Sentiment for gold nears rock bottom: Ruffer’s Baker

Sentiment is close to rock bottom for gold miners in spite of huge ongoing demand for the metal from Asia, according to Baker Steel’s David Baker.

His Ruffer Baker Steel Gold fund – run alongside Trevor Steel – had a tough May, dropping 8.8 per cent against a 6 per cent fall in the FTSE Gold Mines Total Return index, although it has outperformed the commodity year to date.

Explaining the current malaise in the supposed safe haven asset, Mr Steel said optimism about the US economic outlook appeared widespread, although he also highlighted ongoing demand among central banks as a supportive factor.

“Since the height of the European crisis, the Bank for International Settlements [the central bank to the central banks] has increased its gold holding from 100 tonnes to almost 500 tonnes,” he added.

“Gold’s usefulness as timeless, irrefutable, cross-border collateral is being watched carefully by China and the Middle East and we expect the push to physical gold ownership will continue to gather momentum.”

Mr Baker noted comments at a recent conference from the outgoing chief executive of Barrick Gold, Jamie Sokalsky, claiming the gold industry had found a new religion of cutting operating costs, cutting marginal ounces in its reserves and cutting growth projects – all with the aim of creating more attractive returns to shareholders.

“The net effect is potentially an era of falling global production and a continuing lack of new discoveries in an industry with ever-depleting assets,” he said.

“While discipline is a positive attribute for any sector, its implementation does not necessarily attract immediate investor interest. Furthermore, there is some concern the optionality to improved prices will be reduced by these actions.”

Within the mining industry, he said there are companies for which discipline is not a new concept, and a number already have balance sheets capable of enduring a further period of low pricing.

“The current gold price is certainly a challenge but there is a balance to be achieved between cutting to appease in the short term versus preserving the potential a company has for higher gold prices in the future,” added Mr Baker.

“We continually look to focus the portfolio on stocks that aim to achieve this more balanced approach to their business in combination with a number of special situations where companies are seeking to unlock value in very attractive development assets.”

In this regard, he said metals exploration, the fund’s largest position, recently entered an $83m (£48.5m) debt facility with HSBC and BNP Paribas, which, combined with existing cash of approximately $29m, funds the remaining capex of $87.3m for the company’s flagship Runruno project in the Philippines.

“Construction is on track for commissioning of the project in the first quarter of 2015 and at full production of 100,000oz per year in the first five years, should achieve an operating cost of $474/oz,” he added.