The dearth of sport at present has seen your scribe watching classic old boxing matches for which he could not remember the outcome - or at least the detail. For anyone not familiar with the ‘Rumble in the Jungle' or the ‘Thrilla in Manila', they make for great YouTube entertainment while physical distancing1.
In the investment world however, a ‘sporting battle' of greater proportions is taking place. The combatants are gold, of the physical variety (doing well), equity exchanges (not doing so well despite the recent rally) and gold companies (which do not automatically track the gold price).
So, at UWA, we instigated our own ‘sporting competition' between a selection of ASX-listed gold companies, the ASX index and physical gold. The progress scores are in - with the high-scoring match seeing ‘Australian Gold' leading the ASX index, the latter a proxy for the impact of COVID-19.
For those of a numerical bent, the returns were as follows in the period January 24, 2020 to April 13, 2020. The starting date was chosen as the commencement of the Wuhan lockdown through to the recent past (April 13). The contest, of course, remains in progress.
A selection of ASX-listed companies with gold exposure formed the dataset. Explorers, developers and miners were included - including companies holding only with Australian assets, but also those with some assets overseas - and companies with head offices and an ASX-listing, but whose assets lie offshore.
The hypothesis was that companies with far-flung assets would be more exposed to COVID-19 and see most negative impact therefrom compared to those with assets close to home.
The results however surprised us. First to the overall returns. In the period, the gold price made good on its traditional role as a safe haven in times of crisis2, rising by around 7% in US-dollar terms and about 16% in Australian dollar terms.
Next the ASX itself, clearly reflected the economic downturn from the virus, falling a significant 24%.
The ‘Australian Gold' portfolio (of 33 companies3) sits in between - recording a modest average gain (giving unit weight to each company) of 4.1%.
The Devil though, lies in the detail. Individual gold stocks are exposed to systematic and idiosyncratic risk. While the systematic shock caused by COVID-19 is making the headlines, idiosyncratic risk is alive and well.
Rather than see a COVID-19 imposed gradation of performance from those companies with Australian assets (low-impact of COVID-19) through to weaker performance of offshore gold assets (exposed to greater logistical challenges, not least travel restrictions), the data was ‘all over the place'.
So, what factors explain the data? The answer is strikingly simple - but made evident by the ‘natural laboratory' that is COVID-19. Arguably, never before has systemic risk (an extreme form of systematic risk) been so great and thus idiosyncratic risk so small.
For gold explorers in particular however, idiosyncratic risk wins. Why is that? Think of it this way. The likelihood that a drillhole will either hit gold - or miss - is not a function of COVID-19 (assuming that the hole is still drilled). Hence, exploration outcomes have a classic idiosyncratic risk profile.
What we found was that individual circumstances relevant to each company had the most significant role to play. The underlying trends of gold price and COVID-19 imposts had far less importance. More precisely, the role of systematic risk increased on average from 10% to 40% at the peak of the COVID-19 infections in Australia but idiosyncratic risk still dominated with 60% - and for many companies this number was well above 80%.
By way of illustration, let's take the best-performing stock in the portfolio, De Grey Mining (DEG). DEG operates in Western Australia, and despite the regional travel restrictions between parts of the state, exploration work at the company's Pilbara assets has continued. The consequence has been the emergence of a significant gold discovery, driving DEG shares up over 400% in the period.
Now let's move to another high-performing stock, Oklo Resources (ASX code OKU), up by around 47% in the study period, despite the corporate office being (systemically) ‘cut-off' from the company's West African exploration projects by the travel ban. The company's idiosyncratic risk exposure surrounds the drill-bit - with a drill-hit of 55m at 7.65gpt the positive outcome driving the stock price.
Corporate moves too are unrelated to COVID-19 (although one may argue that opportunism in the current investment environment is a consequence of COVID-19-linked valuations). An all-cash takeover offer for West Australian gold explorer Alto Metals resulted in a share price appreciation of over 70%.
The list goes on. West African Resources saw a share price appreciation of 7% in line with the US gold price - but the reason is likely linked to the specific progress at that company's flagship asset in transitioning to production, rather than a generally rising ‘tide'.
The opposite effects also hold true. Realisations of idiosyncratic risk are not solely positive. Okapi Resources, for example, withdrew from a lengthy period of due diligence over a gold acquisition in the Democratic Republic of Congo, with a consequent fall in the share price of 48%.
So, there you have it. ‘Australian Gold', here represented by a portfolio of 33 companies, is beating COVID-19 (represented as the benchmark ASX index), as you would expect given the escalating gold price. But it is not so much the gold price that is driving the outperformance, it is the specific company-risk, read idiosyncratic risk, that accompanies each entity.
Whether a gold stock goes up or down is indeed a function of the gold price and the attractiveness or otherwise of other investment sectors. What really matters however, is what your company achieves (or does not).
Your ‘idiosyncratic' actions matter a lot - more so than COVID-19 - and at present you are winning, collectively.
As to who won the ‘Rumble in the Jungle', between Muhammad Ali and George Foreman, and how, and the ‘Thrilla in Manila', between Ali and Joe Frazier, we'll let you watch those classic bouts yourself to find out.
Right now, the Australian gold industry has COVID-19 ‘on the ropes'.
Allan Trench is MBA Director and Professor at the UWA Business School, a non-executive director of several ASX-listed minerals companies - and the Perth representative for CRU Consulting, a division of independent metals and mining advisory CRU Group (firstname.lastname@example.org).
Dirk Baur is Professor of Finance at UWA Business School (email@example.com)
John Sykes is undertaking a multidisciplinary doctorate at the Centre for Exploration Targeting, UWA and is a sessional lecturer on the MBA programme at UWA Business School. He is also a strategist for MinEx Consulting and a director of Greenfields Research, both consultancies specialising in the analysis of mining and exploration across the base, precious and speciality metals sectors (firstname.lastname@example.org).
1 - Full coverage of each of the ‘Rumble in the Jungle' and ‘Thrilla in Manila' can be found here.
3 - Selected Australian-listed gold companies were as follows (in alphabetical order): ALTO METALS, BEACON MINERALS, BELLEVUE GOLD, BREAKER RESOURCES, DE GREY MINING, EMMERSON RESOURCES, EVOLUTION MINING, GATEWAY MINING, GENESIS MINERALS, HAWTHORN RESOURCES, LEFROY EXPLORATION, MAKO GOLD, MIDDLE ISLAND RESOURCES, NAVARRE MINERALS, NORTHERN STAR, NUSANTARA RESOURCES, OCEANAGOLD, OKAPI RESOURCES, OKLO RESOURCES, PANTORO, PERSEUS MINING, RAMELIUS RESOURCES, REGIS RESOURCES, RESOLUTE MINING, SARACEN MINERAL HOLDINGS, SATURN METALS, SILVER LAKE RESOURCES, ST BARBARA, TEMPUS RESOURCES, TERRAIN MINERALS, TIETTO MINERALS, TROY RESOURCES, WEST AFRICAN RESOURCES