Dundee Goodman Merchant Partners is a Toronto-based investment firm comprised of a team of international mining and investing experts with a proven track record in picking winners from across the sector. Over the last decade, Dundee Goodman has gone along for the ride with the resources industry, watching prices across several commodities bottom out between 2013-15 before seeing a widespread recovery over the last four years, particularly in the gold sector. During this time, mining companies around the world put in a sustained effort to recover their damaged reputations in the investment field, developing disciplined management teams and investing in well-received ESG programmes. The unforeseen arrival of the COVID-19 pandemic in 2020 seemed to pose the ultimate acid test for mining’s new-found attractiveness in the investment market. But how has the sector held up throughout the wild peaks and deep troughs of a truly remarkable year? Dundee Goodman Managing Director Robert Dixon talks to RGN about the development of a commodities bull market, the company’s investment thesis and how mining companies have improved their investment credentials over the last decade.
Jacob Ambrose Willson: Robert, has a mood of positivity endured across the mining sector, despite metals prices coming down slightly from the giddy highs of the summer months?
Robert Dixon: We were all pleasantly surprised by how all metal prices have run up since everything was crushed in early March. Lots of commentators have said that a gold bull market started in 2015-16, but it was only around a year and a half ago that gold topped US$1,500 per ounce. That was a big milestone given where it was in 2012.
I think the massive uncertainty of COVID-19, with regards to the future of the global economy, really made gold relevant. Every country in the world is running humungous fiscal deficits right now, including the US. With this in mind, I think gold’s moment has arrived. This has been punctuated by certain things like Ray Dalio talking up gold and Warren Buffett buying into Barrick. This is not to say Buffett is a gold bull, but his investment encouraged the generalists to wade into the gold space.
We had this big run up to around $2,070 per ounce in August, but I think it was always natural there would be a pullback, it was only a question of when. The gold price has been hovering around this $1,920 level for a couple of months now. The stocks have sold off as a result, but when you’re looking at 10 times your money in a couple of months, that was always going to happen with a lot of these speculative juniors. But the conversation around the Zoom channels these days is that it’s not a question of if, it’s a question of when we start to see them move up again, because the bullish factors haven’t changed, they’ve actually been exacerbated by this situation we’re in.
There is also likely to be uncertainty lingering around after the US election. The kind of fiscal package put through by the winner will drive the gold price in the short term. My sense is that people are sitting back and thinking ‘okay I’m going to see what happens here before I push more chips into the table’. Do I think they are going to do that? I absolutely do and 2021 is going to dwarf 2020, frankly. That’s our view. This year the gold price has gone up around $400 to $2,000. I can see a similar type move, maybe even more in the year ahead.
JAW: Bringing in Dundee Goodman, what are the key tenets of the company’s investment thesis in the sector?
RD: Dundee Goodman has been around a long time as an investment firm with asset management as well as having a lot of other non-mining business over the years. But about two years ago, Jonathan Goodman came back as the eldest son of founder Ned Goodman to refocus the firm. He brought back a team of technical and capital market professionals; essentially people who are experts in all the disciplines you would need as a mining company, but more importantly as an investment team looking at the mining space.
At Dundee Goodman, we bring what we consider to be a world class team of experts, with over 200 years of combined experience, to really sift through the boneyard of the mining space. There are up to 1,500 junior mining companies out there at the moment, and maybe only 300 could be classed as a viable investment. When we consider making a serious investment, we sign a confidentiality agreement with the company and then go into the data room. We complete extensive periods of due diligence (DD) to ensure it meets the required standard across several metrics. Our experts make sure to really question management and have a long period of back and forth on all sorts of technical issues.
This process will eventually culminate in an investment into treasury, with a view that mining is a long–term game. We’re not thinking about one year, we’re thinking five to 10 years in duration. When we are parking money into a company, we are looking at it after doing our homework and aligning with management, with the idea of growing the company.
Generalist and retail investors – and even sometimes institutional investors – don’t have the time or the resources to do the heavy lifting in terms of the DD that we do. We’d like to think that if you see us backing a company, that sends a signal that we’ve done some real work on it. I can cite a lot of examples when we’ve had great expectations about a company before undertaking serious DD and then realising that a number of concerns relating to the investment meant we could not invest.
JAW: Dundee Goodman clearly has a stringent process of filtration when looking at potential investments, so what are the stand-out strengths of the companies that you are currently invested in?
RD: We’re invested in a lot of companies, but I’ll highlight three. Two are ASX-listed: Saturn Metals and Centaurus Metals. Saturn has a project in Australia and Centaurus has the Jaguar Nickel project in Brazil. Then there is Maritime Resources that trades here in Toronto. We think very highly of the management teams at each company. They’re all technical, honest and realistic. They know what they don’t know and are receptive to our ideas as well.
I think management is the number one prerequisite, but jurisdiction is another key factor for us. There is certainly a higher comfort level in countries like Australia and Canada. So there is management and jurisdiction, but it’s also the quality of the work done and the assets themselves. For example, Saturn Metals’ Apollo Hill gold project in the Eastern Goldfields of WA has around 800,000 ounces in resource right now. But we see the potential there for a tremendous amount of growth with more density of drilling that we are helping them fund. We also see the grades improving with more drilling, which improves the economics.
Similarly, when you look at Centaurus in Brazil, the chatter around the Zoom coffees is that this is a unicorn. You don’t find many very high grade nickel sulphide deposits in the world these days. We are talking about 50 million tonnes grading at just over 1% nickel and within that there are higher grade portions as well. Again, there is a lot more potential to increase the grade and grow the resource at depth. Overall, it’s about understanding what the resource is and what it could be. Based on the plans of management, could this expand and grow over the next few years? We think so!
I’ll finish with Maritime and their Hammerdown deposit in Newfoundland. We started looking at this asset a couple years ago when the company reached out to our merchant banking group as an M&A defence because another company was looking at it. When our technical guys were looking at it, they concluded that with a reinterpreted resource it could be far more compelling than even the company appreciated. In that period of time, we pushed to get a new CEO in, added three board members and reinterpreted the resource with that new management. It’s really high grade which is another common theme when you talk about things we are looking for, and the economics are good. You want to align yourself with management teams that know what they’re doing and can push things forward. Saturn, Centaurus and Maritime are three good examples of that.
JAW: In the current bull market for precious metals, are you finding that you are working even harder to filter out the good from the bad in terms of the companies that you look at?
RD: It’s difficult because a lot of investors around the world have made those initial bets, deployed capital and made money. We haven’t shot all the bullets, but we’ve shot some of them. So we’re sitting on some winners. Now we’re looking at the universe and saying: ‘Do we want to deploy more into new investments or more into the investments we’ve already ticked the box on?’ I think there’s a bit of that going on right now, and the obvious low hanging fruit has already been taken. It is getting more difficult and we are being much more discerning.
I think the publicly available information for us is very much a screening tool. We are looking for good management, jurisdiction and good grades. One factor I didn’t mention but is very important is the capital structure of a company. If you can get into a company with a relatively low share count, you have so much bang for your buck. We’ve seen a lot of companies over the years have a decent asset but have blown the capital structure up doing financings at pennies over the last 10 years, which has killed them. So we’re trying to avoid those even if we recognise a good asset. We’re trying to focus on tight capital structure, which signals good management typically.
JAW: You mention some of the mistakes of the past made by mining companies with regards to their investment environment. So what would be your advice to investors looking to take advantage of this bull market we are entering?
RD: 10 years ago it was all about showing more ounces because the market valued ounces. Certain companies were optimising their projects for scale with stars in their eyes when thinking about where metals prices could go, rather than optimising projects for profitability. PEAs were often used as marketing documents and there were mistakes in geological modelling, mistakes in community relations, a lack of environmental planning and a lot of over-promising and under-delivering.
But there’s been a real sea change in terms of management discipline at some of the bigger mining companies now compared to a decade ago. The other thing that has happened more recently is a move away from ETFs in the mining investment space because the alternatives have become more competitive. Previously, generalist investors could just buy bullion to get gold exposure or invest in ETFs to get exposure to the gold miners. That was the logical thinking from the last eight years or so.
Now, generalists investors are looking at the large individual companies themselves more seriously. The change has been led by companies like Barrick Gold and Newmont and it has trickled down into other companies. If you think about Bristow at Randgold, he demanded that projects had a certain threshold of profitability, he paid a dividend, he was highly disciplined even managing those assets in several African jurisdictions at the time. He’s brought that to Barrick and they’re paying dividends and have reduced their debt. A lot of companies have done the same thing. Now, rather than just buying the ETF, investors can own the biggest couple of miners in the world, and they’re going to pay out a growing dividend in this environment.
The AISC for gold producers globally right now is around $1,000 per ounce and we’re pretty close to a $2,000 per ounce gold price. In that environment these companies are churning free cash flow and that wasn’t the case a decade ago. When you have that free cash flow you can pay dividends and the pressure is off in terms of creating value for your company as you don’t have to go out and buy a big risky asset in a less-than-secure jurisdiction.
I think managing in a much more disciplined fashion, creating a legitimate competitor to an ETF and running companies for profit, not for scale have been the biggest drivers of this change. It hasn’t been an overnight thing; it’s taken a decade to get here. But for investors in the sector, my advice would be to own the best quality companies that are producing now. B2Gold just reported they are essentially debt free and growing their cash balancing every quarter going forward in a rising gold price environment. I remember where that company was 15 years ago, and it’s been a phenomenal story. You can also mention Barrick and several other companies in the same breath. It’s not just the price environment, which is obviously beneficial, but these companies are being managed better.