Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
Careful Planning, Particularity, and Patience
The melt up in gold and precious metals along with related stocks continued this week as collapsing global yields and the threat of a slowing global economy sent investors seeking safe havens.
Of course, the gold industry, which has been capital constrained and operating at marginal cost for about a decade, is beginning to see a window of opportunity. We saw an intermediate gold producer with a challenged balance sheet and asset base do a fairly large “bought deal” (a deal that, if not placed, is effectively bought by the institution doing the issuance) to try and solve their balance sheet problem – or at least have enough liquidity to deal with the operating challenges they are facing. It is our understanding that the deal did not go well, and this is consistent with our thesis that it is important to stick with quality. Clearly the market is not prepared to absorb a lower quality supply of equity.
An important metric that we look at when we evaluate producing gold or other resources companies is net asset value growth on a per share (NAVPS) basis. This metric adjusts for the dilution an investor might face when a company is capital-constrained because it does not have the asset base to support free cash flow generation. There is such a dearth of well-run precious metals companies with high-quality asset bases in geopolitically stable jurisdictions that those companies, for the most part, tend to have premium valuations. They are the names that can compound returns over a cycle and withstand a downturn in prices. Fundamentally, this is good for prices as production profiles begin to roll over due to the lack of available investment opportunities for the companies, and this also bodes well for consolidation in the group.
We also see some interesting opportunities in the junior gold area, but we think it is important to be selective. There are still too many companies out there without the asset base and/or access to capital (and usually both, because good projects always find money – often from a strategic investor) that can move through development and into production. Currently, conditions are overbought. However, we will use pullbacks for opportunities to add to existing positions as well as enter new ones.
The rest of the global natural resources complex continues to be under wholesale liquidation. While we believe that there will be significant opportunities to invest in best-in-breed companies in that area, we are in no hurry to allocate capital at the moment. Experience tells us that commodity downturns can persist for a long while, and that our patience will be rewarded. We remain squarely focused on our best ideas, as there are many companies that are run so they can sustain their balance sheets, capital needs, and dividends in a downturn.
On the other hand, another sector that continues to be on fire is what we refer to as “defensive yield,” meaning, non-cyclical companies with sustainable dividends. We are eager to add additional yield to the MAPS strategies. However, we will not aggressively chase the most recent run-up, despite solid fundamentals, because we see current valuations as somewhat stretched.
There will be no Hard Assets Insights commentary next week. We thank you for your ongoing support and look forward to ongoing dialog.
Chief Executive Officer