Sam Broom joined Sprott Global in early 2016 having spent his early career working as an engineering geologist in the consulting industry, both in his native New Zealand and in Australia. During his time in Australia, Sam became heavily involved in the mining industry and gained extensive experience across a wide range of industry sub-sectors. Also during this period, he gained a passion for both the natural resources industries and the markets that support them. His investment philosophy focuses on combining a sound understanding of industry and company-specific fundamentals with technical analysis to fine-tune the timing of investment decisions in order to maximize portfolio returns. Sam received his B.S. in Honors Geology from the University of Canterbury, Christchurch, New Zealand.
In this interview, Sam offers his take on how the mining sector performed in 2018 and provides his outlook for 2019. Sam discusses why the Aussie mid-cap producers outperformed their North American counterparts last year and whether they might do so again in 2019. He explains why he is very bullish on the industrial commodities and provides his commentary on the Newmont-Goldcorp merger. Sam also shares regarding how he is currently advising his clients to position their resource portfolios.
BEGIN TRANSCRIPT:
Bill: Welcome back ladies and gentlemen. Thanks for tuning in to another Mining Stock Education episode. I'm Bill Powers, your host. Well, today I'm speaking with returning guest Sam Broom. It's about six months since we last got Sam's take on the mining sector. And I always appreciate his insights. Sam's an investment executive with Sprott Global since early 2016. Before that he spent his early career working as an engineering geologist in the consulting industry, both in his native New Zealand and in Australia. So Sam, welcome back onto the podcast.
Sam: Bill, thanks for having me again. It's a pleasure to be here.
Bill: And welcome back to the States. When I asked you for the interview, you were across the Pacific in your homeland, so I hope you had a good trip back.
Sam: Absolutely. It's always lovely to get home and see the family back in New Zealand. So, I'm very much well rested and looking forward to 2019 has in store for us all.
Bill: Excellent. And before we talk about 2019, I'd like to get your take on 2018. We spoke twice throughout 2018. Did 2018 end as you expected for the mining sector, and the commodity sector? And what do you think are some of the biggest stories or takeaways for investors?
Sam: Sure. 2018, if we're frank, was a fairly tough one, almost across the board for natural resource investors. And in fact, almost any investors globally. I saw a report a while back that said, I think, in 2018 something like over 90% of global asset classes when measured in US Dollars were down on the year. So, pretty much unless you were in US Dollar cash or short term government bonds, chances are your portfolio, regardless of whether it was commodities or just the general market took a hit in 2018. So I'll be frank, it was a tough year for mining investors as well. I guess the themes we've discussed previously in terms of commodities, the agricultural commodities, the precious metals, the battery leveraged base metals, particularly nickel, they did the best of the sector, they were still all down. Gold actually ended up just very slightly down. But they were better than the rest of the space.
So I was somewhat happy that on a relative basis things tended to go pretty well, but on a nominal sense it was definitely a tough year. One of the other themes that I've been big on for a couple of years now has been the Australian mid-cap producer space. And that was one of the bright spots in the sector. For those of you that want to look at it, you can look up Australian All Ordinaries Gold Index. Which is an index that tracks the Australian mid-cap space. Usually you'll find it under the ticker AXGD. And that was actually modestly up on the year in US Dollar terms. So that was pleasing. But apart from that, yeah 2018, not a good one for commodity investors unfortunately. But I'm sure we'll talk about it as the interview goes on. I do think the scene is setting up for one of these days we're going to get a really big turnaround in the sector. So, the scene is certainly set.
Bill: For those of us, like myself, that don't follow closely the Aussie mid-cap miners, what were the primary factors or driving causes of why they were up, when most of the miners here that we monitor in North America were down?
Sam: Yeah. There's a few reasons why I think the Aussies are outperforming. The Aussie dollar did depreciate rather substantially during the year against the US Dollar. That's why I always liked to measure the indexes in US Dollar terms, because the currency does have an impact. But what that meant was, for US investors, and North American investors, the cost base of these of these Aussies basically went down. And when your local currency depreciates, your cost of labor, and cost of capital expenditures is obviously in the local currency. So, that helped. But on top of that, the Aussies tend to be able to mine gold very, very cheaply. So if you look at the industry-wide cost profile, particularly in the gold space, you'll notice that the vast majority of the companies at the lower end of the cost curve, so the lower lowest core tile are the Aussie producers. There are some companies that are producing north of between 500,000 and a million ounces of gold a year at all in sustaining cost sub 7.50 US Dollars per ounce.
So the margins on those at the moment are truly good. So these companies are actually generating free cash flow, are either paying down their debt, or have paid down their debt and have strong balance sheets generating free cash flow, and even paying a dividend some of them. So, that completely contrasts what's happening on average in the North American space. And I think that part of what's really driven the out performance in the Aussie market. Some people now think the Aussie market is overvalued versus the North American peers, which are all sort of down in the dumps. I can see that argument. And if we get a face-ripping gold price rally, I can definitely see the more levered North American names outperforming the Aussie market. But if we see a sustained sort of sideways to down move in the in the gold price, I definitely think the are going to continue to outperform.
Bill: What do you expect for 2019? Can you give us an overview of your expectation for the sector as a whole, and some of your top commodities?
Sam: Sure. So, I'm basically going to rinse and repeat what I said in 2018. Because to be frank, it didn't quite play out as I'd hoped in 2018 in terms of nominal performance. But I do think the same thing is going to come. I'm obviously precious metals. I don't need to go over the fundamental reasons why you should own precious metals. I do think what is interesting for precious metals now is the narrative surrounding the broader economy is starting to roll over a bit with that volatility we first saw in February last year, and that reared its head again in December this year. So now all of a sudden you've got investors in the general market that realize that, hey, equity valuations can go down. And on top of that, I actually think a really interesting narrative that's going to emerge this year is the US federal debt again. So if you look at the figures for what the US government is racking up every year in terms of the deficit there, it's starting to look quite staggering.
And this is supposedly at the best economic times we've ever had. So you're looking at north, on an annualized basis, north of $2 trillion adding to the budget deficit there every year. And that's in a good time. So I'd hate to think what that's going to look like if we do get some sort of recession this year. And at that point in time, the narrative around precious metals really comes back into the fray again for the generalist investor. Because what we really need to see is fund flow back into this corner of the investible universe. Because at the moment no one cares, you ask a generalist investor to name one gold company, I bet you 90% wouldn't be able to even name you a single name. So that's going to be interesting. So I am still interested in precious metals here. In terms of what's most hated at the moment, even more hated than precious metals, I think is industrial commodities at the moment. Things like copper. I'm still very big on nickel, for the same reasons that I outlined last time.
It's still looking good. It went up. It was one of the best. I think it was the best performing base metal last year. It was down 14% last year. But that's still looking really good for those that want sort of less speculative exposure to the battery space. But also just the general supply demand for things like stainless steel is looking really robust. Particularly in the class one nickel producers, so that are nickel sulfide producers. So, I would keep a lookout for that next year. But guys like ... The big boys like Freeport I think was off 50%. One of the biggest miners in the world, so a 50% decline in it's share price in 2018.
So, that doesn't mean we're going to get a bottom anytime soon. But whenever we see those kind of depressed situations, it definitely picks my ears up. Because I know the long term fundamentals of these industrial commodities is very sound. There's a complete lack of supply from new mine construction coming down the line. So, at some stage in the next ... It could be the next six months, but definitely within the next two to five years, that's going to really start coming home to roost.
Bill: Even if the global economy rolls over, Sam? So you'd see the supply deficits as the primary driver even more than economic demand?
Sam: In the long run, yes. I get the narrative. And to be frank, that's what keeps me up at night. Particularly China. China consumes between 30% and 50% of most industrial commodities. So if China really were to hit the skids in a big way, there's no doubt that that's going to cause some pain in terms of short term swings in the commodity prices of industrial metals. However, I think we're going to see a move from developed economies to start spending on infrastructure when this next recession hits. So it would not surprise me at all to start seeing major infrastructure spending programs being implemented in places like the US, in places like Europe, even Canada and Australia when the next downturn hits. And I think you're going to see develop economies come and take some of the slack of the demand away from China. And the nice thing about things like copper and nickel is they're very much modern wealth commodities.
So, it's very hard for me to see copper and nickel demand declining materially over a five year time-frame, just simply as a function of basic population growth and the move towards electrifying just about everything. So yeah, in a short term, certainly if we get a major economic slow down, there's no doubt industrial commodities are likely to take a hit. And that's why think having your precious metals in your portfolio makes a heck of a lot of sense. But I actually think on a longer term time-frame, the investment case for industrial commodities actually looks the most robust because you actually analyze it and figure out what's going to happen and to me it's fairly obvious what's going to have to be on the line.
Bill: Are you currently a steering your clients more so into producers or late stage development companies? What category of mining company are you looking at and seeing great value right now?
Sam: So right now I am very focused on the high quality end of the market. So by that I mean free cash flowing producers at the lowest end, or low second quarter, but hopefully first quarter cost quartile for the bulk of their portfolio. The reason why I'm doing that is because, it has been so tough for so long, and you really have to have capital available when that cycle turns to be able to reallocate down the food chain and get a bit more speculative when that time comes. So unless you've got a reoccurring stream of capital coming in to keep topping up your portfolio, I want to have exposure in the things that still have high quality leverage to these commodity prices, but have much less downside. I'm still interested in the juniors. I still keep an eye on them. There are some very cheap options out there for those with a very high risk tolerance.
And I'm still very interested in new discoveries, because literally, the pipeline is extremely bare. So anyone that makes a material new discovery, I'm going to have a look at them hopefully as soon as the drill results are out and try and figure out whether it's real or not. And I do think those ... The very few major new discoveries we're seeing are definitely worth having some speculative capital in. But for the bulk of client portfolios ... And then this is where I'm probably moderately different than a lot of people in the sector. I do think it's best to stick with the lean, mean cashflow-producing, strong balance sheet producers. And to be frank, probably 85% of those that I've found are in the Aussie market. So hence my interest there. So, I'm very heavy in the Aussie market, and the Aussie mid-cap producer space at this point in time.
Bill: We just saw Barrick and Randgold merge. And then this week the shocker announcement was Newmont and Goldcorp merged. I'd like to get your thoughts on that. I've listened to people kind of grieving that a Goldcorp is leaving Canada. People also complaining about the excessive change in control fees, what management at Goldcorp was paid. Some people say it's negative for the junior sector. Some people say it's positive. What's your take?
Sam: Yeah. Obviously some very interesting M and A activity this past year and early this year. I think it was inevitable. And I personally think the sector probably needed it. I know there are nuances that go with it, like the sort of change of control clause, which when you're a shareholder and you've lost a lot of money, and then the guy that was at the helm while that happened, gets a big fat payout. It's tough to swallow. And I'm not a huge fan of that. To be honest, I don't play that in the mega-caps, the Goldcorp's and the Barrick's, because I don't usually play with them too much. But I do think net net it's probably a good thing. I think consolidation for the sector is probably what it needed.
And I think there's going to be some interesting opportunities coming up for mid-caps that have the balance sheet to acquire some of these assets that are going to get spun out. Because what's become apparent from both merges is both new companies are going to be spinning out their sort of tier-two assets. So there is going to be a glut of sort of 100,000 to say 250,000 ounce a year mines coming onto the market. So what I'm most interested actually is seeing where those go. And if there's a whole bunch of these on the market at one time it should be happy buying for those that are nimble enough to get involved there. So I actually think that could be an opportunity. Not for the big guys that are spinning them out, but for the mid-cap space, if they can manage to get these things at a right price. And hopefully at a bottom point in the cycle. So that's what I would keep a lookout for as a takeaway from the whole merger situation.
Bill: Sam, in conclusion, anything else you'd like to share with us about the Australian mining equity sector?
Sam: Yeah, I would just highlight that, particularly if you're a North American, or somewhere else in the world, and you're an investor in the commodity space, and you don't have exposure to the Australian sector, it's something that you really, really should look, or consider looking into. I'm always more than happy to talk to people that want to learn more. I don't know if you can put my email address up.
Bill: Yes. And please share it right now.
Sam: But my email address is sbroom@sprottglobal.com. I'm always happy to share my thoughts with people. But yeah, you really missing out on half the market,. Well, probably not quite half, but at least a third of the market. And I'm finding at the moment a lot of the very high quality stuff is actually an Aussie ... The stuff that's done well over the last couple of years, even in spaces like nickel. I've got one of my favorite nickel producers is an Aussie. But a lot of them had kept gold producers, they're all in Aussie. They're all doing well. So if you don't have exposure to it in your portfolio, it's my personal opinion, it's obviously not right for everyone, but my personal opinion, you should definitely look into it.
Bill: If you're looking for a good broker that also will advise you on some of your investments, please do reach out to Sam. And Sam, you're also on Twitter. I'll let you share your handle. And please explain why you chose that handle when you share it.
Sam: Yup. So my Twitter handle is @thenudeinvestor. It's a hangover from the day where I ran a blog called The Nude Investor. The bare essentials of investing was the tagline. So, that's where that one comes from. But yeah, feel free to follow me. I'm not super active, but whenever I find something interesting I do try to put it up for informational appeal.
Bill: Sam, thanks for coming on and sharing your insights. I appreciate it.
Sam: Bill, always a pleasure. And I look forward to our next conversation.
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