BlackRock’s Gold & General fund manager Evy Hambro warns gold miners they risk becoming “barbarous relics” unless they change their ways.

1st May 2013

Evy Hambro, manager of BlackRock’s £1,640m Gold and General fund has warned the managements of gold mining firms to change their ways or risk becoming “barbarous relics grinding themselves down into the pits in which they operate” as the giant fund marks its 25th anniversary.

Despite this stark warning, Hambro also discussed the recent moves in the gold price and said the ‘opportunity set’ was now phenomenal.

Hambro said his team has been incredibly disappointed by the actions of management within the gold mining companies. He criticised the  “strategies they have followed to force growth in volume ahead of growth in profitability on a per share basis”.

He added: “Without change in the way these companies are run, these companies will end up grinding themselves down into the bottom of the pits in which they operate and will become barbarous relics of the past. They won’t be the gold producers of the future. We need to see management adapt and become much more profitable as businesses, and see management re-establish the link between the gold price and their own profitability.”

Hambro gave three ways for the management of mining firms to bring this change about.

* He said they needed to “shift the focus away from cash costs where the industry has been focused, boasting around these low numbers when the true cost of production has been far higher, leading to disappointment in the minds of investors when thinking about equity investment”.

* He said firms needed to share the profitability of their businesses with an increased ratio shared with the owners/investors of the businesses. “If we can achieve that, then we will truly link the share prices of these companies back with the gold price once again. When the gold price goes up, you will get a higher rate of return. In this market where income is so important to investors, we need to get the yield on the sector higher, and not just as a result of share prices going down. We can achieve that by increasing those payout ratios.”

* He criticised the excessive issuance of equity, something gold mining firms have done for the last few decades. “The way they have been issuing shares to grow and expand has been fairly care-free. These trends are coming back to haunt them. We can restrain them from doing so by attaching yield as a higher function. If you issue shares, that is more money that needs to be paid out, if the dividend per share is unchanged. If we can get that back, we will reduce the amount of equity issuance creating greater linkage to the underlying gold price.”

Despite these tough words, Hambro said that recent volatility had created an “opportunity set that is phenomenal”. He added: “We are seeing gold company share prices re-link with the gold price. We are seeing the beta coming back. When gold mining companies are seeing low rates of profitability, small moves in the price generate huge changes in profitability and the beta has come back and that is very encouraging. Yield is rising. We are already on the journey of rebuilding trust with underlying investors, between them and the management teams. We are not far away, but we need more data points.”

Hambro also added that the phrase “barbarous relic” was applied to gold itself many years ago by the Financial Times, when gold was close to previous low, but since then the asset class had confounded the sceptics. In recent weeks, he said, two forces, paper trades and physical activity had been fighting each other.

“The events of the last few weeks have brought incredible volatility including the largest two day move since the 1980s. The pattern behind that is a huge impact on the market from paper trading in the futures market that has now created massive buying in the physical market. You have these two forces – paper trades fighting against physical activity. He cited photographs from jewellery stores in Asia which are now empty of gold. “The premiums that is being paid for the immediate delivery of gold into the Asian market is now incredible testament to the buying power of individuals when they want to come back to the theme. We are seeing the gold price grinding higher again,” he said.


26 thoughts on “BlackRock’s Gold & General fund manager Evy Hambro warns gold miners they risk becoming “barbarous relics” unless they change their ways.”

  1. Anonymous says:

    This type of event are show a diffrent type of talent.

  2. mickc says:

    But interest rates to borrowers (if they can even get a loan) are not low.

    Putting up interest rates will collapse the economy-similar to the Howe “oversqueeze” of the early 80s.

    1. Forbin says:

      the issue here is if the BoE raises the base rate – will it be passed onto consumers?

      given that

      1, as you state the mortgage loan rate is divorced from the BoE currently

      2, other loan rates and credit card rates seem also to be in their own bubble

      3, Even if it is coupled again , ie 0.5 goes to 1.0% , the rate of coupling will be , what for 0.5 rise or will they plump for a 1.0% rise onto the mortgage rate – stating they are building in a future safety factor ( and Arthur Dent would say ” who’s safety , yours or mine? ” )

      4, What will HMG be paying ? Double the rate means…….???


      1. mickc says:

        Oh, any rise will most certainly be passed onto the borrower!

        There is no risk to the banks in doing so. They just blame the BoE for the problems created- and get bailed out again by the taxpayer if they look shakey.

    2. therrawbuzzin says:

      Indeed, without change in circumstances, new borrowing, or anything which might affect my credit rating, I received a letter from Santander two days ago, stating that it was raising the interest rate on my credit card by THREE PERCENT!
      Bye-bye Santander credit card.

      1. mickc says:

        Many are not in a position to do so! So they are totally f***ed!

        The resentment this is building politically isn’t understood by the Westminster and City elites.

        Dump financial shares before the next election. Labour will win and the City will take a (well deserved) hiding.

        1. Anonymous says:

          I agree pressure is building. But the establishment understand that without the shape-shifting City the UK will be unable to kick the can using fake accounting and will be insolvent.

          This is what’s interesting. Cameron/Milliband can’t come out and say “we have to have huge immigration to shore up the support ratio for fake pension promises” and the boomers are clamoring for their own death warrant via UKIP. Similarly the end of the city will implode the UK, even if it is a cancerous nightmare. The UK is too far gone. The changes required are not politically possible. They will become possible when there is a huge systemic failure.

          1. Paul C says:

            Progrock, decisive commentary as ever!

            Indeed, I believe your broad ranging conclusion hits the
            nails right on the head. The older cohort that are most likely the voters challenged by immigration. In addition to indulged/ignorant to realize that their wealth concentration is from occupying rubbish housing stock that is in very short supply and in addition rentier lifestyle adorned from commanding such “assets”.

            I am entertained to think of Farage, referred to in Italy as “IL Clown” (I was there on Tuesday). What would he actually do if entrusted with the job, he is not dumb. I think he would adopt identical Con/Lib/Lab policies of ineffective border controls because as you say the
            country is too desperate for a support ratio to pay pensions.

            I agree regarding the city, despicable though their recent actions (last 10 years) are, there is nothing to replace this kind of £”value” of services export.

            In an bizarre confluence of self-inflicted wounds and
            antagonistic influences we cannot physically build the homes necessary to shelter the growing population because the construction skills/trades have been lost, by perverse counter, if we did build enough then that could topple high house prices. We don’t need to worry however because the same Boomer/Nimby brigade voting for Farage are voting against any new development anyway.

            The perfect scenario is plainly evident: Immigrants should preferably not be here, however if they are then they must pay rent to boomers whilst working in care homes looking after the boomers, their PAYE taxation and consumption taxes can be harvested to service pensions promises to boomers. It is a perfect circle.

            Regarding interest rates, there is no bigger rock or harder place that that created through the financial repression by concerted western governments. Rates simply cannot rise or there will be a catastrophe. Take a look at Gillian Tett’s article this evening in the FT, she is calling the order of the day.

            Of course the economy is getting better we’ve got
            growth don’t you know?

          2. mickc says:

            Whilst believing the outlook is grim, the substance can be fixed.
            The UKhas to be weaned off house prices as the growth area- more have to be built as all political paries now agree. This will be done despite the nimbys.
            Investment in manufacture must be prioritised, not yet the policy of all, but Labour will prob do so in their manifesto.
            The banks have to be controlled (think Thatcher/unions) ans again Labour will prob do this.
            And Labour will prob win the next election, so a start will be made.
            The giraffe is, i’m a paid up Tory but they are clueless!

          3. Anonymous says:

            Hi, not sure which Tett article you mean. Was the title “Tranquil markets are enjoying too much of a good thing”?

          4. Paul C says:

            That’s right, for all the media would have you believe about a recovery there are those that recognise that this may be a temporary period of tranquility, not a truly reflective position of resolved issues.

        2. Anonymous says:

          Will the city take a hiding from Labour ?

          Tony B didn’t hurt the city. So the next Labour leader (whatever the timescale) might also be more interested in their own “ascent to heaven” with a post-politics highly paid bank job.

          1. therrawbuzzin says:

            “Ascent to heaven.” brilliant!

    3. Anonymous says:

      Hi Mickc and welcome to my part of the blogosphere

      As to the gap between official and actual interest-rates you are preaching to the converted as it was one of my earliest theme on here.

      As to the problems of raising them then actually remain the same. It is always argued that a rise cannot be afforded by borrowers and will lead to economic collapse. As to the Howe “oversqueeze” he did shoot them up! Six months after being elected the MLR had gone from 12% to 17% in what feels like a completely different world now does it not?

  3. Noo 2 Economics says:

    Hi Shaun,

    Why do you feel “open mouth operations” are a failure? Whilst they may have caused confusion when entered into by the IMF they seem to have worked well for the Fed, ECB and BOE.

    For now, I’ll stick with the BOE as that is today’s topic. Without doing anything other than talking (open mouth operations) Carney has managed to talk up the GBP thereby reducing inflation (and somehow increasing exports!). I think this is actually an achievement, he has fooled most of the people most of the time and the UK is better for it.

    I’m now becoming scared by Weale’s comments as I agree a base rate rise now will send the GBP sky high at which time it will be considered a “safe haven” by investors who will pile in and send it into the stratosphere which, will then be followed, with depressing predictability, by another bust, only this time there’s no money left to bail out the banks. Oh, I forgot there are always private savings via bail ins of course – remember Cyprus!

    1. Anonymous says:

      I think the BoE can only create space for political solutions, of which there have been none. By defying expectation Carney is playing with sentiment which, the further you stretch it, the faster the backlash.

      The bottom line is the UK needs low rates unless there is systemic change. This change isn’t politically feasible without a crisis. Therefore there will be a crisis.

      I’ve seen nothing to suggest the UK is in anything other than the eye of the storm. Mix in demographics and you have the perfect storm.

      1. Noo 2 Economics says:

        Agreed, although it will take decades for the end to arrive and when it does, it may lead to a new beginning. Meantime they will try to increase rates slowly over the next 2 – 3 years if for no other reason then to build policy space.

        The base rate has become meaningless to all except the banks as Shaun says the actual borrowing rate used as a reference is circa 2.75% due to bond futures movements which then of course has a premium added to ensure profitability before being retailed.

        1. Eric says:

          I don’t think savers who are receiving very low returns on money in the bank regard the base rate as meaningless.

    2. Anonymous says:

      Hi Noo2

      If we think of this in the way of the Frenchman from the film the Matrix with his “cause and effect” I do not see any mechanism here. So Bank of England Forward Guidance offered lower interest-rates for longer when nobody expected them to rise anyway. Now we have moved into 2014 there have been some voices asking for a rise and futures markets have moved that way. So what has Forward Guidance achieved? Do we believe that people invested or took out mortgages believing this?

      As to the currency as I have said with my “dark side” theory I do give Mark Carney credit for not following the “talk the £ down” mantra of Governor King. But did it rise because of his policies? I think that the return to economic growth which began before he turned up did that. So Mark Carney has been lucky which according to Napoleon is far from being all bad..

      1. Noo 2 Economics says:

        Yes, certainly the man in the street took out his mortgage believing the “lower for longer mantra” in spite of the evidence of loan rates drifting upwards, with the exception of HTB which of course can be used as the reason for more mortgages being taken out and fueling the recovery via rising house prices, which in turn lead to a “feel good factor” over the last 7 or 8 months.

        I agree the recovery started as Carney arrived 10 months ago but it could have easily fizzled out towards the end of last year had he messed up on Forward Guidance. Sure, futures are expecting a rate increase as I have been since last November but I am discussing the man in the street who watches/reads/listens to msm and the only messages from the msm is “lower for longer”. As for investors, we usually do our own research so Forward Guidance was never going to work on us, but then I believe it was only ever aimed at the man in the street as it is he who will push the economy forward through spending slightly more and creating an increase in aggregate demand.

        Obviously we are in disagreement but I will leave this thought – would the average person, having suffered below inflation wage rises over the last 6 years, have taken any kind of mortgage with expectations of having to pay more interest on their loan in the next 12 months?

  4. Eric says:

    Hi Shaun, 25 bps would be a 50% rise. Why not 5 or 10 bps? If we are now on dangerous ground (timing wise) then why not start really small. And just because the rate starts to rise doesn’t mean it should automatically continue. We could end up at 1% for a couple of years (for example). Mark could even put that in his forward guidance – the policy I mean, not the 1%.

    I’m just not sure about the “output gap” – it could very easily be a mirage caused by exceptionally loose monetary policy. Calling .5% an “emergency” rate was a mistake; it caused fear and doubt in the minds of nearly everybody – confidence remains low 5 years on.

    1. Anonymous says:

      It wouldn’t because nobody borrows at the base rate.

      1. Eric says:

        I don’t understand pogrock. What wouldn’t?
        I’m clumsily saying because the rate is currently .5% then any rises could be in smaller increments than .25% per quarter . The rate could be nudged up (to quote Shaun) not hiked up.

        I’m not making any assumptions about what rates of interest people borrow at; although I guess when the base rate does start to rise bank mortgage rates will rise faster than savings rates.

        1. Anonymous says:

          Sorry it was a terse reply. I mean that as nobody actually borrows at the base rate a 0.5% increase, although a 100% increase on the base rate, would be a significant but smaller % rise on loans the public can get at 4% or whatever it is nowadays.

          I’m sure you are correct that saving rate rises will lag mortgage rate rises. However I think they won’t raise rates until forced by the US. Plus the UK can’t raise rates as we have a hollowed out turd of an economy.

          1. Eric says:

            Hah, thanks. When I wrote the first comment I had it in mind that when the MPC finally decides the time is right to start to raise rates they would not want to frighten all the king’s men and all the king’s horses. Just think of the effect on the £ if Carney’s “guidance” suddenly implied that the rate would be 1% higher by this time next year.

            The MPC really have painted themselves into a corner.
            Trapped by a hollowed out turd indeed!

  5. Anonymous says:

    Hi Forbin

    At the moment both official consumer inflation and wage inflation
    give the Bank of England an excuse for “masterly inaction”. They will get a bit of time on this as April’s wage data will be influenced by last April’s surge where bonuses were shifted to miss the 50% income tax rate. That will likely buy a few more months…

    The independence argument pretty much went when the Bank of England had to ask the Chancellor’s permission to undertake QE by buying Gilts. But should they wait until after the election to raise base rates then another nail will go into what is already a pretty full coffin lid!

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