Ross Beaty Revived my Gold Optimism

From The Maven Letter: 25 January 2024

I didn’t expect to leave these conferences feeling more bullish. Perhaps the last too many years of weak mining markets have worn me down, but I had very low expectations around finding bullish sentiment.

What’s notable is that I found it from some of the voices I respect the most.

A prime example is that I had a long chat with Ross Beaty. Ross is one of the most successful investors in the mining space in modern times, right alongside folks like Lukas Lundin and Frank Guistra. He is known best for Lumina Copper, which was a vehicle he built in the early 2000s. He picked up five large copper projects free of fatal flaws when the copper market was still very weak and advanced them meaningfully for 4 years or so, demonstrating that each made sense as a mine. All five were acquired in the hot markets of 2007 to 2011, returning over one hundredfold for Beaty and his investors.

He had the same bull thesis for silver as for copper and that led him to found Pan American Silver, with the idea that investors had few options for pure silver production. His ideas were both spot on and Pan American became a major silver company in that same bull market.

For the last decade Ross has turned his attention mostly to philanthropy, much of it focused on nature and conservation. He invested in a few mining deals that really liked along the way but quietly and passively. He commented to me that whenever he cashed out of a position in the last decade, he put the money into his foundation rather than putting it back into the market.

(I should note: through that time Ross did remain involved in two public companies, Equinox Gold and Pan American Silver; he is chairman of both.)

But his disinterest in investing in this sector is changing. Right now. Ross was an early investor in Osino Resources, which as we know was just bought by Dundee Precious Metals. Ross says he plans to put the $30 million he’s taking out of that into gold stocks “because, with rates falling, gold is going to go up this year and investors are going to notice and these insanely cheap gold miners are going to hand out doubles.”

You all know that I agree on the gold price breaking higher once rates are actually cut. What stood out to me was how confident Ross was that such a move in gold would hand out such gains in low risk gold majors.

It’s something I want to believe. And I know the argument: if generalist investors turn attention to gold and put just 0.5 to 1% of their portfolios in gold companies, the entire sector would double as a start. It’s just been that ignored and starved of capital. The chart below shows how intermediate gold producers have not benefitted at all from gold’s gains in the last four years – their Net Asset Values have increased, which is to say that their operations are worth more on paper, but their prices have not risen, which means their P/NAV ratios have tanked.

And rate cuts mean we are looking at a completely different foundation for the space, one we haven’t really seen since gold’s last bull market.

Add in continued strong central bank buying and significant ongoing geopolitical risk and continued economic uncertainty that regularly suggests a need to hedge and a technically bullish chart…and gold does look poised to move.

It just has to move enough to attract outside attention. Gold stocks will double when generalist investors decide they want to position for a gold market. The fundamentals are in place and that has more fund managers looking. For the last six months, gold company CEOs have been telling me that they are getting inbound calls from fund managers who haven’t been in the gold space for a decade but who now want to know how they will position when it goes.

Many haven’t really bought in yet. But they’re prepping for a move.

It’s all very heartening. And it makes me want to own the stocks that will move first and most when this surge of generalist interest arrives. They are

1. Major and mid tier producers. Any of them.
2. Sound single asset operators, especially those with relatively new mines and expansion plans for those mines. “Sound” means the mine is operating well and making good money. Expansion is the bigger opportunity that increases the attraction as a takeover
3. Large, near development or under construction new gold mines. These are rare but generalist fund managers know they offer leverage to gold like a producer, plus the re-rating of the Golden Runway.

The Maven portfolio already has good exposure to categories two and three, but I decided I needed to own another few producers to also have category one covered. I then used all kinds of data to screen intermediate gold producers for potential to outperform in this move, which led me to buy two stocks. Subscribers got to see the process and the ones I chose!