‘It’s a lot cheaper to buy projects’ – Michael Gentile on why mining M&A will keep rolling

‘It’s a lot cheaper to buy projects’ – Michael Gentile on why mining M&A will keep rolling

[Music]
this week BHP launch what could be one
of the biggest deals in mining in
decades this year gold has hit several
alltime highs and copper is up 177% so
how sweet is it I’m with Michael gin he
is co-founder of fashion Asset
Management Michael welcome back to Kito
great to see
Michael uh Michael we just have to start
with m&a uh this week we learned that b
is attempting to acquire anglo-american
in a deal size estimated at 39 billion
that follows a series of other huge Ving
deals I can’t name them all Michael but
asena resources and yente for 368
million Alamos gold and aranot for 325
million what’s driving all this m&a and
can it continue Michael I think it
absolutely will continue Michael I think
a bunch of things are driving it first
of all the scarcity of projects that are
shovel ready that are be able to built
in quality jurisdictions are at record
low it’s been a dramatic underinvestment
in mining and development the last you
know 10 to 15 years so there’s a real
the coverage be so to speak there a lot
of projects that are ready to built
you’ve also seen the projects that have
been built most of them have gone wildly
over budget so the the cost to build uh
these projects are increasing by the
month by the year and so it’s a lot
cheaper to buy projects that are either
almost completely built or in the case
of BHP by producing assets that are
already in construction it’s a much
cheaper bet especially with how cheap
the stocks are tra trading you can buy
producing assets or your development
producing assets you know at maybe 30
40% of the cost of building and be one
today so that’s why you’re seeing all
these shovel ready projects or projects
that are half completed or earning
production getting snapped off the board
both in the copper space and the gold
space you listed a few of them I been
many many more and especially in
jurisdictions which are more favorable
to operate in you’re seeing those
projects get snapped up extremely
quickly in the market as we speak what’s
the impact we’re seeing on the junior
sector Michael that’s interesting you
know so the the stocks remain incredi
cheap I mean we’ve had a huge move in
the gold price a nice move in the CER
price the stock remains very very cheap
so that’s also another impit for m&a if
the stock market doesn’t want to pay for
these projects the corporates that are
now cash flowing significant amount of
free cash flow with clean balance sheets
now have the attitude to get more
aggressive and like I said if you can
buy something that’s already built or
90% built for 40 40 cents of the dollar
why would you put your cash flow on the
ground and look for new projects so I
think you’re going to see that value gap
between the developers and Junior
precious B producers and the seniors
start to narrow as more and more m&
happens less projects creat scarcity
creates premium pricing and hopefully
the stock market the retail insal
investors wake up and see the value in
the development and expiration space as
well so I think that this m& should lead
to increasing valuations in the space I
expect to see more of it and as more and
more investors benefit from these
takeouts other stocks that have yet to
get taken out should start trading
higher valuations in the market Michael
how do you contrast the precious metal
space with the critical mineral space is
do you have a particular F do you have a
particular
favorite um I’ve been for years seeing
how posi decline I am to the precious
metal space been very nice to see the
gold price that finally break out here
to to new all-time highs I mean there’s
two separate themes that are driving H1
Michael in my opinion gold is
reasserting itself as a world currency
again as as the US dollar and Us
treasuries Fall more and more out of
favor for multiple reasons which you can
discuss later on if you like uh you know
the large countries that hold 65% of
their FX Wiz and US dollars are are
slowly and now quickly rotating out of
US Dollars into gold as a currency so
that’s that’s thematic that I think is
going to continue and should have a nice
Tailwind for for many years ahead for
for gold prices and and the gold
equities eventually as they catch up to
the gold price on on the EV side it’s
different story it’s a demand driven
side with the with the you know
transition towards electric vehicles and
more electrification of the grid we need
more of these basic EV metals and and
there there’s a huge scarcity of quality
projects to build so we we don’t have
enough copper to meet the demand that
we’re going to need for this e
transition and so therefore we need a
higher stimulus price to incentivize
companies to build new lights
incentivize increase production so you
have on the copper EV metal side it’s
demand driven on the precious metal side
it gets a fundamental rotation of you
know US dollar Reserve currency into a
more stable currency which is gold and
so both have very positive tails at
their backs uh I have a slight
preference for gold because it’s less
dependent on on macroeconomic
environment so in a slow slowing economy
or a recessionary scenario gold would do
very well whereas copper is more
sensitive to the economy so if you’re a
bar the economy or have some
macroeconomic concerns going forward
Comer can be affected but that the
driver of electrification will be an
excellent Tailwind for Cooperative the
decades ahead uh now Michael speaking
with critical minerals we have seen a
bit of cautionary tale with what’s
happened with the nickel markets uh
obviously nickel was part of the
critical mineral space uh key ingredient
in EVS but what we have seen is we’ve
seen that uh despite having uh support
by governments for critical mineral um
critical mineral policies uh we’ve seen
a series of closures of uh nickel mines
in Australia uh just because they
haven’t been able to compete with the
buildout that has been happening in
Southeast Asia I’m just wondering we do
see uh government support we do see
government mandated policies for uh
supporting critical minerals but um also
at the same time uh what type of concern
or what type of lesson should we take
what’s happening in nickel yeah I think
the best I mean there’s two two
ingredients that lead to a positive
backdrop for any commodity Michael right
it’s supply and demand so you know I
think a lot of investors got kind of
lithium same thing lithium is even more
dramatic in terms of the correction
we’ve seen right so when you have strong
demand for a commodity does not
necessarily mean that that commod is
going to go up in a straight line
forever uh you also look at what’s the
available Supply you know so in in
nickel you mentioned Indonesia southeast
Asia there was an abundance of supply
and they’re currently flooding the
markets with it so despite having a
positive you know demand backdrop for
nickel the nickel price is suffered
despite having a very positive demand
backdrop for lithium lithium prices
crashed 90% from the highs because
Supply started to resp respond to the
high prices de May was a little bit
slower than people were anticipating a
couple years ago and the price had a
severe price correction so in order for
a commodity systematically work you need
both you know stricted Supply and
inability to bring a new Supply in a
relatively short manner I was I was
skeptical on lithium Michael last couple
years because lithium is not in short
supply uh ge geographically or GE
geologically speaking there’s abundance
of lithium globally so high prices would
stimulate a strong response if you look
at Copper we’ve been mining copper for
for 60 70 80 hundred of years the high
quality copper deposits globally most of
them have been mined out so the deposits
you’re moving towards today in Copper
are ever lower grade ever more expensive
to bring on to production and ever lower
quality which means higher costs per
pound to bring into production so that
means you need a a stronger uplifting
price for a very long time to
incentivize new production so when
investor looking at any commodity you
got say yeah prices might go up because
of demand but what will supplier
response be how quick will the supplier
response be what impact will that have
on pricing going forward so commod has
his own story to tell but you can’t just
get excited about demand without looking
at supply
side uh you know kind of a lesson within
uh the metal space and commodity space
is look with is absolutely beaten up now
in another uh interview and then tying
on what you’re talking about you said
that uh lithium and nickel look
interesting as well as zinc although I
should note that zinc has had a bit of a
lift in the last month yeah any anytime
a commodity Michael gets to a price
where producers are forced to shut off
production so you get you get that point
in the cost curve where the higher cost
producers are now losing money on a per
pound basis to produce the commodity
that gets my attention as a commodity
investor so I’ve started to look at
lithium names again I’m not a wild ey
lithium bull I’m not saying lithium
prices are going to dramatically
reassert themselves to the upside but
lithium price have now got to a level
where some of that high cost production
that came out when the lithium price
spiked is starting to come off you’re
starting to see the same thing uh in
happening in nickel as well so zinc is
at a price now where you’re not far from
incentive pricing you have pricing
that’s probably barely making money for
most producers so in that sense those
prices are more likely to go up than
down in the months and years ahead and
that’s usually a good place to start as
an investor now I’ve got to get
comfortable with the demand and I got
comfortable with how much Supply would
come back on if prices moved back up
that’s the that’s the other key thing
you look at when you’re investing
Commodities it’s nice that production is
coming back offline because prices have
fallen but if prices are back up 10 20%
is that production come right back
online and causing more problems in the
future so yeah when the prices drop a
little enough where producers start to
feel the pain or produc start to shun in
production that’s usually a good place
to start and if you’re posi on the
demand out look that’s probably a
constructive starting point to do some
work on on tomon in
particular uh in another interview
you’re critical of a big Pension funds
not investing in resource stocks so one
of Canada’s top sectors why should
Pension funds invest more in mining
Michael look I’m not I’m not a fan fan
of top down edicts I think Pension funds
should be allowed to invest where they
see the highest Returns what might I
think what I said interview was a lot of
those penion funds have lost the skill
set of investing in the resource sector
that they may have uh 30 analyst
covering the technology sector and maybe
one 28-year-old kid covering the the
commodity sector they may have let go of
most of their experienced commodity
investors over time so I think the
capacity of a lot of Pension funds to
invest in the resource sector has been
dramatically reduced so whether they
want to or not their ability their skill
set in their organizations has been
dramatically hollowed out like the
industry has as well like 10 years of
under invested Michaels not only in the
mining industry it’s could in the
investment Community as well we all look
at these stocks I would strongly
encourage them to look at the sector as
as a capitalist myself because I think
Returns on these stocks are going to be
phenomenal the next 3 to 10 years the
valuations where these stocks are
trading at the free cash flow yields
these companies are going to generate uh
far outpace anything I see in the market
today yet they’re not paying any
attention at all right so I think the
they’ll get there eventually but the
time to invest is now when the
valuations are at Rock Bottom levels but
levels organizations don’t have the uh
the teams in place to do that right now
which is a problem for the industry
we’ve got to start hiring people that
don’t how to invest in in mining stocks
and in the sector in general for going
to allocate Capital as a as a world
company a world world Community to this
sector now Michael help us out with
what’s happening in Quebec probably
Canada’s most important or one of the
most important uh regions for mining
you’re an Eastern Canada specialist
you’re based in Montreal what are some
of the uh top um how would you say top
developments are that you’re looking for
that’s going to be happening to Quebec I
mean there’s a massive amount of
investment and there’s also a number of
Juniors that are exploring out in that
area absolutely I mean I think we
mentioned earli at the beginning
interview Michael you’ve seen the shovel
ready projects in Canada whether it be
you know Valentine Lake fired by
Marathon you s argonut go any any
project in Canada that is kind of shovel
ready or in construction is getting
taken out why why is that happening is
because a lot of the other jurisdictions
that have been very positive
jurisdictions for Mining and quite ofly
getting a little more difficult these
days Latin America we saw first Quantum
and Panama we seen you know Mexico get a
little more difficult some issues in
Africa as well so the jurisdictional uh
premium associated with high quality
jurisdictions like
continues to increase in the market what
Quebec has done that not many other
provinces have done is they put in place
a very supportive framework for mining
both in terms of tax support encouraging
the mining industry especially in the
critical metal sector vertical
integration so if you’re a major Mining
Company going you know where do I want
to focus the next 20 30 years of my
company’s uh you know cash flow in terms
of building the next mine Quebec screens
very very well they have an abundance of
resources great infrastructure roads uh
Power Workforce you know experience in
the mining space support of government
tax programs so it’s a very attractive
place to set down your flag and build
minds I think what you’re going to see
Michael as all these developers get
taken out the next stage will be the
resource development companies and if
you want to start acquiring you know
reach resource packages and endure
jurisdiction over a 15 20 year view I
think KC position yourself very well to
be a premier place to to build Minds in
the future both on an environmentally
responsible basis and an economic
basis uh Michael I want to finish with
the top macro trends that you’re
watching for in the space so so uh we
have seen that we’re expecting there to
be uh some more rate cuts from the FED
but uh that looks like that’s being
deferred just because uh inflation has
not come down as quickly as it’s wanted
to uh you mentioned uh at the top uh
talking about debt levels and how that
can Advantage gold uh liking it a little
bit better again what are some of the
top macr trends that you’re looking for
and how that could actually play upon
Metals
Michael yeah in the precious metal space
in particular Michael major Paradigm
Shift we’re going through right now if
you go back on YouTube dig up some my
old interviews from you know 2018 2019 I
was talking about when rates were zero
how the US government is going to be
trapped even though they were you know
funding their debt with Zer percentage
rates back then and there wasn’t a
balance sheet problem in terms of
interest rate problem back then I said
if rates ever go to 5 perc the US
government is going to be in significant
financial difficulty you know low behold
rates are knock on the door of 5% again
today the US is running you know1
trillion doll deficits in real time 1.5
trillion to 1.7 trillion def if you
annualize that 5% interest rate on their
debt I think the gold market the bond
market and the global investment
Community are are are figuring out in
real time that the US government is
quasi and solvent at 5% interest rates
that they’re in a bit of they’re they’re
in a debt trap they truly are tra
because the rates can’t go higher
because they would be able to afford the
interest on their debt yet inflation is
not yet under control so they should be
raising rates but they can’t U so you’re
going to have some form of yield curve
control yield curve control or you know
money printing require requ ired to get
them out of this m and that shift I
mentioned earlier from you know the
reserve current to US dollar losing a
bit of its luster I’m not here saying
the US Dollars going be replaced by
another Reserve currency I’m saying
you’re going to see a rotation out of us
treasuries out of US Dollars into gold
as investors realize they’re be paid
back with US dollars that are worth ever
less money going forward and by the way
Michael this is not a us only problem
Canada is in even worse position
unfortunately for for us as Canadians
and the other European countries and
Japan they’re all the same boat so so
we’re that that’s a mega Trend that’s
that’s happening in real time that you
know real real rates are going to have
to be negative again very soon and and
think gold is sniffing that out and at a
rotation out of you know fiat currency
into into hard currency which is gold is
an enduring enduring Trend in the stock
market the equities have not even at all
woken up to this so the gold Market’s
waking up to this uh maybe some macro
investors are waking up to this central
banks are definitely waking up to this
but Equity investors are not at all uh
engaged in the sector I mean you saw you
new M time had a good day today but you
much closer to 52 we low than it is to
52 we High most gold stocks are still
you know well down from their 52 we
highs so we see a lot of room left for
equities to start outperforming uh the
overall market and the goal of PR metal
space and that macro CH I think is a a
real good Tailwind for the years
at Michael thanks for speaking with kcko
thank you Michael great to seeing my
name’s Michael McCrae and you’re
watching kcko mining
[Music]

Miners are going to be pushed into more and more M&A, said Michael Gentile, co-founder of Bastion Asset Management.

On Thursday, Gentile spoke to Kitco Mining.

Gentile is a strategic advisor and director for several companies in the natural resource sector.

The mining sector is on a roll. This year, gold has hit several all-time highs, and copper is up 17%. M&A has been on a tear, too. This year, there’s been several big mining transactions: Osino Resources and Yintai in a $368 million deal, and Alamos Gold and Argonaut Gold announcing a $325 million deal. The headline M&A was this week when BHP Group made an unsolicited offer for Anglo American. The price could top $39 billion.

Gentile said M&A is not stopping.

“M&A will absolutely continue,” said Gentile. “A bunch of things are driving it. First of all, the scarcity of projects that are shovel-ready and are…in quality jurisdictions are at a record low. It’s been a dramatic under-investment in mining and development in the last 10 to 15 years. You’ve also seen projects that have been built, but most of them have gone wildly over budget, so the cost to build these projects are increasing by the month, by the year, so it’s a lot cheaper to buy projects that are almost completely built.”

Gentile said the rationale for the Anglo American deal is low valuations.

“In the case of BHP…it’s a much cheaper bet, especially with how cheap the stocks are trading. You can buy producing assets…at maybe 30% to 40% of the cost of building one. That’s why you’re seeing all these shovel-ready projects…getting snapped off the board.”

0:00 – Will M&A continue?
2:50 – Copper vs gold – what’s your favorite play?
4:38 – Nickel’s cautionary tale
7:11 – Lithium and nickel at compelling values
8:35 – Canadian pension funds not investing in resource sector
10:00 – Quebec resource sector highlights looking ahead
12:00 – Macro outlook and the effect on metals

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