Apologies GP, my context here for short term is something like two years or so. We are talking about the mentality of the people who manage insurance companies and superannuation funds. These people are the patient players in the market. At this stage there seems little doubt that Hemi will become a world class mining operation. The infill drilling has to be completed but with the funds in hand and the drill rigs under contract that task is a foregone conclusion - it will be done and likely within a year. Once they have a measured model of the ore body the rest is a process to a reliable income stream generated by a mining operation that is mining base money because that is the essence of what gold represents in our financial system. You could put London to a brick that the price will go up when they release the BFS. The only question is how much.
We are on the cusp of what they euphemistically like to call a "rationalisation of the market". This is a polite way of saying a period of consolidation enabled by mergers and takeovers. Yep, that's right. "Takeovers". I have noticed a few announcements this past week or so and small fish with prospects are becoming part of a greater whole. The interesting thing is that there are numerous other influences happening concurrent with this activity. 1. Evergrande has wobbled badly and their issued bonds have lost confidence. A full bail out of Evergrande would cost China almost half of their foreign reserves so expect something less, maybe way less.
2. The US Government debt ceiling negotiations just happen to paralyzing the money creation functions of the US at the same time that liquidity is contracting from the slow down in commerce brought on by the Covid lock downs. Make no mistake about the seriousness of this issue. Because manufacturers have not been able to get goods to market they have not been paid and they have to pay for the three key components of land, labour and capital - and some part of that is an expense paid for in US Dollars. Since most of this manufacturing is done outside of the US this is an international problem.
3. The international trade problem is being exacerbated by problems with shipping. Again, some of this is due to the covid lock downs and it seems that shipping ports in the US are only slowly resuming function. This is now compounded by a shortage of truck drivers in the US. This has disrupted a source of flow for US Dollars to get into the international economy to satisfy the need for those dollars. This is making the international problem worse.
4. China is now selling US Dollar bonds because they are short of dollars. This is a part of the reliquification process. They sell these bonds and get the dollars they need in order to lubricate the wheels of their own banking system and paper over bad debt.
5. Input costs of just about everything are going up. Again, much of this is due to the covid lock downs. Because of the lock downs there are now insufficient raw materials, intermediate stage manufactured goods or high end components to satisfy the demands of the market. Some participants in the market are missing out on supplies while others are paying more to ensure that they get their inputs. The problem is that it is very difficult to pass the higher costs on to the customer because the customer is not getting higher wages sufficient to compensate for the higher costs. This is different to the inflation of the 1970's because in the 1970's the money multiplier was positive and the money supply was expanding. Today the money multiplier in the US is net negative and the US money supply is contracting and that is bad for global trade.
These are the sort of conditions where gold can really shine. Confidence is waning. Investors are starting to wonder if their investments are safe and they are certainly not about to subscribe to any old IPO in this market. IPO's will be pulled and selling real estate off the plan will become difficult, to say the least. The money supply needs to be expanded and gold is a dependable way to do it. Especially if the gold miners are one of the most profitable sectors in the stock market and if fund managers have virtually no exposure to the sector. The gold miners will be cash flow positive and paying a dividend, the dividend will be risk free because the sales of gold will be for cash on delivery and the share price will be going up making it both a yield play and a growth asset. And on this count it beats Bitcoin because Bitcoin has no yield. It is a long shot but one in which you simply must be invested.
Getting back to the merger activity, the gold miners have been very poorly priced by the markets. This is at a time when the gold miners have been making excellent profits too. They are being priced at PE multiples of as low as 5. For a cash flow positive business that is the kiss of death because there will always be a predator looking for an easy meal. The merger activity that is happening at the moment is mostly happening in private negotiations but this does not stop other suitors for the deal turning up. There is interest by more than one party in more than a few of these deals. I have seen one party get gazumped already and I have been only glancing at the announcements. This indicates that we may be about to enter the period of hostile take overs and, eventually, bidding wars for the really choice assets. Because De Grey is tightly held it will not be an easy meal and it will, to all appearances, be let alone. Behind the scenes there will be a lot of schmoozing and maneuvering trying to get control of share parcels even without those shares changing hands. But being a world class asset De Grey could eventually become a part of a bidding war between the majors. I feel that this is a more likely outcome than De Grey becoming a stand alone producer but I would be happy to be wrong on that.
There is another aspect to be considered here as well. Two factors are converging. The fund managers who are looking for yield will notice that the gold miners have strong positive cash flow and are underpriced. The miners looking for mergers will also be noticing the fund managers and they will be wanting to complete their take overs before the fund managers enter this investment space. In short, that means the window of opportunity for cheap acquisitions is relatively narrow but the rewards for executing them will be all the greater for the larger the company the more it will attract the investments of the fund managers either directly or through an index. Big investment funds tend to invest through GDX and GDXJ because they can do this without overly distorting the market - and De Grey is in the GDXJ so that will be an additional tail wind for the short term of the next two years.
De Grey is looking like being one of the choicest assets to own and hold for the next five years.
DEG Price at posting:
$1.14 Sentiment: Hold Disclosure: Held
(20min delay)