Why Investing in Gold & Copper Miners Now Could Generate Substantial Returns

• Sean Roosen and Oliver Turner discuss the current gold market and investment opportunities
• They believe the gold price is high but gold equities have not responded accordingly yet
• Keys to success include acquiring quality assets, especially during downturns, and having an experienced management team
• Copper and gold are seen as the most attractive metals currently from a fundamental perspective
• Investors should be patient, invest in good assets and teams, and expect strong returns when capital flows return to the sector

The gold market is currently in an intriguing position, with a high gold price that has not yet been reflected in the share prices of gold mining companies. In this article, we examine the perspective of two successful mining executives - Sean Roosen, Founder of Osisko Group, and Oliver Turner, former analyst and current executive at Karora Resources. They share valuable insights on the current market dynamics, how to evaluate gold mining investments, and the keys to generating strong shareholder returns in this environment.

The Current Opportunity in Gold Equities

Both Roosen and Turner emphasize that while gold prices have increased substantially, gold mining equities have generally not responded accordingly.

Roosen notes "The excitement is that I don't have to worry about the gold price going up, it's already gone up. The question is when are we going to see the equities respond, which I think is a far easier problem to solve.

Turner echoes this, saying, "We've arrived at this wonderful year that we've been talking about for the last 15-plus years when it comes to the gold price, and the equities haven't responded to the way they should yet. But of course, they will, once some of these financials start to flow through to the broader markets' optics.

They believe this disconnect currently provides an attractive opportunity for investors. With the gold price at high levels, gold miners are poised to generate substantial free cash flow in the coming quarters. As Turner explains, "Fortunately neither of us are involved with those [struggling projects], and obviously, we're in a different bracket being a producer that's generating cash...as margins start to expand, or let's just say as some of them even just start to turn into making money rather than just continuously losing money."

As this cash generation becomes evident, they expect generalist investors to take notice and capital to flow into the sector, driving gold equity valuations higher. However, they caution investors that they need to be selective in choosing which companies to back.

Importance of Asset Quality

One of the key themes that emerges is the critical importance of asset quality. Roosen emphasizes "It starts with the quality of your project. If you don't have a good asset, the cost of capital is not going to be there for you."

He cites the example of their Canadian Malartic mine, which Osisko started by acquiring for under US$1 million when it was an orphaned asset. They then consolidated the land package through over 20 additional deals before eventually building it into one of Canada's largest gold mines and selling it for over US$4 billion.

Turner also stresses the importance of acquiring "True Synergies from at the operational level" in M&A, not just "cost-cutting" synergies. In Karora's merger with Westgold, he highlights the value of Westgold's equipment and capabilities to accelerate the development of Karora's Higginsville assets as a key rationale. The message is that while the gold price provides a strong backdrop, investors still need to focus on assets that can be profitable through the cycle based on their fundamental attributes like scale, infrastructure, and cost structure.

Acquiring Assets Counter-Cyclically

Roosen also points out that some of the best opportunities to acquire quality assets at attractive valuations are during downturns when others are selling."My strategy in imperfect markets is to focus on M&A and try to get discounted assets. We built Canadian Malartic. We got that for $8,888 out of bankruptcy, and Barrick had sold it in 2003 for a dollar. But I ended up doing 20 more deals to consolidate that land package, which is now hosting 33 million gold ounces.

Turner shares a similar strategy, noting Karora's acquisitions of the Beta Hunt mine and Higginsville mill out of distress: "People took a big groan - 'oh Beta Hunt that's a legacy asset with a lot of issues', 'oh Higginsville that's something that the prior company couldn't make work', 'what are you guys doing as management teams?'. We think in terms of three, five, seven-year-long strategies. We look at the asset base, we realize there's a whole bunch of hair on it in the current environment that we live in today."

The takeaway is investors can get ahead by backing management teams who have the courage and long-term vision to acquire fundamentally sound assets when they are out of favor, and the capability to then optimize and build value over time.

Betting on Proven Management

Asset quality is necessary but not sufficient in isolation - it must be combined with an experienced, proven management team with a track record of creating shareholder value. As Roosen colorfully puts it:

"You need a good jockey. A fast horse is not enough. No good jockey is ever going to show up with a bad horse. The reason that they're a good jockey is because they're pretty good at horse selection. That combination of the jockey and the horse, and being able to manage all the things that are going to happen during the race, is also the key thing if you're looking to invest right now."

Turner shares the sentiment, noting how their management team was able to deliver solid returns for shareholders in previous roles at Klondex Mines, Karora and new lithium spin-out Kali Metals despite a challenging market environment:

"Where Karora started, that's a 74% return. Paul and the team prior at Klondex printed a plus 800% return for shareholders. So to Sean's point about teams that have done this multiple times - it's horse and jockey. And when we first entered at Karora, people took a big sigh - Beta Hunt's a legacy asset with a lot of issues, what are you guys doing? Pay attention, see where Sean and his team go next, what they do next. See where we go next, what we do next, and back those teams.

Focus on Copper and Gold

When evaluating the outlook across metals, Roosen sees copper and gold as the clear winners in the current macro environment.

On copper, he notes "It doesn't matter which scenario you look at, copper is a winner. The critical minerals business is sort of a variation on traditional metrics and themes." Turner agrees, calling copper "just a simple math problem - it's the most basic math problem out there. If we're going to achieve any of the energy reticulation goals that we have, and this doesn't have to be EV dependent whatsoever, you just talk about the advent of AI and just the gargantuan amount of power that's needed for these operating centers... No matter what, we need a lot more of this metal."

For gold, Roosen highlights increasing central bank buying due to geopolitical risks as a key driver:

"Central banks are buying gold because the threat of sanction out of the US system right now is pretty widespread. Central banks are hedging away from the US dollar system, and you can't. If you take physical delivery of gold, it's hard for somebody to sanction you on the value of that."

Turner points to the potential for a "violent uptake" in gold equities when generalist capital returns to the space: "The investable universe, relative to our sector, the investable universe in mining, let alone gold stocks, is a pimple on the back of the US capital system or global capital pools. If and when, or I'd say when not if, that capital decides to allocate 50 basis points of portfolios into some of these leveraged gold plays rather than just physical gold, it is a very, very violent uptake and it's fast, it's fast capital flows and it's fun to be a part of."

The Investment Thesis for Gold

In summary, Roosen and Turner make a compelling case for investing in gold miners currently:

• The gold price is at high levels but gold equities have not yet responded, providing an attractive entry point
• High gold prices will drive significant free cash flow generation for gold producers in coming quarters, which is not yet reflected in equity valuations
• Generalist capital is likely to return to the sector as this cash flow generation becomes evident, driving a strong re-rating of gold miner share prices
• Copper and gold are the most attractive metals to be exposed to currently based on fundamentals

To capitalize on this opportunity, they advise investors to:

• Focus on assets that have fundamental attributes to be profitable through the cycle
• Back management teams with long-term vision to acquire good assets counter-cyclically when they are out of favor
• Look for management with a proven track record of creating shareholder value
• Be patient and invest for a 3-5 year horizon, not short-term trading
• Expect very strong returns when generalist capital returns to the space

The combination of high gold prices not yet reflected in equity valuations, the prospect of significant free cash flow generation as those prices flow through to producers' bottom lines, and the potential for a strong re-rating as generalist capital returns to the sector makes a compelling case to be investing in gold miners currently. By focusing on quality assets and proven management teams, and having the patience to see the thesis play out, investors can position to generate attractive returns from the opportunity in gold miners over the coming years.