1st May 2013
Evy Hambro, manager of BlackRock’s £1,640m Gold and General fund has warned the managements of gold mining firms to change their ways or risk becoming “barbarous relics grinding themselves down into the pits in which they operate” as the giant fund marks its 25th anniversary.
Despite this stark warning, Hambro also discussed the recent moves in the gold price and said the ‘opportunity set’ was now phenomenal.
Hambro said his team has been incredibly disappointed by the actions of management within the gold mining companies. He criticised the “strategies they have followed to force growth in volume ahead of growth in profitability on a per share basis”.
He added: “Without change in the way these companies are run, these companies will end up grinding themselves down into the bottom of the pits in which they operate and will become barbarous relics of the past. They won’t be the gold producers of the future. We need to see management adapt and become much more profitable as businesses, and see management re-establish the link between the gold price and their own profitability.”
Hambro gave three ways for the management of mining firms to bring this change about.
* He said they needed to “shift the focus away from cash costs where the industry has been focused, boasting around these low numbers when the true cost of production has been far higher, leading to disappointment in the minds of investors when thinking about equity investment”.
* He said firms needed to share the profitability of their businesses with an increased ratio shared with the owners/investors of the businesses. “If we can achieve that, then we will truly link the share prices of these companies back with the gold price once again. When the gold price goes up, you will get a higher rate of return. In this market where income is so important to investors, we need to get the yield on the sector higher, and not just as a result of share prices going down. We can achieve that by increasing those payout ratios.”
* He criticised the excessive issuance of equity, something gold mining firms have done for the last few decades. “The way they have been issuing shares to grow and expand has been fairly care-free. These trends are coming back to haunt them. We can restrain them from doing so by attaching yield as a higher function. If you issue shares, that is more money that needs to be paid out, if the dividend per share is unchanged. If we can get that back, we will reduce the amount of equity issuance creating greater linkage to the underlying gold price.”
Despite these tough words, Hambro said that recent volatility had created an “opportunity set that is phenomenal”. He added: “We are seeing gold company share prices re-link with the gold price. We are seeing the beta coming back. When gold mining companies are seeing low rates of profitability, small moves in the price generate huge changes in profitability and the beta has come back and that is very encouraging. Yield is rising. We are already on the journey of rebuilding trust with underlying investors, between them and the management teams. We are not far away, but we need more data points.”
Hambro also added that the phrase “barbarous relic” was applied to gold itself many years ago by the Financial Times, when gold was close to previous low, but since then the asset class had confounded the sceptics. In recent weeks, he said, two forces, paper trades and physical activity had been fighting each other.
“The events of the last few weeks have brought incredible volatility including the largest two day move since the 1980s. The pattern behind that is a huge impact on the market from paper trading in the futures market that has now created massive buying in the physical market. You have these two forces – paper trades fighting against physical activity. He cited photographs from jewellery stores in Asia which are now empty of gold. “The premiums that is being paid for the immediate delivery of gold into the Asian market is now incredible testament to the buying power of individuals when they want to come back to the theme. We are seeing the gold price grinding higher again,” he said.