Global X's Ashby: Gold Explorers Vs. Miners
December 11, 2012
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[This article previously appeared on HardAssetsInvestor.com and is republished here with permission.]
Alex Ashby is a research analyst at Global X funds, a New York-based provider of exchange-traded funds. One of the company’s products is the Gold Explorers ETF (GLDX), which is tied to the gold exploration industry and has $42 million in AUM. Ashby provides research and analysis for the suite of Global X ETFs through investment cases and other materials. He is also active in new product development for the firm. HAI’s Sumit Roy recently spoke with Ashby about investing in gold explorers, which he described as the venture capital of gold.
HardAssetsInvestor: Why have gold miners consistently been underperforming gold in recent years?
Alex Ashby: It’s an interesting divergence that we’ve seen there. If you look at the performance of the physical commodity relative to the miners—whether it be the larger-cap miners or the juniors or the explorers—it’s definitely outperformed significantly in the past few years. Looking at the longer-term trend, however, the miners are at a lower valuation and the divergence is more significant than we've seen historically.
There have been difficulties that have been facing the mining industry, and you don’t have that same exposure with the physical commodity. The miners have had to deal with escalating costs and capital expenditures and that sort of thing. This is partly why some investors have moved toward the physical commodity and out of the miners and explorers. Moreover, the new ETFs and products out there have made it much easier to invest in physical gold. Some people who used to get their gold exposure through the miners are now getting their exposure through these physical ETFs.
But it’s a trend we think will eventually revert back to the historical mean or the average. And right now, a lot of people are seeing opportunities in the mining companies as a result of that recent underperformance. It’s also important to note that the tax treatment of a physical gold investment is different, as these investments are treated as collectibles and subject to higher tax rates than equities. Physical gold investments also do not provide income in the form of dividends, which is something that investors may receive with an allocation to the miners and may be appealing in this low-interest-rate environment.
HAI: Speaking of those costs, what’s the most difficult cost for gold miners to manage?
Ashby: Costs related to personnel have been difficult to manage. There’s a lot of difficulty in the industry at the moment in terms of finding the qualified personnel at levels that are cost-efficient for the companies. Capital costs have also increased, and significant capital is required to develop a mine and maintain high levels of production.
The other issue where there's a lot of uncertainty is taxes and regulation. We’ve seen in a lot of different countries in recent years, higher tax rates and changes in policy, where there’s pressure on some of these governments governments—especially emerging markets or developing countries—to extract a little bit more in taxes from these international companies that are operating mines within their borders. There’s definitely uncertainty with regard to the tax situation in some of these countries. And maybe that’s part of the reason for some of the underperformance recently as well.
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