2020: The Year that Gold Glittered and Canada Re-discovered Explorers

(AND The Lion Clock moved to 10 o'clock)

Cinderella was famous for two things – she won the hand of the prince, but she was terrible at keeping an eye on the time. We don’t know whether she realised that it was 10 o’clock, only that when midnight arrived it took her totally by surprise. Midnight in the mining cycle is when a crash takes place – and there was a moment in March that it looked like this might have been upon us. But the equity market as a whole has staged an impressive, if to some improbable recovery and as time goes by popular confidence in the recovery appears to have grown. A premature midnight it surely would have been, and as the recovery in equities sticks we can reflect on two stand out developments in the mining market that have taken place since the start of 2020:

• Gold price has appreciated strongly. In fact, even that is an understatement – gold has hit new record highs, driven by a combination of low interest rates and uncertainty
• The Canadian market has led a surge in investor interest toward exploration companies at the riskiest end of the mining sector. Investor sentiment is strongly linked to the gold price, but the really big news is the Canadian investment market coming around from its multi-year experiment with medicinal cannabis

This opens the door to the part of the mining boom – substantial capital returns are usually available through this stage, especially in the ranks of junior miners and explorers, as it is characterised by liquidity moving down into smaller companies as investors search for value.

Gold – always glitters, but now eye catching

By mid-year in 2020 gold had appreciated by more than the whole of 2019, and by early August was up by almost $550/oz for the year, peaking at an all-time high closing price of $2063/oz on 6 August. Once the domain of gold fanatics, fundamentals for gold are now being reported in mainstream media.

What’s good for gold is great for gold equities, and gold champions are making light of Berkshire Hathaway taking a circa US$560m position in Barrick Gold, the world’s largest producer. The headline is all the more tantalising because Warren Buffett has been famously outspoken against holding gold in the past. It is important to point out that this is not a large investment for Berkshire Hathaway, and in that regard might not have been championed by Buffett directly. Even so as an outsider looking in, this appears an ideal exposure for a value-oriented investor such as Berkshire Hathaway – the investment is in a gold producer which has far greater leverage to gold, generates earnings and is capable of distributing dividends. The underlying assumption is that such an investment is presumably underpinned by a view on the outlook for gold, and as such is an excellent example of “generalist” money moving into the space having previously held little to no exposure.

Canada – back in the exploration game

As of the end of July, miners on the Canadian Venture Exchange (which is dominated by explorers, many gold focused) had collectively raised C$1.7B for the calendar year. This is 86% above the same time in 2019, and represents 47% of all funding raised by miners in Canada this year – a staggering proportion. This is a huge jump in funding for early stage companies in the world’s largest mining funding market, and spearheads a surge in investor interest into the riskier end of mining globally. The kinds of “risk investors” that would support exploration companies aren’t obliged to continually fund exploration, nor do they. Through 2017, 2018 and much of 2019, Canadian investors’ “risk money” was fascinated with medicinal cannabis – an investment theme premised on a new legal platform and consequent perception of an emerging market, and now at the point where market size, company revenues and valuations have reached a kind of equilibrium (ie – the fun is over). Consequently, by late 2019, the Canadian pool of risk money was ready for something new, and the renewed lustre of gold in a heady mix with global pandemic was perched to catch their collective eye.

Lion Clock - 10 O'clock

This development opens the door to a new and exciting stage of the mining boom, and even though there is a clear centricity toward gold, investor enthusiasm for risky activities such as exploration is spreading across the sector in a fashion that was last seen almost a decade ago. Investors are moving decisively and with strong interest into the exploration space, and valuations are jumping as a result. With this the Lion Clock has moved to 10 o’clock. We now find ourselves within the part of the cycle where juniors can perform with access to enthusiastic investors and funding to progress.

Rather than anticipating an imminent end to the cycle, there is a strong expectation the mining sector has exciting years remaining. The Lion clock doesn’t move at a steady pace, rather it reacts to indicators of liquidity and these tend to occur in irregular surges rather than a set tempo. The time between 10 o’clock and 12 midnight in historic cycles has lasted for years.

Perhaps Cinderella did sneak in a quick time check with the magical benefactor who provided her dress, coach and glass slippers. Fairy God Mother would surely have said to Cinderella “keep dancing sweetheart, its only 10 o’clock and we’re only just getting to the funnest part”

Summary from the Lion Selection Group (ASX:LSX) Quarterly report.  A more thorough discussion is contained within the announcement: https://www.asx.com.au/asxpdf/20200827/pdf/44m0ghxkc301y3.pdf

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