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The Denver Gold Forum should be a happy, happy place, what with the precious metal on a multiyear run to levels above $1,700 (U.S.) per ounce. But the forum is not a convention of hoarders of coins and bars; it’s an investment conference for the companies who pull the stuff out of the ground.
And since gold-producer equities have badly lagged gold’s gains over the past couple of years, there was less celebrating, and more head-scratching and soul-searching, in Denver this week.
Even Franco-Nevada Corp.’s Pierre Lassonde, known widely as an off-the-charts bull on the gold price, titled his talk “The best of times, the worst of times” – with gold prices the former, and gold equities the latter.
Why the disconnect? Well, as one company’s director of investor relations explained to me, it wasn’t so long ago that the typical buyers of the stocks were gold bugs who preferred production capability to profitability.
They believed the mineral itself would inevitably rise, taking care of profits for the companies mining the most gold.
In the past several years, however, investors who care about real return on capital and maybe some dividends began getting into the sector.
It’s taken some time for the companies to adjust their message – and their results – for the new reality.
Mr. Lassonde has several explanations for equities’ woes. Costs are rising as companies pursue lower-grade deposits. The return on a dollar invested in exploration has been on a multidecade decline, even with recent record gold prices. And there have been no major gold strikes to get investors excited.
And the “best” reason, he says, lies with the sell-side equity analysts covering the gold stocks. The analysts, he says, have been forecasting flat to declining near-term gold prices. By contrast, oil and gas analysts forecast rising commodity prices for the producers they cover, he says.
“Twenty to 25 per cent of our cost is energy, so both are saying we’re going to have margin compression. Why would you want to own any stock of any company that has margin compression and the commodity price going down?” Mr. Lassonde’s message to analysts: “Either you hire Nostradamus, or use the spot prices.”
Nick Holland, the CEO of Gold Fields Ltd., put it another way. He urged his peers to “stop kidding ourselves” by reporting “cash costs” of mining gold that are $400 to $500 an ounce.
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