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TORONTO (miningweekly.com) – Opportunities for equity investors seeking to achieve gains from the next upcycle, particularly in the gold space, as the bottom in the market is reached, are growing, IBK Capital president and CEO Michael White told attendees at the recent Cambridge House Toronto Resource Investment Conference.
“We believe that we’re at the bottom, although it’s sometimes difficult to appreciate this because of all the noise, [owing to] the bombardment in headlines we receive every day,” he said, adding that while it was important to keep up with current affairs, “you should always keep your eyes on the bigger picture”.
For White, a bigger picture can be found in gold equities. “I can’t tell you when gold equities will turn up, but I know it will happen. This sector is cyclical; it goes up, it goes down, then it goes back up. I know that to be true, I just can’t time it.
“Still, how do I satisfy myself that we’re at the bottom? How do I satisfy myself that the downside is limited or derisked and that there is an upside? Well, I start by looking at things like the S&P-TSX Global Gold Index. When we assess this from 2005 to 2014, it looks like we’re at the bottom,” he said.
White also recommended looking at exploration and considering the valuations of mergers and acquisitions. These represented a price paid for ounces in the ground over time and, through analysis, he said, it became apparent that a bottom was reached in 2013.
“You can also examine current market conditions in terms of the value an ounce in the ground for exploration companies. For the companies we follow, the median is now around $10/oz, But the rule of thumb over time is about $50/oz, so this feels like a bottom as well,” White noted.
DOWN, BUT NOT OUT
Gold prices would be backstopped by physical demand, which remained robust, and would be assisted by tightening supply as marginal operators were forced to reduce output or shutter their mines.
“Depending on who you speak with, the current cost to produce an ounce of gold is between $1 100/oz and $1 300/oz. So gold prices are now flirting with the average cost to produce an ounce and that’s a good thing [because] physical uptake is spurred when gold is down and considered cheap,” White pointed out, stating that, in recent history, jewellers, bar purchases and central banks propped up physical demand when prices declined.
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