuation methods to choose companies – or those who simply bought the momentum of the bull market years – will simply give up, if not already.” Fewer market participants mean less money in the sector, but also a stronger base from which to begin the recovery. “This is unpleasant to witness but ultimately very healthy for the sector” he states.
What kinds of companies should you invest in?
“The viable companies in the space are those where board and management has the greatest stake in the game,” says Steven. “The sell-off in gold and other metals has exposed mismanagement for what it is, but the sell-off in the stocks has been indiscriminate and this creates a stunning opportunity as the underlying themes which drove metal prices since the turn of the century, including gold, remain firmly intact.”
Steven’s reasoning is that the bad practices that took over the mining industry during the bull market which broadly lasted from 2002 through 2010, are already coming to an end. During that period, many companies became a mere means of providing a lifestyle to their management and advisors, he explains. Instead of spending their shareholders’ money creating value, much was spent inflating salaries as well as consultant and advisors fees – plus a heavy General & Administration overhead. “Cash was splurged, seemingly encouraged by the market to ‘make it big’, regardless of the absurd capex implications, juniors drilled with abandon and even new graduates expected almost rock-star treatment.”
“Shareholders weren’t necessarily opposed to this arrangement. It didn’t matter if companies were not actually creating value with the money they received because most share prices went up regardless, on the mantra of ‘growth is good’.”
Now, Steven says, “that party’s over.” The rules of the game have changed. With the sector having given back most of its gains, almost to 2002 levels, the trend following speculators have “largely left the market for now, to chase the blue chips being powered by central bank money printing”.
The remaining market participants, he expects, will be far more demanding in terms of how efficiently companies run their operations, less swayed by the big, unrealistic promises and focused on how the directors look after their greatest asset – their share capital.
"Investors in the space will understand the kinds of questions and answers they should be getting, and how to interrogate the premises of management teams. So this period is a ‘cleansing’ period rather than a mass extinction, which is a natural occurrence in the resources sector. You will have a cleaned-up market with a more questioning investor base even amongst the generalists.”
In turn, the companies that survive should be those who behave more efficiently: “The amount of money spent on activities besides taking samples, drilling, growing resources, or building mines must become far smaller. This will be deflationary for the cost of mining and exploring for new ones. We’re re-booting the sector a little bit right now.”
“In addition to an overall rebound that we would expect based on previous experience in bear markets, there is also the fact that due to the lack of success in discovering world class deposits over the last 35 years, the true high-quality, economic deposits that are discovered by juniors will be of tremendous value to the producers going forward.” So, Steven expects that buying good projects with disciplined management will start to pay off.
Should we hold onto our cash and wait for prices to fall further?
“It’s rarely wise to try and call the bottom,” says Steven, “but we’re seeing tremendous value right now. We are currently buying up the best opportunities that we see, and holding some cash plus exposure to the metals too, allowing us to invest aggressively if prices fall still further. Dripping money into these markets when participants are so disaffected – and this is especially the case during the summer months – is an intelligent strategy in the current volatile market.”
learn more »
Sprott Inc., a public company listed on the Toronto Stock Exchange, operates through its wholly-owned direct and indirect subsidiaries, including: Sprott Asset Management LP, an adviser registered with the Ontario Securities Commission; Sprott Private Wealth LP, an investment dealer and member of the Investment Industry Regulatory Organization of Canada; Sprott Global Resource Investments Ltd., a US full service broker-dealer and member FINRA/SIPC; Sprott Asset Management USA Inc., an SEC Registered Investment Advisor. We refer to the above entities collectively as “Sprott”.
The information contained herein does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation.
This report contains forward-looking statements which reflect the current expectations of management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this document. These factors should be considered carefully and undue reliance should not be placed on these forward-looking statements. Although the forward-looking statements contained in this document are based upon what management currently believes to be reasonable assumptions, there is no assurance that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this presentation and Sprott does not assume any obligation to update or revise.
Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any fund or account managed by Sprott. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any fund or account managed by Sprott will be invested.
Tuesday, November 26, 2013
Double, double toil and trouble. ‘Treasuries’ burn and ‘markets’ bubble
Friday, November 22, 2013
Rick Rule: Are Some Mining Stocks Heading Up?
Monday, November 18, 2013
19 ‘Tough’ Questions for Eric Sprott on Gold and Silver
Wednesday, November 13, 2013
Vaults are Booming! (in Asia)
Friday, November 8, 2013
Glum Resource Market Creates Value Plays: Adam Footer
Wednesday, November 6, 2013
How to Be Your Own Central Bank
Tuesday, November 5, 2013
Are Junior Miners Just Leveraged Gold Plays? -- Eric Angeli
Monday, November 4, 2013
Will Indians Keep Buying Gold?
Thursday, October 31, 2013
Number of existing South African gold, platinum mines likely to close
Wednesday, October 30, 2013
China Needs PGM's Now
Friday, October 25, 2013
Gold Mining: Is Turkey a Model Country?