Sprott Gold Equity Fund Video
Why Gold Equities
Doug Groh, Senior Portfolio Manager, looks at how gold mining equities have been revitalized by improved managements and M&A activity.
Doug Groh: We have seen revitalization in the equity space over the last year with several mergers and property sales. We're seeing investors becoming more intrigued with the dynamics that are underway in the gold sector, whether it's M&A (mergers and acquisitions) or the cash flow, and gold mining companies are in an excellent position right now to generate significant cash flow.
Gold Miners are Much Healthier
Balance Sheets Have Improved Substantially
Doug Groh: Over the last few years, gold mining companies have been cutting back on costs, focusing better on projects and getting their capital allocation in a much better position than they were, say seven, eight years ago. This has resulted in an expansion of the gold price last year or so, with gold moving more than $200 an ounce. The margins for gold companies are quite spectacular, in our opinion, and we believe that they are likely to continue for the next four or five years as investors recognize that there is potential for significant cash flow generation here.
When we're looking at gold mining companies to invest in, we're looking at several different aspects. This includes their resources and assets, and financials and balance sheets.
Management Teams are Key
Help Define the Equity Investment Opportunity
Doug Groh: But one of the key aspects of a company's success is its management team. One has to understand what management's trying to do, perceive what they're able to achieve and accomplish, and then recognize the challenges as well as the opportunities. Investors can learn what management's doing and what their strategic approach is in allocating capital, their discipline with their assets, their focus on return, as well as their approach to risks. All these things come together for us in terms of understanding the investment opportunity for our clients. Having the conversation and interaction with management is critical to understanding how a company is going to perform in the future.
M&A in the Gold Sector
Doug Groh: The M&A market in the gold mining space is quite dynamic and active on an ongoing basis. This past year, we've seen some large transactions that included Barrick, Newmont, Randgold and Goldcorp. However, we're also seeing smaller companies come together and look at either buying properties or merging with other similar-sized companies. [Please Note: As of 12/31/19, Sprott Gold Equity Fund held 0% of total net assets in Barrick Gold;1.20% in Newmont Mining; 0% in Randgold; and 0% in Goldcorp.]
M&A is Moving into the Junior Space
Doug Groh: The dynamics in the junior space are very interesting. In particular, there is concern about liquidity. Mid-sized companies don't necessarily have the recognition in the marketplace or the liquidity at their current size, so they're seeking out a partner or greater scale so that they can achieve that liquidity and recognition in the marketplace.
Another dynamic is that mining companies do deplete their resources and must replace those resources either through more exploration or development or alternatively through M&A. This is a significant driver of what's going on in the marketplace right now.
Several positive things are going on, and I think companies are recognizing that being a single asset company is not quite as attractive to the marketplace as having multiple assets in multiple jurisdictions. This is forcing mid-cap to smaller-cap companies to seek out ways to become more relevant in the marketplace, in order to improve their asset quality and perception in the market.
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Past performance is not a guarantee of future results. All data is in U.S. dollars unless otherwise noted. Sprott Gold Equity Fund invests in gold and other precious metals, which involves additional and special risks, such as the possibility for substantial price fluctuations over a short period of time; the market for gold/precious metals is relatively limited; the sources of gold/precious metals are concentrated in countries that have the potential for instability; and the market for gold/precious metals is unregulated. The Fund may also invest in foreign securities, which are subject to special risks including: differences in accounting methods; the value of foreign currencies may decline relative to the U.S. dollar; a foreign government may expropriate the Fund’s assets; and political, social or economic instability in a foreign country in which the Fund invests may cause the value of the Fund’s investments to decline. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund.
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