(Kitco News) - John Hathaway, senior portfolio manager, Sprott Asset Management, says there are two reasons why gold stocks haven’t kept pace with the gold price. One is the creation of the gold-backed ETF, “which cannibalized demand for gold stocks.” Secondly, the mining industry has proven itself to be a poor allocator of capital.
In February Hathaway spoke to Kitco Mining at the BMO Global Metals, Mining & Critical Minerals Conference 2024 in Hollywood, Florida.
Hathaway has written about gold equities being undervalued. He said the implied gold price — the price at which an investor would recover the market capitalization of a company — is at about a 50 percent discount to the gold price. “That's the steepest discount that I have ever seen. I've been doing this for 25 years.”
Asked when the market could rebound, Hathaway replied “soon”, stating “I think we're in the final stage stages of the washout.”
Hathaway said there are a dwindling number of generalist investors hunting for value in the mining industry, but that means they could easily move the needle if the investment climate improves. Companies with free cash should use it to buy back stock, Hathaway advised.
“It will not take a lot of new investment flows at the same time the companies are buying back stock to generate very satisfactory returns on capital,” he said.
Hathaway didn’t like Newmont’s (NYSE:NEM) $16.8 billion acquisition of Newcrest and he noted that neither did the market, with Newmont’s share price tanking, post-acquisition. “I would not call mergers of equals healthy. There’s very little value creation,” he said.
He sees the smallcap to midcap space as ripe for more accretive dealmaking, using the examples of Calibre Mining (TSX:CXB) buying Marathon Gold, and Dundee Precious Metals’ (TSX:DPM) attempted takeover of Osino Resources (TSXV:OSI).
Coverage of the BMO Global Metals, Mining & Critical Minerals Conference sponsored by First Majestic Silver (NYSE:AG).