🔴 Why Gold Mining Companies Destroy Capital (w/James Rasteh)


It’s very difficult for a bottom-up fund manager like myself to formulate a Conclusive view on the macro trends affecting the sort of ebbs and flows into specific industries, but certainly, very cognizant of the fact that a lot of historical investors in gold seem to have allocated capital to cryptocurrencies and to Bitcoin over the past few years that’s certainly been the preferred instrument for a lot of investors to bet against potential inflation or an erosion of the value of fiat currencies these gold mining companies happen to be in large part headquartered in Canada and a lot of capital that would have Historically formed toward coal mining company seems to have flown into sectors that have garnered much greater interest in Canada Cannabis companies believe it or not being a case in point and in general I would say that the management teams in the gold mining sector have given investors every reason not to invest in their companies Right management tiers in this sector have an extraordinary track record of destroying capital And that capital has been destroyed basically through terrible investments in in exploration projects but also really destructive M&A over the past few years so by way of example the whole sector right now has about 225 billion dollars in market value and most of the companies in the sector are public record it so for about 225 billion dollars you could buy every single gold mine in the world just about right But the top 20 players in the sector alone have destroyed a hundred and fifty seven Billion dollars worth of capital just only over the past ten years this extraordinary mismanagement track record is the biggest reason I can think of why investors have shunned this sector and why they will likely continue to shun the sector unless Important changes are made and we’re investing in the sector to affect and to bring about change Investors have allocated to the sector with I on average pretty terrible results historically right ever since 2006 I think the price of coal has almost doubled right and the average company has lost 50% of its equity value so investors would have been right to avoid the sector and that’s what’s gotten us to a point where Valuations are near all-time lows the price to cash flow that the sector is trading at particularly in the mid You know among the mid level miners that we look at Valuations are currently at 30% on a price to cash flow basis of what they have been on average over the past 20 years Why now you ask? There are two reasons one is in 2020 starting in 2020 Almost every major gold miner in the world will have entered a period of declining reserves and productions Right, so you think all right well Maybe they can offset this declining reserve and production through new discoveries. Well, here’s fact number two We’re not finding new gold. Okay last year We spent three times as much capex looking for new gold reserves around the world as we had spent in 95 Three times as much we found only 5% of the gold that we found in 1995 and the quality of the gold that we found was 50% Measured in grams per tonne of what it was in 95. So the majors are running out of gold They’re not discovering any new gold. The only way for them to replace those reserves is through consolidation And by the way, there’s an extraordinarily powerful economic rationale for consolidation in fact there are many but here’s one of the most powerful as a major gold miner you are trading at twice the multiples on price to net asset value price to cash flow Whatever metric you want to look at on average you trained in a hundred percent premium to the smaller players in the space. And so Financially speaking It certainly makes all the sense in the world to consolidate the sector and then when you think about the fact that the smaller miners have lower margins because they’re encumbered with a Onerous and unnecessary cost structures all of which at the GNA level can can be done away with upon Consolidation you look at an extraordinarily powerful rationale for consolidation and we think that Consolidation has to happen and has to begin to happen before 2020 last the majors in this space continue to decrease in size There are many companies in the sector that spent over almost and in some cases over a hundred percent of EBIT on GNA Right and they traded half the multiples of their of the major players in this sector, right? You remove GNA and many of these companies you double profits If you look at the number of gold mining companies in any given market cap range say maybe One to five billion dollars you look at you The the gold mining sector has three times as many companies in any given market cap range as producers of other Metals in the world some of which have bigger end markets in terms of yearly sales, right? And so this is a sector that it seems to us particularly You know in the mid cap range of this space should have a third of the companies that it currently does So you’re looking at you know, many many dozens of transactions that need to happen Just over the past ten years the top 20 companies in this sector have destroyed 157 billion dollars worth of capital over the same time frame They’ve made almost 130 billion dollars worth of cash and we’re looking at pretty stratospheric numbers and the way that that capital has been destroyed is by Investing in new and greenfield projects that have yielded very little and in fact have yielded zero return on capital Okay, and then here’s another big problem with the sector, which I think is maybe the root problem Is that the management teams in the sector have very low? Ownerships of the companies that they lead right average insider ownership rate management top managers founders. What have you is about? 0.4% Yeah, that’s a fifth of the next lowest entire own Industry that we’re aware of which happens to be in the natural resources space as well So these management teams really are an incentivized based on share price performance, but their yearly cash bonuses which tend to be very generous or Calculated based on how large their reserves of the companies are and how large the product is The howlers reproduction profile is so what happens is when the price of gold goes up the share price of the company might go up Their cash flow certainly go up the bankers through a lot of capital at these companies They use their share price and their cash flow and that capital that’s newly available to them to buy the biggest goldmine that they’ve been Looking at buying that they’ve been interested in buying and adding to their collection of assets and for maybe a year they make a much higher compensation but when the price of gold then goes down their cash flows dry out their share prices decline and now they have leverage to Contend with and they could potentially face liquidity problems, right? So they sell the very asset that they had bought often for pennies on the dollar and you rinse and repeat this process over a cycle you end up with an industry that even though fundamentally very profitable at the operational level will through an extraordinarily Non judicious allocation of capital and business development Destroyed the kinds of capital that this industry has destroyed over time You You You

17 thoughts on “🔴 Why Gold Mining Companies Destroy Capital (w/James Rasteh)”

  1. just take the best one , look gcm gran colombia gold , look the market cap , look the q1 earning, the cash on hand, the debt, the q2 is the 15 august so check closely the boom after

  2. This makes me even more bullish for gold in next few years! Add it to many other things such as Basil 3, Brexit, Deutsche bank. Even the US economy looks like it will turn away from stocks and run to gold/silver and perhaps even cryptos?

  3. Wait wait wait gold bugs pay is based on real production an this guy wants to abolish that to pay share holder's no way!!!!! Lulz

  4. Why are you re-showing something from 2018? Gold Miner ETFs like JNUG have bounced higher, almost triple since the last 3 months. As the trade war intensifies, the run to safety will benefit miners even if they are poorly managed.

  5. K tell me this bitcoin genius's with no lower denominator how isn't bitcoin just another inflationary currency on the planet? If I buy

    $100.00 worth what do I have? I have a fraction of a imagined coin and fractions are infinite.

    Paper currencies have a lower limit there the problem is the infinite printing.. Your limit on how many bitcoins is meaningless without a lower limit. As the price goes up more fractions are created. You can't tell me how this isn't the stupidest hyped miner on the planet.

  6. Seems to me to be making a perfect contrarian case for long miners. Valuations at long term lows and gold prices on the rise. I would think that a gold mining company run by retarded monkeys would still be profitable if the market price for gold is over $2K per oz.

  7. FinBrain Technologies has developed Deep Learning algorithms for modeling the future price movements of the financial assets, you can visit our website for more.

  8. The cryptocurrency market will experience a market optimism in 2020, as not only Bitcoin, but all the major cryptocurrencies will also experience an upward shift. The governments and the central banks will embrace the digital currencies; hence the demand should be more. So I want to purchase some more Bitcoin in advance… and bet on the side that always wins. That is a pretty safe bet, although I was able to increase my 2 Bitcoin to 30 Bitcoin in a very short amount of time with trades that yielded consistent winnings which was done with the help of Gérard Barrientos who is a Pro Trader and has been helping beginners in crypto investors showing them ways to trade their Bitcoin, he is down to earth and always ready to serve, I made profits, and it was worth it. I urge all of you to contact him now on for more assistance e-mail; [email protected] for your signals and tips on how to quickly create a work strategy to increase your portfolio and earn profit Consistent and consistent. Still a big fan and I like your channel but had to get this off my chest.

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