Investors Should Consider Gaining Exposure as Gold Bull Market Gains Momentum

• Gold prices have increased significantly in recent years and are expected to continue rising
• Underinvestment in gold mining over the past 15 years will lead to supply shortages, putting upward pressure on prices
• Despite challenges, gold mining companies with strong management teams, development projects nearing production, and good jurisdictions are attractive investments
• Tragic mining incidents highlight the need for responsible practices, but shouldn't overshadow gold's strong fundamentals
• Gold acts as a safe haven and hedge against inflation, making it a prudent part of a diversified investment portfolio

Quality Gold Miners Offer Upside as Prices Rise

For investors seeking to protect and grow their wealth, the case for investing in gold has never been stronger. Recent years have seen the price of gold rise substantially, with further gains expected as demand increases and supply tightens. In a wide-ranging discussion, Alex Black, CEO of Rio2 Limited, and Hugh Agro, CEO of Revival Gold, laid out the compelling fundamentals underpinning the gold market and why investors should consider gaining exposure, especially through quality gold mining companies.

The Bullish Case for Gold Prices

Over the past five years, the price of gold has increased by approximately 65%, with a 10-15% gain in the last year alone. Alex Black noted that gold is currently trading around $2,100 per ounce, well above the $1,350 price many banks are using in their models. He expects gold to settle into a new, higher trading range, stating "Gold's doing what it's supposed to be doing and it's behaving like a currency as well, which is the differentiator there.

Hugh Agro highlighted gold's performance, saying "In 20 years the gold price has quite tripled. In the last five years it's up some 65%, 10-15% in the last year. So, the price of gold is performing, no question about it." He sees current margins for gold miners as around 40% over all-in sustaining costs, allowing them to generate substantial cash flow.

Despite gold's rise, Agro argues it is not a speculative frenzy, but rather a series of step changes. "We're seeing step changes and we were at $1,250 there for five years. We went up to $1,850 for about 3-years and now we breached $2,100 and who knows what the next level is. Gold's doing what it's supposed to be doing.

Underinvestment Leading to Supply Crunch

A key driver of the bullish outlook for gold prices is chronic underinvestment in the gold mining industry over the past 15 years, if not longer. Major gold companies have seen their project pipelines and reserves depleted. As gold prices rise, these majors will be scrambling to replenish reserves and resources by acquiring development-stage projects nearing production.

Black commented, "The bigger guys are going to wake up to some of the better assets that are out there. It's very interesting that since we got our approval in December, we've had a few corporate approaches - not that we're for sale, but people are starting to wake up to exactly what's going on in the sector.

Agro concurred, "As a guy who's worked in the corporate development trenches and banking in the past, what I can tell you is that people start to panic at the big companies. They will look to fill those pipelines, those cupboards that have run bare, and they'll scramble around to find projects that are either construction-ready or near to construction-ready.

The lack of investment is expected to lead to a supply crunch in coming years. "15 years of relatively speaking underinvestment, or at least 12 years of underinvestment in the space, and that'll boomerang back," said Agro. "Just as we were saying, it'll be a scramble. Everybody's going to look for seats on the bus; there aren't going to be any. And those of us who've been in the industry, soldiered through, and preserved our capital structures, we'll have a lot of winnings at the end of our journey.

Characteristics of Attractive Gold Mining Investments

For investors looking to gain exposure to rising gold prices, investing in gold mining companies can provide leverage to the gold price. But it's critical to be selective. As Agro stated, "Mining is a risky business. Anything can go wrong, that's a fact.

When evaluating gold mining investments, Agro advises investors to look for 3 key things. First, be diversified, with investments across juniors, seniors and royalty companies. Second, choose management teams with strong track records of success, even if they have some bumps and bruises from the past. And third, focus on "NAV", or net asset value, by examining the economic value of the company's projects.

Black emphasized that investors should look for companies focused on execution and delivery. He pointed to Rio2's past success with Rio Alto, which it grew into a $1.2 billion company acquired by Tahoe Resources. "It comes down to execution and delivery. When we had Rio Alto and we built that company up, we had a pretty low profile. A lot of people still don't believe what we're going to do in Chile, and nobody believed what we were going to do in Peru with Rio Alto. And we executed, we delivered, we did as we said we would do, and the rest is history.

Jurisdiction is another key consideration. Agro is bullish on Idaho, USA, as a mining jurisdiction. "Idaho is a state that was founded with mining in the mid-1800s and has been a producing state in silver and phosphate since the very beginning. And you've got a number of players working in the state doing really good quality work." Black is also optimistic about Chile as a mining jurisdiction moving past recent challenges.

ESG and Responsible Mining Practices

No discussion of mining would be complete without acknowledging the inherent risks, and the critical importance of responsible environmental, social and governance practices. Black spoke candidly about a recent tragic incident in Turkey, where 9 people died at an SSR Mining operation.

Accidents are going to happen. We understand that nothing's unavoidable, but with all this focus toward ESG, it's like we're this pristine business - that we're not," said Black. "Mining is a difficult business, it's not sustainable. Mines start and close. What you leave behind is hopefully sustainable businesses that are not related to mining that people can get into.

However, Black notes that the mining industry has made significant strides in recent decades. "ESG has become this buzzword over the last two or three years, but I've been in the mining industry 40-years and we've always done ESG. It's been called different things - CSR, whatever it is. So the mining industry in general terms is a good steward when it comes down to ESG.

Agro framed responsible mining as an imperative. "If we're doing our jobs properly, we're going in, we're taking the resource out of the ground and we're putting it to good use for man's good purposes, whether that's electric vehicles, whether that's to support the central bank with its currencies, whatever it happens to be. And then we put the place back into good shape for other uses.

He continued, "We have a responsibility to do this because it would be like leaving a person uneducated or a community unconnected to the Internet - to not take advantage of the resources we have available to us and to do it responsibly. I know Alex feels the same way I do about doing things responsibly. And most of us who work in the mining industry, we love the outdoors. We fly fish, we hunt, we like to walk in the woods and we appreciate the environment in which we're working. Most of us live in these places. And so we take care of where we are and we think pretty carefully about the way we do it.

The Investment Thesis for Gold

In summary, the investment thesis for gold is compelling

• Gold prices are in a long-term uptrend with significant gains in recent years and further upside likely
• Demand for gold continues to grow while a lack of investment in new mines will constrain supply
• Margins for gold miners are attractive at current prices, around 40%
• Quality management teams with track records of execution and delivery
• Geopolitical risks and economic uncertainty increasing gold's appeal as a safe haven
• Inflation concerns also driving interest in gold as a hedge
• Depressed valuations for smaller gold companies after a period of underinvestment sets up an attractive entry point

For investors looking to act on the opportunity in gold, consider:

• Investing in a diversified set of gold mining companies across the market cap spectrum
• Focusing on companies with experienced management teams who have built and sold companies before
• Selecting companies with high-quality development projects in attractive jurisdictions nearing production
• Using any pullbacks in gold prices or gold mining shares as a buying opportunity to build positions
• Adopting a long-term investment horizon to benefit from the upward trend in gold prices

The roundtable discussion featuring Alex Black and Hugh Agro laid out a highly compelling case for investment exposure to gold. With gold prices breaking out to the upside in an environment of increasing demand and constrained supply, the precious metal is reasserting its historic role as a store of value and hedge against risk.

While geopolitical and economic risks abound, the overall picture is one of a rising tide for gold prices, which should disproportionately benefit the stronger mining companies with seasoned management teams, attractive projects, and the ability to execute. Depressed valuations in the space after a long period of underinvestment only enhance the opportunity for investors to take a selective, long-term approach. While responsible mining and ESG issues remain an important consideration and risk factor, the industry has made major strides and the best companies are focused on the right things. As the gold bull market gains momentum, now appears an opportune time for investors to be building exposure.