BlackRock’s Evy Hambro sees good year ahead for gold equities
Fundamental supply and demand factors in 2012 will unleash value in gold equities, with the rebound in share prices likened to the unleashing of a coiled spring, according to BlackRock manager Evy Hambro.
Hambro, managing director and joint CIO of the natural resources equity team in BlackRock’s EMEA Fundamental Equity Portfolio Management Group, gave his outlook for the coming year in a review of the sector.
In simple terms, demand remains high – not least because central banks have become big net buyers over the past year – while supply is constrained at the same time that mining companies’ margins have increased considerably.
Taken together, these factors point to the sector throwing off considerable excess cash. One option is to return the cash to shareholders at higher dividend yields than has historically been the case.
Another is to re-invest. However, as Hambro points out, the low valuations of gold equities generally means that it is cheaper for companies to buy existing production than to borrow money to start their own. This means he expects a considerable jump in the volume of M&A activity.
Whether it is higher dividend payments or M&A activity, it is clear to Hambro and his team at BlackRock that investors will see returns from gold equities rise through the coming year.
Refering to specific figures from Scotia Capital and Datastream, he noted that since the last quarter of 2008, gold company margins have increased by 219%.
Bullion has appreciated 114%, but gold equities have risen just 50%. There is what he terms a “disconnect” between share prices and the underlying fundamentals of the industry.
This disconnect may be down to market uncertainty over the costs facing the industry. The price of gold has increased, but so has the price of steel, used in infrustructure required to support mining, and so has the price of energy.
“Clarity around cost inflation will be a key factor in unlocking the coiled spring,” Hambro said.
Another area where BlackRock sees potential is leveraging its ability to capitalise smaller to medium sized mining companies.
Currently there is a funding liquidity crisis in as much as banks are increasingly refusing to lend to SMEs in the sector. They instead are turning to the likes of BlackRock for funding, for example, to finalise mining projects. BlackRock has the money to invest, but is looking to extract a higher rate of return from engaging in this type of specialist financing. In turn this should help boost overall returns made by funds such as the open ended BlackRock Gold & General and the closed ended BlackRock World Mining Trust plc.
“We will charge more for that capital than in the past. That’s because the value of that capital is higher,” Hambro said.