John Hathaway: Gold Stocks “Ridiculously Cheap,” What Will Make Them Move?

John Hathaway of Sprott shares his thoughts on the disconnect between the gold price and gold stocks, explaining why it’s happening, whether he’s seen it before and what could make gold stocks finally start moving.

“You could have … the dot-com crash in 2000, 2001 and the global financial crisis in 2007, 2008 combining to turn consensus investment banking upside down,” he said. “That’s the sort of thing that would lead investors to look for diversification.”

#Investing #Mining #Gold

0:00 – Intro
0:32 – Gold vs. gold stocks disconnect
3:45 – What gold miners should be doing
8:31 – When will gold stocks move?
11:58 – Gold price drivers for 2024
15:42 – What to look for in a gold stock
20:24 – M&A activity in the gold space
24:35 – What will spark interest in gold?
27:20 – Outro

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I’m Charlotte McLoud with investing.com and here today with me is John paay managing partner at Sprat and Senior portfolio manager atout Asset Management USA thank you so much for joining me great to have you here a pleasure bye Charlotte really excited to be speaking with you and for some context I had a

Friend send me your report on the investment case for gold and when I read it I thought it would be great to go through that for our audience because I know we have a lot of people who are seeing the gold price historically high and they’re wondering what’s going on

With the gold stocks so we’re going to get into that today but where I thought we could start with is studing the stage historically and looking back and seeing if if we’ve ever seen a disconnect like this in the past not to my knowledge um and I guess

I’ve been doing this for 25 years so this is the greatest disconnect I’ve ever seen okay so all the better all the more reason to be talking about that and I think we should get into what are the main reasons for this Des disconnect everybody knows that it’s there they can

See it happening what are the the reasons that we’ve seen this build up because as I understand compared to the previous B market gold miners have been cleaning up their balance sheets they’ve improved profitability so what what’s the reasons to me one of the the biggest culprits or explanations is passive

Investing um and we’ve seen a lot about this lightly I believe there was a very good piece in the financial times written by John authors and it’s in the last week or so so people can look it up um basically saying that uh that passive investing uh which really dominates the

Markets today doesn’t uh uh favor uh smaller sectors and and the the gold mining sector is the market cap is about the same as um Mastercard or Home Depot those Tien but in in today’s markets uh so that’s that’s one factor and another Factor that’s kind of an offshoot of the

Same point is that in uh 04 2004 the gold ETF was launched by the world gold Council and now since then there have been quite a few more so uh before that there was really it was really difficult for Equity investors to position uh the macro thesis behind gold which we

Can probably talk about at some point um without owning gold stocks but gradually over the last call it 20 years it’s been increasingly easy just to buy GLD or the equivalent of which there are many and so it took a lot of the thinking out of the equation um and and and

Therefore uh I I think it’s fair to say that uh the um goldback ETFs have cannibalized demand for gold mining equities so those would be two of the biggest reasons I can think of yeah okay that’s a really interesting point that you mentioned with the ETFs and the rise of passive investing the

Other point I was going to bring up so we’ve got we’ve got that aspect and then aside from that we’ve got so many other things options that people have today for investing they can look at crypto they can look at other other trendy Investments I’m wondering if you think

The gold miners have a responsibility or should be looking at ways that they can make themselves more interesting to investors or your thoughts there okay well that bundles up a lot of questions you mentioned crypto um and certainly that has taken some of the air out of the room for Gold Mining stock

Certainly that’s especially for uh the generation let let’s call a dividing line somewhere in the in the 40s so people under 40 um are going to think seriously about crypto and um so that’s another factor that uh that you could men um what could the goldminers do to make themselves more attractive frankly

Uh uh they’re already so attractive I don’t think they have to do a whole lot I do believe and this is kind of a soapbox I’ve been on lately is they should be buyback stock because they’re so ridiculously cheap there’s a a better return on Capital from share BuyBacks

And there is on investing in a big new M um and in a way that’s saying that the industry is should be or at least at least the market is saying and they should um uh management should think seriously about semi liquidation um you know why build a billion dollar new mind

What it it it it U takes up a lot of capital uh takes takes on a lot of risk for shareholders whereas buying back uh Equity that’s undervalue uh provides a sure return to investors and is a way of uh taking taking advantage of the fact that uh

Nobody cares um and I think there’s a lot more return from doing that um than there is for necessarily building um a big new mining project I think that would be a controversial view uh to many of the mining managements but um I I do believe that uh that should be

Strongly considered um as opposed to um taking a lot of capital risk on uh these companies are penalized for for growing um they can only grow by or they can only sustain themselves by investing heavily in new uh mining assets and uh the Returns on on on a new mine really

Don’t become apparent where probably five years maybe maybe 10 years so anyway that’s uh that is my thought to the the best thing I think the mining industry could do would be to take advantage of the heavy discounts that they’re being valued at and and um uh uh and hand shareholder returns by

Doing that I was going to ask you know if you if you see any companies that might be looking to do this but then you mentioned it’s controversial so I guess I guess perhaps not at this point well there there’s some that are doing it uh but they’re they’re it kind

Of um I guess the best way to put it it’s it’s not enthusiastically um they’re doing it because people like me and other portfolio managers analysts in the gold mining space tell them that it’s a good idea so they kind of go along with it but not

Wholeheartedly uh and that’s fine I mean but I think I think as time passes and should these stocks remain as ridiculous ridiculously inexpensive as they are I mean you look at other other industries that are out of favor you could talk about uh base Metals mining you could

Talk about steel you could talk about oil and gas they’re all engaged in shareholder uh in share BuyBacks uh and try to create shareholder value that way I think the binding industry is behind the curve on that on that particular um as okay really really interesting to go

Over that and I want to go back down to that disconnect between gold price and the gold stocks and when I ask people who I’ve interviewed in the past you know what what makes the gold stocks catch up a lot of the time I am told you

Know the gold price is historically high but we need to see it move a little bit higher and maybe that’s when the stocks start moving but you had written in in your note that perhaps they could catch up just if we see a prefer verion to

Mean so I thought that was quite an interesting idea and I wondered if you could talk about that sure well you brought up one thing and that is a higher gold price but we have a higher gold price and I can’t remember how many days we’ve closed over the magic $2,000

Number um but there probably been uh a couple of months worth and it hasn’t done a darn thing to generate interest in Mining stock um so um you know is it a little higher well yeah I think it is higher I think uh um uh you know is it 2100 is a

2500 somewhere along the way uh um higher gold prices will generate interest in gold mining stocks because they’re leverage to the gold price and nobody to go into it in any depth but um so I I I think that that is the uh that that’s the conundrum we have we

Have what we’ve always wished for as as investors in gold mining um one of my partners way back when we started the gold CL 25 years ago said you know the only reason anybody shouldn’t allow to own a Gold stock is because they expect

The gold price to go up and and and he was right until now when that hasn’t been right um so how much higher does the gold price need to go I don’t know the answer to it but at some point um um a higher gold price will J will lead to such

Incredible uh cash flow and profitability that even this tiny little space will will catch somebody’s eye I note recently that Stanley dren Miller the legendary investor um has started to sell his Magnificent Seven stocks and he’s starting to buy big cap names like numad and Barrett and I’d like to think he’s right

He’s usually been right um so my guess is that that uh that there are some value investors out there there still are um active investors they’re still active investors even though assive investing dominates the markets but uh because the space is so small and because collectively the market cap uh

Is is Tiny relative to the capital flows in today’s markets it doesn’t take a whole lot of change to generate um potential outsized returns so you know I’m I’m I’m sitting here expecting that to happen I’ve been waiting longer than I would have thought but I still think I’m on the right track

Here I want to spend a little bit of time looking at the gold price this coming year so I think I think it’s the consensus definitely is we’re we’re going higher we don’t necessarily know when or how much in what period of time but but the trajectory looks higher

Higher so hoping that we can talk just a little bit about gold in 2024 and the drivers you see of course everyone is watching the fed and the added context there’s an election year we have GE geopolitical things we have Central Bank buying going on so just just just a

Quick look at your thoughts on go drivers this year well uh certainly uh you bring up the fed and uh it it has been uh this Narrative of higher for longer interest rates has been a real headwind for the gold price um but uh um it hasn’t really hurt the gold price

Fact we’ve had higher interest rates for a long time time um and despite that uh the gold price is trading at record levels um and what’s interesting is that is that it has happened without participation by uh investors in Western Capital markets I’d say the

US um and um Europe uh to be the to be the ones uh the main ones uh so why is the gold price gone up it’s gone up because Central Bank buying is taking place at record levels and then uh I guess the question is why are central

Banks fying when nobody else is at least nobody in in the in the markets that we are familiar with and the reason they’re doing it is because they are diversifying away from the US dollar um and settling trade balances in Gold not in us treasuries uh

And um I read recently uh that 20% of oil is now traded uh away from the US dollar so um think of it uh we have gold training at record prices and the the level of interest in Western Capital markets is is absolutely negative it’s it’s zero

Gold back ETFs have lost assets for the last two years and yet the gold price has gone up and just imagine what could happen if people in our part of the world decided Well they they should probably have a bigger exposure to Gold you know again hard to say when that’s

Going to happen but uh remember that when um uh gold previously Peak 10 years ago uh Western investors were heavy buyers of of of ETFs um and uh that helped Propel gold to uh the 10year peak um or the the previous Peak 10 years ago so should

That happen again um and we could we could guess all day as to why it wouldn’t happen but I’d be happy to supply some thoughts uh it wouldn’t be crazy to think of gold training in a sustained range North of $2500 $2500 to 3,000 if people in our cor of the world

Decided they wanted to increase their exposure to the metal and should that happen um I’ll just you know need to guess too hard to see what would happen to gold mining stocks yes and what I wanted to ask you about gold mining stocks So eventually they’re they’re going to move I think I

Think that’s probably a given at this point how how do you think that will play out because usually we hear that when stocks start to move we see the larger ones move first and then on down to the bottom of the chain so but it

Feels like now we have this pent up um everything is waiting to move so I wondered if if you thought it might play out in a different way sure I mean I think that’s a good point the big cap names Barr Newmont in particular have been dogs and they’ve

Been dogs for a couple of reasons um um and they dominate they dominate uh GD X the vanac gold miters etx uh and and so that creates a negative impression for the entire space um but if you look down um deep into the into the components of

GDX and then look at companies that aren’t even in in in in in the ETF um smaller companies midcap and um smaller uh they’re actually holding up pretty well they’re doing better uh than uh the headline names um and I think that is a sign of how inexpensive they are and and

Maybe they’re maybe they’re better managed maybe there’s more ownership by management um and uh U alignment with shareholders than you see with the big names the two of which I’ve mentioned there are others as well so um I think that um the ray of sunlight uh that I would point to is the

Relative performance the the actually good relative performance of um Mid to smaller cap um gold mining stocks um particularly those that are located in countries that have um a rule of law and I think that you know in today’s world that eliminates a lot of the uh service of the glow but uh

Companies in the US Canada and Australia um are important in the gold mining space and um that’s where we’re investing we’re not investing as much as we used to in um either Latin America or Africa okay so that that’s a little bit on on jurisdiction in terms of what

You’re looking at can you add any other any other criteria that you are focusing on right now when it comes to Wood stocks well we we we we pay a lot of attention to something I just mentioned earlier which is um management ownership of of shares and alignment with

Shareholders and you know that doesn’t really exist in the large cap names as much as it does in the mid to smaller cap space so that’s a really important uh aspect of what we look and you mentioned jurisdiction that’s a critical component there are some great minds in Africa and and South America

And Asia um but you have to be super picky about um where you’re investing in those areas just because there are so many bad headlines coming out of I don’t even need even need to name the countries um but uh the rule of law is is is is a is

A Vanishing Concept in in many parts of the world sad to say but true and therefore you know um we think when investors return to this space they’re going to appreciate the the the difference between one jurisdiction and another and so I think the kinds of things that we own will trade at

Significant premiums to to the rest of the space right now nobody cares so everything is kind of muddled together but uh when um in generalist investors start picking over the names that uh are are are are inexpensive and attractive uh they’re going to end up focusing on uh jurisdiction as one of

The major criteria I want to hopefully touch on the m&a angle as well well because I think I think you mentioned earlier you know the large miners their their reserves are depleted there’s been underinvestment in Exploration and in in your report on the investment case for Golden stocks you had an interesting

Point talking about marathon gold which ultimately was bought by caliber wining but I think you’d mentioned there were something like almost 20 entities that were interested so it feels again like this is an an environment where we might see m&a I wondered if you could give

Some some FL on what we might see what level we might see it at and and how much uh right that’s a that’s a that’s a very important thing to talk about um so we’ve seen two kinds of mergers one is mergers of equals where there’s really

No value creation even though uh the the participants would say otherwise uh they’re done at no premium and there really aren’t any synergies um they’re always of course there some but they’re not meaningful in terms of U uh value creation uh on the other hand the one

You just mentioned U caliber uh uh buy Marathon uh is an example of a really smart merger um there are others that we could talk about uh of the same kind but there um there is a premium involved uh and uh there is a case to be made for a

Rate um on a bunch of scores on that particular uh example we have a company that’s string a lot of cash flow based in nicaragu it’s managed by um um a team from Australia um and they bought a marathon which was poorly managed in terms of U

Capital uh raising but uh located in in Canada New Finland a terrific asset that is in the final stages of construction it will be producing in the uh and within I think another year and so you have uh a company that sort of rated at

Um three or four times cash flow I’m I’m sort of making this up but just to make the example because I can’t recall the exact number off the top of my head that should be training at uh at least 50% or twice that that kind of valuation once

Um the the the jurisdictional advantage of having a large component of your cash flow coming out of Canada um a and and that I think that the that that that tends to diffuse the fact that although they have very good mining operations in Nicaragua um uh I think you blend the

Two and invest uh can be more more reassured of the continuity of the business so that’s long withed answer but there are examples of that other examples taking place and um they just don’t make headlines because the companies involved are small so that’s the kind of thing I’m thinking of they are value

Creating um and and and um um I think we will see more of that one last point point on this and that is that it’s instead of starting from Scrat to build a new M which in involves huge Capital risk there’s a huge discount for buying existing operations in the market and we

Figure um it’s as much as 30 to 50% um versus uh starting from scratch and building a new mind so again the the the astute managers in the space and there are many of them uh are seeing this opportunity and taking advantage of it and of course we we applaud

That okay thank you for going through that I think we’ll wrap it up here this has been a really good run through gold and gold stocks and I do encourage everyone to call and actually read the word that you put together I’ll I’ll have it linked in the video description

But just before I let you go I’ll put it back to you and ask if there are any final top top topics that you would leave ambassadors with well we didn’t talk about what could happen um to make people think about this space one thing of course is a

Higher gold price but what would what would that be I think it would be a a reversion to mean not just in the gold mining space but a reversion to mean in the external markets we all know that the stock market basically has been driven by seven names huge concentration

Huge um um again if you’re a contrarian uh it’s an easy trade to make you know sell sell the mag 7 like Dr and Miller just did and look for something that’s completely discounted it’s not just the gold lighting space you could talk about oil and gas you could talk

About uh some cyclical names um so I think that’s one thing the other is um I think there is some potential um uh in in the world of banking uh we’ve been reading about uh how commercial real estate is in trouble it’s not just in the US it’s in Europe as well so

There are potential issues in the banking system which nobody is paying attention to so I think that’s another thing so in a way um you could have a combination of the do crash in uh 2000 2001 and the global financial crisis in 20078 um uh combining to uh uh turn

Investment consensus investment thinking upside down and you know that’s the sort of thing that would lead investors to look for diversification which gold represents and again we’ve noted that uh nobody is nobody in our part of the world world is there so a small trickle of Interest driven by just suggested two

Possibilities um for for things to change I believe that that’s the scenario I would point to uh for the gold mining industry and gold itself to come back into favor okay thank you for for adding that on to tie everything together I think that leaves us in a in a good position

To wrap it up so thank you so much for coming on to talk bye Charlotte appreciate it of course and once again I’m Charlotte McLoud with invest.com and this is John H thank you for watching if you like this video make sure you subscribe to our Channel we’d also love to hear your

Thoughts so leave us a comment below we’ll see you next time