Seniors record sluggish 2015 performance as cycle turns in gold’s favour

TORONTO (miningweekly.com) – Senior mining companies continue to struggle with production costs, reserves depletion and write-downs, according to Adrian Day Asset Management owner Adrian Day, who addressed an audience at the newsletter writers’ day during the recent Prospectors and Developers Association of Canada convention.

Compounding matters, the costs that had been clawed back were modest in offsetting the effects of the declining gold price. That was even more noticeable when the savings afforded by lower oil prices, a central expense for any mining operation, were considered.

Strategy mistakes made during the supercycle also weighed on revenues and profit. “We’ve seen major losses over the past three years,” he said. “In fact, the losses have increased in the last year-and-a-half.”

Write-downs still haunted the market, which was particularly true for gold projects or operations compared with those tied to other commodities. More were likely to be on their way.

“We are talking about many billions of dollars and it’s not apparent to me that these companies have cleared the decks. Everyone is waiting and hoping the gold price will go up and bail them out of their previous errors,” said Day.

Reserves were being maintained through acquisitions, although major gold discoveries had declined compared with the mid-1990s and a small bump in the early 2000s. In addition, the timeframe of taking a discovery into production now averaged about 20 years.

“So the odds are that future production will decline as we look at discoveries from 15 to 20 years ago to come into production [now] and see there aren’t so many of them. Absent significantly higher gold prices, we are likely to see production decline over the next three years,” he said.

Mergers and acquisitions (M&A) activity remained muted, although Day noted the counterintuitive behaviour of some seniors who bought into projects at the market top, when the best time had been over the past three years because of the low prices.

However, M&A had moved into a higher gear in the second half of 2015, which Day noted as a positive development.

Stock and equities were still undervalued, while the recent gold rally appeared more tangible and concrete compared with former moves higher for gold in the first-quarter period. Those previous rallies usually presaged a downward trend for the remainder of the year.

Reasons for Day being a gold ‘super bull’ included the immense level of paper beyond physical material. “I realise that not every contract on Comex has to be, has always has been, or ever will only be delivered in gold. But the fact that paper claims on gold outstrip the amount of physical gold is clearly a bullish thing.”

The performance of central banks was also a bull signal. “The central banks around the world are, in my view, totally clueless,” he said, also noting US Federal Reserve chairwoman Janet Yellen’s discussion of negative interest rates in her mid-February testimony to US Congress.

“It’s clear from the testimony that they are not just talking about [negative interest rates], but they have done some fundamental thinking and planning for it,” he added. “Negative interest rates in the US would be extremely bullish for gold.”