Evolution Mining (ASX:EVN) executive chairman Jake Klein has long been known for his conservative views on growth in the gold sector and mantra of “quality over quantity”.
As the boss of Australia’s third biggest gold miner, he used his Diggers and Dealers presentation yesterday to warn that valuations “too good to be true” are emerging from stock markets to the property markets to, in particular, “green metals”.
As other miners chase commodities that will take centre stage in the electrification and decarbonisation super-narrative, Klein says gold remains a good bet as cash-printing, stimulus addicted governments accumulate trillions of dollars in debt to help their economies limp clear of the pandemic.
With the risk of currency devaluation, he said bright times could be on the way for gold as a store of wealth.
As news emerged of negotiations for the resources sector to be able to dole out vaccines privately to workers, potentially ahead of the general population, Klein, who is locked down in Sydney, has also joined calls for a cohesive strategy from the Australian Government on how it will achieve an 80% vaccination rate.
Stockhead spoke to Klein after his talk via video link at the Kalgoorlie gabfest yesterday.
You were critical in your Diggers and Dealer presentation of the low vaccination rate in Australia and clearly frustrated about the lockdown at your home in Sydney. Is it up to business to put pressure now on the Government to get it moving?
“We were leading the world when there was no vaccine and now we’re laggards of the world when there is a vaccine.
“The complexity between the State and Federal Governments seems to have made the vaccine rollout very cumbersome.
“I think it’s up to everyone. If you want to return to normal life you have to get everyone vaccinated.
“If you look at the stats in the US and the UK I think an 80% vaccination rate is aspirational but some people just don’t want to get vaccinated.
“In the US they got to 60% and they’ve just plateaued because of people who are reluctant to take a vaccine.
“I just think there needs to be more clarity, leadership and vision from the Government that is both pragmatic, practical and realistic.
“If that means people who are vaccinated get more freedom than those who aren’t vaccinated, then maybe that’s the outcome.”
Where do you think the gold price will be going given where the global economy is heading?
“I think stock markets and property markets are at all time highs and don’t seem to be pricing in any of the risk of setbacks which we are currently confronting, which seem to be now and present.
“When you’ve got a market that’s priced for perfection there seems to be much more downside risk than upside, and in an environment where the world isn’t as bright and shiny as people are now pricing into the market, there will be headwinds.
“Gold will outperform and people will head back to that space and head back to a store of value like gold.”
Has that been borne out by frustration about where the Evolution share price has headed over the last few months given the gold price is still relatively strong historically speaking?
“Gold stocks are generally 30% down off their highs 12 months ago, as is Evolution. We were at a historic high and the world was at a historic low, I suppose.
“I think there’s been an overreaction and I would say most portfolios are underweight gold exposure. When and if those risks start to become more front of mind for portfolio managers they will reweight towards gold stocks.”
You were critical of the valuations of battery metals companies and you brought up the dot com boom comparison. Do you view it as a bubble?
“There’s definitely a lot of money chasing opportunities. Some are going to emerge but some are going to fail.
“Based on the presentations I saw yesterday and what I’ve read, there’s still a big gap where the valuation matches the future promise rather than the pathway to delivery of that promise.
“There’s a lot of capital to be invested before the returns are generated for those companies and investors need to be cautious in scrutinising the quality of the opportunity.”
With the Kundana purchase you’ve chartered a path to 1 million ounces over the next few years. The Mungari asset it’s being paired with has been a recent underperformer. Why was buying Kundana a better option than selling Mungari?
“It was an option available to us, but when we looked at the opportunity we do have a very efficient mill. We know the area and the geology and during our due diligence we became enthusiastic about the potential not only to mine higher grade ore in the existing resource-reserve envelope of the Kundana JV, but also the exploration and discovery potential.
“On the million ounces, gold miners only tend to talk in ounces of production, but I think what would be better to talk about is the amount of money we’re making per ounce.
“You’re better off making double the margin and double the cashflow at 500,000oz than you are half.
“That’s something all the presentations seem to overlook. We all talk about production growth but we don’t actually talk about the quality of production.
“Sometimes it feels like we compare a Maserati to a Volkswagen and say they both go the same place, but one’s a lot more expensive than the other, and a lot more powerful and prestigious.”
We said five, but just a follow up: As the gold price goes higher have gold miners just been willing to accept higher costs?
“We’re an industry that has a capacity to accept that we’ll compress the margin, even when the gold price is going up.
“When the gold price is going up generally there’s inflation and there are cost pressures. I’ve been a long-time advocate that we are better off focusing on quality and not quantity.
“Analysts and investors are focused on it, so we should be. As you get to that (quantity) you tend to mine at a higher cut-off grade which gives you a higher cost base.
“So if the gold price went down by $300/oz there’d be a lot of mines that would be in real trouble in Australia today, so we keep saying the same thing that we want to build a business that can prosper through the cycle.
“Even though the long-term trend is up, there is volatility and you don’t want to be caught short if you keep on chasing the gold price. It hasn’t worked in the past and there’s no reason it will work in the future.”