Mexico’s proposed higher mining royalties could block nearly $7bn in investments
The Mexican government proposed raising mining royalties under the argument that metal prices have risen in recent years.
Jason Mayer manages the Sprott 2013 Flow-Through Limited Partnership and the Sprott 2014 Flow-Through Limited Partnership (LP), tax-advantaged vehicles for Canadian residents to invest in natural resource companies.
Jason says we are at a decade-low level of interest in these funds, which indicates that the sector is ripe for a reversal.
“From my observations, in 2007, the industry raised about $1.7 billion in flow-through funds. The five largest funds jointly raised about a billion dollars. The partnerships typically lasted two years. So when these ’07 funds – which suffered from the financial crisis and resources cratering – started to terminate in ‘09, the returns were horrendous,” Jason explains.
“As a consequence, in 2009, the industry had a very difficult time raising assets for these funds. Those five largest funds raised only a third of what they had raised in ’07. Nobody wanted to buy because of poor performance; the herd was out chasing performance elsewhere. Meanwhile, in ’09, flow-through LPs had the best returns since 1999.”
Where are we today?
“In 2011, the industry raised one billion dollars. In 2012, it raised 700 million dollars. In 2013, the industry only raised 350 million dollars – the lowest in a decade. This year, the industry is tracking 15% below 2013 in flow-through funds raised. We are seeing a complete disinterest from investors.
“Why is this? The 2011 funds, which are the most recently terminated funds, were very poor performers. We’ve seen this move before: As in ’09, the herd is now out chasing performance elsewhere.”
Meanwhile the picture for commodities and precious metals is still attractive, he says. Fears of a slowing demand for resources have been put to rest.
“Consumables – oil, gas, and base metals – look a lot better today than a year ago, in my view.
“Last year, the Eurozone was in recession. Manufacturing activity, which is obviously critical in the consumption of natural resources, was in contraction in every country except for Germany.
“Today, the Eurozone is experiencing positive GDP growth once again. Recent PMI numbers for the Eurozone, which is indicative of manufacturing activity, hit a 32-month high in February1. The concept of a ‘hard’ or ‘soft’ landing in China has been dismissed. The US has seen positive economic numbers as well.
“If the data keeps indicating synchronized global economic growth, it should be very good for resources, and specifically resource stocks.”
What about gold?
“I think we are in the process of putting in a bottom in gold. In 2013, deflation fears absolutely creamed the gold price. Now, we are seeing gold prices become more resilient, shrugging off further bad news.
“The second thing I’ll point to is the number of recent mergers and acquisitions, which show that some gold miners are taking advantage of low gold prices to consolidate and expand – which is positive for the industry. The headline deal is the Yamana Gold Inc. and Agnico Eagle Mines Ltd. takeover of Osisko Mining Corp.2 We are also seeing several others. PMI Gold Corp. being bought by Asanko Gold Inc.3 B2Gold Corp. purchasing Volta Resources Inc.4 And Primero Mining Corp. acquiring Brigus Gold Corp., to name a few.5 There have also been a number of deals involving specific assets changing hands – another sign of a bottom.
“Finally, if you look at where sentiment for gold has been, the December lows in the HUI sentiment indicator were last seen in November of ’08 when gold was at about $750.6 That is a reflection of how poor sentiment was in this space. As this gold price turns, I think the gold equities will grossly outperform other assets.”
Investors should start taking a good look at the sector, says Jason. “Interest in 2014 flow-through funds is down from last year, where it was already at a decade low. Interest has not yet begun to return…
“The sector is beaten up and out of favor, and most investors haven’t been interested for a number of years. Based on our experience following ’08 and ’09, the last time the market was this disinterested, I believe we may also see the best returns going forward.”
Jason Mayer joined Sprott Asset Management LP in November 2012. Jason has more than 10 years of investment industry experience and joined Sprott from Middlefield Capital Corporation, where he acted as lead portfolio manager on a number of investment funds with a focus on growth-oriented resource equities.
Mr. Mayer is an MBA graduate of the Schulich School of Business (York University) and holds the Chartered Financial Analyst designation.
By Henry Bonner
4 http://finance.yahoo.com/news/b2gold-corp-volta-resources-inc-192809484.html
6 http://finance.yahoo.com/q/bc?s=%5EHUI&t=my&l=on&z=l&q=l&c=
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Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.
