BlackRock, Inc. (BLK) Earnings Call Transcript & Summary

Hello, everyone, and welcome to another 121 Mining Investment online discussion. I'm very pleased to be joined today by a fantastic panel of investors with Board expertise across the natural resource and other sectors, of course. We're going to be getting some feedback on how investors are interpreting the economy at present and in turn, to have a better understanding of -- for metals and mining projects. I'm pleased to be able to draw on the expertise of Cailey Barker, Director of Natural Resources at BlackRock; Caroline Donally, Managing Partner at Denham Capital; and Gervais Williams, Senior Executive Director and MD at Premier Miton. So thank you for joining me today, everyone.

Let's start off with looking at the basic -- the macro theme. How long do you think this recession is kind of run for, if indeed, this is different from other economic conditions that we've seen before. It seems to be hitting consumers rather than the factories first. Yes, China, we already hear this week, it seems to be coming out and restarting things and restarting their economy. So I just want to get a touch on what's the global view at the minute from your side? And I guess we'll just go around houses. If we can start with Cailey, what -- starts off, please?

Thanks, Adam, and thanks for having me here. Yes. Well, I think my view might change on a daily basis, depending what data we get out and there's no real playbook for what we're experiencing, right now. So it's very difficult to predict what the future may hold. I think if you'd have asked me a month or 2 ago, I probably would have been far more downbeat. And I would have said that this thing would be -- we would have had way more impact and over a longer period of time. But what we're seeing now certainly if we believe all the data we analyze, then the number of deaths per country is not -- let me take the U.S. for example, perhaps not a million. So it's not as bad as feared, but it's certainly up there. So I think the overall impact on the economy and what is a humanitarian problem is probably somewhat muted relative to our previous various expectations. But I would -- but I've also come to the conclusion over the period this time is that it will drag on further. We will most certainly get, albeit maybe more localized, but certainly second and third waves. So probably not as bad as feared, but going on longer, and it may take time for us to come back to some level of normality through all of this. And I certainly see that taking up most of this year and perhaps a good chunk of next year as well before we get back to levels, I suppose, the hope is that there is some kind of lessons we learn out of all of this, and that there will be some changes. I think the broader message that I think that -- it is pretty bad. Things will be down. GDP will be affected. But signs of life, as you mentioned, China is picking up. And I think economies will bounce back relatively strongly in some areas, but it will be a choppy market as we go through that.

And do you think some regions are going to come back quicker than others? Well, we know for sure in terms of who's past the peak of this current wave. But what's your sort of take on the situation with the U.S. at the minute, for instance, and there's huge unemployment that's come about of this. And obviously, China is hard to sort of gauge because there might be difficulties in the data or consistencies in what's actually reporting and what we're hearing. But what's your view in terms of the different regions in the U.K., for instance, coming out of this?

It's going to be very tough. I mean we haven't had us -- if we go back to the GFC, that was a situation where it affected a small number of sectors in comparison. This is just in everything across the board in different time scales. I think the big powers, the U.S. and China, we -- hopefully, what we're seeing in China is that an indication of what the future may hold down the track for the U.S. in the next few months and that things will certainly come back to level of normality. But I would come back to my earlier comments that there will be fallout from this. And there's obvious sectors that will be affected like the airlines, for example. We know that, that's going to take a lot longer to recover. But I think our sectors, in particular, will be -- will recover quicker. And we've already seen that as some countries obviously deem mining essential. And we've seen operations start to ramp back up to levels that were enjoyed previously.

Yes. Let's come back to the mining more specifically in a minute. I'll just jump over to Caroline. You're over in Houston. What's the mood like there? And what's the view from Denham at the moment in terms of these -- the big picture that we've been touching on.

I think the U.S. is almost a bifurcated tail end that you have New York, and that's obviously a hotspot, and there is -- I rather -- I don't want to call it a crisis, but certainly, things are very challenging in New York. And then I think you almost have the rest of the U.S. And if you look at the infections and the death rates, et cetera, it's much, much lower in other parts of the country. So here where I am, restaurants have opened back up, admittedly only a 25% capacity, but people are going out and about. Retail stores have opened up. Personal services like barbers and hair salons and things like that have opened back up. So we're actually starting to see quite a lot of activity come back into Houston. I think for a city like Houston, which is very much oil-based, that, to me, is going to be the major swing factor as to what happens to this very localized economy and then how that impacts the rest of the U.S. When we had the GFC, there was obviously -- as Cailey said, there were different sectors impacted, but you didn't have oil at such a low level. What we have here appears to be unemployment is sky high and that seems to be a more short-term issue, except for things like airlines, which in the new normal, those sorts of things may have a completely different outcome. But for retail and consumer-style goods, I think as people go back to work and start doing what they were doing, those will pick back up to their regular levels. Then you have the benefit of the cheap oil price and your ability to move goods and services, electricity is cheaper. And everything that goes with that, logistics, transport, et cetera, and I think it's going to be very interesting to see how that all plays out, along with the large amounts of money, which have been pumped into the economy, in a time when, frankly, the banks are in sort of reasonable shape. The banks have been through the GFC, come out the other side, obviously met liquidity ratios, et cetera. So you have an interesting dynamic here of banks in good shape, lots of money coming back into the market, economy is starting to open up in parts in the U.S. and then a very cheap oil price and how that feeds into business moving forward. So it's going to be interesting to see how those dynamics play and how this all unfold.

Yes, definitely some key points there that I'll come back to you on the lending side and also on the oil side. But Gervais, just to get your quick take on the big picture as well. How have you been seeing things here from London?

Yes. It's interesting because I've been sort of waiting for this moment, not because I wanted a pandemic, obviously not. But I've been -- we've been in a period of globalization, which lasted for about 20 or 30 years. And more recently, we've been in a period of sort of globalization coming to an end. We've seen quantities distorting market prices. We've seen a lack of productivity. We've seen people not getting the wage rises, they're not used to. And as a result of that, we've got to a stage where the election or voting in much more nationalistic governments. And I think this is what's been the pattern anyway, irrespective of COVID. I think COVID has probably accelerated the change. So what we have now is, unfortunately, a global recession, which I think will catch an awful lot of businesses overgeared. So I think there'll be quite a lot of companies which get caught out financially. I think quite a lot of companies go bust, particularly private companies. I think there'll be quite a lot of bad debts around. I think governments will continue to throw money at the markets as they are now. But I think banks will start putting the cost of debt up. I think specifically, you'll find that banks are much more prudent in their lending policies as they don't want to get defaults going forward. As a result of that, I think we've got a sea change actually. I think this is a major change. I think unemployment will be much higher after this. It won't just go up. It won't come down as much as people think. I think globalization will be a thing in the past. I think, specifically, global growth will be very weak in the next 10 or 20 years, maybe some recession, some growth, but not very much either. And overall, I think we're in a major change of trends. And specifically, I think things like commodities, strange enough, are going to get more important. You can throw notes of all fiat currencies at this thing. But in a way, all that you do is you devalue money relative to real things. I think real commodities will start to become more important. I think mining companies actually may be well placed for this uncomfortable future.

Yes. So systemic change, but not necessarily a bad period for mining and metals. I mean -- but what about -- how would you address the fact that supply and demand shocks have happened simultaneously, particularly in commodities, metals and mining? You've got forecast being rapidly revised lower. Where does the institutional money -- how do you view those forecasts? And yes, it could be a good period for mining companies, but would it be a good period for all mining companies, given those supply and demand disruptions?

Sadly not. I mean, as I mentioned, I think there'll be a lot of companies going bust. I think as we've seen, commodity prices have been flying around. If you take out the precious metals, a lot of commodities have come down considerably. Unfortunately, it could come down considerably more depending on how bad the recession is. But I do think that leads a Darwinian process where a lot of marginal players unfortunately go out of production. Many other companies, which are probably viable businesses, go bust because they're overindebted. And so I think those which are listed can take their assets from the overindebted for knockdown prices, put some working capital and get some very quick cash payback. So I think the win (sic) [ winner ] win bigger. I think the losers lose worse. But ultimately, you get quite a lot of capacity coming out through the Darwinian process.

Yes. I'll come back to that in a minute in terms of who those winners and losers might be. But Cailey, do you agree with the sentiment around this Darwinian process is going to be reshuffling exactly who's going to succeed and who's going to endure this? There's some chat yesterday about -- on the panel that I moderated, it was around resilience. Wasn't aware that [ turned up a lot ]. Are the resilient companies really going to shine through? Is it going to be quite clear who those are going to be, particularly to mining metals?

Yes. I think we've already seen that really in quite a lot of regards. The big guys in both gold and on industrial metals and diversifies, we've seen them outperforming a lot of their mid-tier and certainly junior peers. Some of that, we've seen some of that reverse. But I think that's a fair reflection of how they're handling the crisis. If you think of the sins of the past, where companies were overindebted, and they've learned those hard lessons pretty well ever since we bounced back from, what, 2016, I guess it was. And to Gervais' point, the indebtedness of a lot of companies in a broad number of sectors hasn't really applied to particularly the major mining companies. It's more the junior companies. They need, as I say, the [ money ] for exploration or they're in development phase that they need access to capital. And that capital is few and far between. I mean we have seen evidence that there is some access to it. And if you've got a good project and you run your company well and you're well positioned, then you've got a good chance of getting your hands on it. But we're -- as I think Gervais eloquently pointed out, it's a big industry, and there will be fallout from that. And I don't think that Darwinian process, as he put it, is a bad thing because we have 4 supporters of good companies, good citizens. And I think broadly, across the mining space, particularly looking at the big guys, they've handled themselves excellently. I think if they've perhaps been more promotional and message themselves more operationally, they could be showing themselves in a fantastic light that they've been extremely good citizens and handle their business phenomenally well throughout this crisis.

Yes. And do you think that's the big, big mines across all commodities, not just the sort of Barrick, Newmont, who are doing well with the gold price in a minute. You mean across Rios, India, Vale and other large caps?

Yes. I mean obviously there's exceptions to the rule and some doing better than others. But on the whole, absolutely. I mean I speak to a large gold company today. And they made the head of one of their operation or key operational areas are native, the native people that are very vulnerable to the virus. So they closed down those operations and move them out early. So that's just sort of anecdotal evidence that I think they've been handling it very well. They've been following government guidelines, which not all of us had in London, and they've been using given -- using the opportunity to follow their other themes that they've done for decades, but not necessarily message that well of sustainability and social license and all those other important things that come along with mining that have not always highlighted as perhaps well they should be.

Caroline, do you -- what's your view on the sort of consolidation of the Darwinian process in the sector at the moment? And also, how might private equity react or respond to that in terms of your sort of -- your long-term view that often you talk about? Does this really dramatically shape that up? Is there an even longer-term view, having to take now in terms of getting your portfolio companies to where they need to be resilient in this situation?

Yes. Adam, I think there's a -- there's almost a bifurcation in the market. You have the major miners who, as Cailey said, sort of 4, 5 years ago, discovered that it wasn't production for production's sake. It was actually production for cash flow's sake. And a number of companies cleaned up their balance sheet, sold off noncore assets, made sure that the ounces they were producing were generating positive cash flow, which meant that coming into this pandemic, those balance sheets are actually in pretty good shape, and they can afford to withstand the downturn and they have access to capital in the form of their revolvers and longer-term debt because they spend all those years cleaning up the balance sheet. Then on the other hand, you have the juniors who, frankly, have always relied on more of the sort of retail market in order to raise their capital. And as we, at Denham, have been saying for a number of years, we're starting to see, and we've seen it more and more, that capital is formed in the junior market just in a very different way. The retail investors who frankly used to provide all the capital for the juniors across the board are no longer there. Yes, I think there are some bright spots here and there admittedly. But across the board, those retail investors are just not putting their money into mining. When you look at the S&P and you can buy an index and it's flying, frankly, why would you take the junior mining risk. So what we're starting to see is more private equity coming into the space. Obviously, there's royalty streamers. There's those sorts of groups who have been around for a while. But I think we'll see private equity doing more deals, we'll see more club deals amongst the private equity funds where the funds team up and do deals together. We've seen part of that here and there, but not a huge amount. I think we'll start to see more of that going forward and less of assets being funded fully in the public market. To Cailey's point, there are exceptions to all these things. So over the recent past, we have seen development capital raised from certain smaller mining companies. We've also seen, in some instances, shareholders providing debt alongside the development equity in order to get the assets into production. So that's a bit of a change where you've almost got public market investors acting more like private equity and investing across the capital structure. So I think those examples are few and far between. This is -- I don't see that as being a broad-based answer to how do juniors move their projects forward.

Yes. Yes. Surely, with precious metals or with gold looking to be the sort of safe haven asset at the minute, that might trigger a little bit more activity on the retail space or in the public markets in terms of gold, maybe mid-caps in? And then also with that, does that -- do you feel that this could trigger another growth period of M&A, actually, off the back of that as well?

Well, we've seen an immense amount of M&A in the gold space just over the last couple of months. There was a merger of equals announced yesterday. There was a takeover. There was a bit of a bidding war going on for Guyana Goldfield. So there's a lot of activity in the, call it, mid-cap space in the gold market. And when you have the gold price over $1,700 an ounce, and you have the Aussie dollar, it's like $0.62, and you have the Canadian dollar at $0.71. I mean it's not surprising. The gold price in Canadian dollars and in Aussie dollars is sky high. So I think we will see more of there. It does remain to be seen, though, whether any of that trickles down into the more junior developers and explorers as they try and move their projects forward.

Yes. Gervais, you've got, obviously, a knack for picking small caps in the resource space. Do you think that some of that capital is going to come down to the smaller, the junior mining companies? And whether that's gold -- sorry, gold juniors or other commodities, or perhaps that's not so much the case right now?

Yes. I mean I think the area which is doing well at the moment is very much precious metals, not just gold, silver, platinum and others. And there are some smaller quoted companies. I think what's interesting about the globalization process is that actually most investors have narrowed their investment universe. The professional investment universe has actually often might break up to mid and large caps, and they have a large number of different holdings across the world in this area. And if anything, I think smaller, small quoted companies, small mining companies, particularly, have actually found it pretty difficult to exist over recent years. And in fact, the London market, it's quite unusual. They're still having a vibrant universe of small and micro-cap companies as well as mid and large caps. And there are some small gold companies in there, and there are some other companies in there and other assets as well. I think going forward, I think world growth is stagnating, if we don't get much global growth. We won't necessarily find that many of the big companies produce much return because there's not much world growth. Then you will find actually investors start becoming more alpha sinking. BIT is not doing it for you. You're going to need to move into individual companies which excel, stop picking in the old fashion way. And I think that will bring actually more interest into some of the small quoted companies, not just because they're small and they sometimes get lucky. But actually, if you are going to ping an asset which has gone bust, you're going to raise some cash, bring it back into production, you need to put some working capital in. Sometimes, if you're in the middle of a recession, you make out like a bandit on that. Sometimes, it's good for big companies which do that, but they're quite big and small acquisitions that don't make much difference. But for some small companies which do it, it could be transformational, and they generate outstanding returns. And this is what happened in the '70s and the '60s before globalization, and this is why small companies actually outperformed. They put cash in, they got transformational returns, and they generated more cash payback, more dividend growth than the main market. Clearly, we have had dividend cuts on a wide-ranging basis in the U.K., around the world over recent months. And on that basis, we think actually, going forward, that cash and the ability to generate cash paybacks can become more important. Clearly, gold is an area where that's happening now because you've actually got the gold price moving up at a time when the rest of the world is in a bit of recession. But most particularly, I think there will be other assets, other parts of the mining sector, which become in shortage of supply, maybe because of electric vehicles or the ongoing development of all of that. Also because you'll see ultimately better returns. We have a slide, which we can share, which actually shows that if you look at the very long term, since 1955, this is -- since beta was first put together in London in a detailed and regular basis, you find that the smaller the company, the better the performance. Now that's been happening over the last 30 years. But so what, you made out like a bandit in any asset you chose. People didn't need more companies. I think going forward, I think this factor is going to come hugely important. I think there will be money moving down the market cap range. I think professionals, investors will start to get involved. I think private investors, to be fair, there's some which are still involved even in that sector at the moment. So what you can see on that slide is a long period over 60 years, you can see the bond yields at the left-hand side are fairly low. The All Share Index in the middle, about 6.4% per year. And then as you get into the mid-cap, the small cap and the micro cap, the Numis 1000, you can see that you get compounding sort of 4%, 5% extra return per year from the bottom end of the market. And obviously, there's stock picking, which can add value to that, too. So we think this is going to become horribly relevant at a time when actually main asset returns on nearly all assets are going to be pretty paltry.

And what about the liquidity for small caps that's available that -- is that a challenge right now? Or if we're taking a long-term view, do you think it's less of an issue?

I mean whether you like it or not, the whole point about small credit companies is they are quoted. And therefore, the price, you might not like the price, but it changes every day, depending on buyers and sellers. It's not like some of the other forms of investing where you're depending on models and such like. Specifically, we've had [ drip, drip, drip ] money coming out of small companies pretty much 30 years. So if anything, there's been too many sellers, not -- on a marginal basis. And so liquidity has been -- can you get out? I think actually going forward, we'll start to find at certain periods, there'll be periods when people want to put capital in, but there's no one selling. Nearly everyone in the institutional world who wanted to sell is already sold. You've got companies which are successful, which are coming through well. And that will start to lead to [ drip, drip, drip ] more money going in than coming out. And the liquidity people we're worrying about isn't so much that they can't sell. They can sell all sorts of things quite quickly. They'll find actually, they can't get money in. It's a small sector. Small amounts of money make a big difference, transformational return, small companies in the U.S. and other places around the world are starting to outperform.

Yes. Okay. Caroline, what was your views perhaps on that getting out there? What's the private equity view on sort of now? Obviously, you need the exits to keep a healthy sort of environment to keep up the exits? Do you see now as the time just to hold focusing on the projects? Or is it looking for that M&A as yet?

Yes. Again, I think it depends on what stage of the business you're in and the development stage of the assets. I think this is the time when people should try and push forward with their project, to the extent they can under social distancing and other restrictions. But if you're in a company which is doing a feasibility study, like measure it, get it done. There is absolutely no reason to stop at this point. We follow an approach where we bring projects through into production where we have development assets. And we're carrying on with that. The blips and moves in the market for us, frankly, almost, I don't want to say irrelevant, but they're relevant as far as commodity price is concerned. But as we move down a path of bringing our projects into production, provided we can still see good returns at wherever the commodity price may be, we will carry on with those projects. And certainly, my advice -- my personal advice to companies is if you can carry on, and you can push through this, then push through. I think we're very bullish on the copper space and have been for some time. Obviously, this COVID-19 issues had a major impact on pricing. Fortunately, nothing like we've seen in oil. So I think we can all feel quite fortunate that we're not -- we're certainly not in that sector at this point. But we still remain quite bullish on copper. And for those who can continue developing their projects over time, I think in the, call it, 1 year to 2 years, maybe 3-year space, we should see a big pickup in the copper price, which, hopefully, for companies who've managed to carry on is the point in time where they're thinking about coming back into production and looking to raise their construction capital or if they've been successful in raising construction capital are actually coming into production at that point. So for us, it's a case of -- we don't view that now is a particularly good time to sell, but it's certainly a very good time to be continuing with your projects and not putting things on hold whilst you wait to see what happens with the market.

Yes. That makes sense. Cailey, what's the view from BlackRock? Because obviously, a different style in terms of where we see value within different types of mining company? Are you seeing the value, perhaps maybe more in the mid tiers at the minute who've got that development capital in place and cracking over their projects rather than the -- some of the riskier smaller caps that today might -- has been champion?

Yes. I mean, as you know, we invest right across the piece. I mean by virtue of the size of our funds, liquidity is always a concern for us. But we've invested up and down the spectrum, and we have done for the 30-odd plus years that the funds have been running. I mean I think the -- what's most exciting, I think, that I think the big caps will continue to do well. Even if, as Gervais put it, a lower global growth world. It's there. They're in good shape to generate right down the bottom on the cost curve. They're in good shape to generate decent cash flow and pay back shareholders. So I think those will continue to do well. But they have outperformed in the market. And we've already seen a slight rotation into mid tiers. Overall, fund performance has been heavily dominated by growth. We've seen that growth factor investing has really been where the market has benefited for the last 10 years and across all sectors. But there is a gentle rotation into value. And I think that will come into play and would help the mid caps, certainly. I think where we've always held space for, and there is sometimes some misconception that we don't do a lot of small caps. We certainly do, and we always have done. As I said, there's just -- we just have less capacity in some instances, and there's only so small we can go. But what we're very excited about is some of the exploration success that we're seeing across the world. And I think if we're right that there is lower global growth, we don't necessarily need the next, I don't know, let's call it, small average quality mine in the world because we just, quite frankly, don't need the metal, and we certainly probably don't need it in gold. So we don't get -- I don't -- I'm not excited about those kind of opportunities. Developers, we've invested, we've invested over a number of years, helping companies develop their projects. And it's been a very mixed success. Lots of projects have been complete, has asked us to just not coming in on time, on budget, not delivering as expected. And that hurt us in performance over the last few years. So we've tended to move away from that market to some degree, and we still do it, but we -- certainly less emphasis. And we put more emphasis on the earlier stage exploration. People -- companies that are really looking for sort of world-class-type assets in exciting or new frontiers, new jurisdictions, new greenstone belts, whatever it may be. And I think they're getting -- the excitement is that they're actually finding good stuff and getting a reward for it in the market, which we haven't seen for quite a few years. So that area, it just looks very interesting to us.

That's good and exciting. Yes. Are there any particular commodities within that that you're quite bullish on? Caroline remains quite bullish on copper. Is that quite big for you?

Yes. I think copper has got a bit of a haul to come back out of. I don't -- I mean, on the longer-term basis, yes, battery demand will help. Yes. Not finding or not developing large-scale mines that we've enjoyed in the past, I think, will help the copper price. But do I think it's going to go back to the heady days of $3, $4 per pound copper, I think that's unlikely. So I expect to see a bounce from here. I think that's probably the best place of the ore commodities. Iron ore has been incredibly resilient, and that's probably due to some soft correction over a period of time. I think that gold, this is the environment where gold is doing what it should be doing. And we haven't seen that for 7, 8 years. We haven't seen this. So finally, gold's got a response. So you've got to be, I think, you've got to be bullish on gold and the PGMs as well. In some areas like palladium, I think that looks extremely exciting as well. And the battery metals, again, but just -- probably just not -- just now until the economy picks back up and we see EV demand return to some level of normality again.

Yes. I was going to say how much does these automotive you're buying -- purchasing of vehicles, consumer patents are going to change. I'm not going to buy an expensive EV necessarily if I'm on furlough or there's disruptions in the markets for me. And then you have the aviation industry as well, the engines and the metal demand there. How much does that disrupt battery metals, palladium, for instance? And if it does massively at the moment, is that a short-term effect? Obviously, it's hard to say, but do you think -- do you see that as a big alert?