Pierre Lassonde’s Keynote Address at the Denver Gold Forum (September 10, 2012)

Hosted each September in Colorado, the Denver Gold Forum (DGF) is the world’s most prestigious precious metal equities investment forum. The Denver Gold Forum showcases four-fifths of the world’s publicly traded gold and silver companies when measured by production and reserves.

For a video presentation of the speech, click here: http://www.gowebcasting.com/events/denver-gold-group/2012/09/10/keynote-address/play/stream/5084

Pierre Lassonde Speech

Thank you, Tim. It’s a great pleasure to be here. I’ve been coming to the Denver Gold Show for as long as it’s been around, so 20-some-4 years, I guess. And it’s always one of the preeminent forums for our industry.

So, I thought what I would do today is I’ve entitled my presentation “It Was the Best of Times, It Was the Worst of Times” and it has to do, really, with where we are in the industry. When you look at the last 30 years, if you want, this bull market in gold started in 1971; gold went from $35 to $800 in the 70’s.

You can see it took about seven years for the industry to respond, but then respond it did. Production then more than doubled over the following 20 years while the gold price kept going down for 20 years, interestingly enough. But we see the same pattern again. We’ve had seven years of downturn in the production, but then finally last year in 2011 we are back up now at the same level as we were back in 2000.

So, is the story, well, are we going to see production double again from here and what’s happened with the gold mining companies and the equities? Well, in the 70’s the equities responded directly with the gold price and even at the very end they did far better than the gold price and I remember buying (sounds like: free state gold) in 1975 at $5 selling it at $108 in 1980.

That was the kind of return that you expected in those days and look at what’s happened this time around: the opposite. The gold equities in the last seven years have essentially – if you look at it in broad aggregates, if you look at the XAU, for example, compared to the gold price, the gold price is up 250%, the XAU is flat.

So, to use an old Chinese expression, “Wha’ happened?” {Laughter} Well, I’m going to try to tell you exactly what happened, okay? And it all starts with grade. With the gold price going up, what do you think mining companies have done? Well, they’ve dumbed down the grades; go down for a low grade. The reserve grade is down 60% in the last ten years. Well, that has an impact on costs.

And, of course, everything else is up. If you look at the production costs, they’ve more than tripled. If you look at the capital costs, the CAPX, they’ve more than tripled in that period of time and if you look at even (GNA) which used to be $20 an ounce is now $100 an ounce, it’s more than gone up by five times.

Why costs are up? I think that there are people in the audience that are far better than I am to answer that question. But bigger projects, more complex projects and, of course, when you go from a 5 gram deposit to a 1 gram deposit to produce the same amount of gold, you got to have five times the size.

And so, the projects have gone from $300, $400, $500 million in CAPX to $1, $2, $3, $4 billion, if not even higher. Well, the bigger the project, the more complex, the more time you need to permit, all of that has had a real, real impact on costs.

But to me the elephant, really, in our room, in our industry, is the following: this is a chart of new finds, new gold finds in millions of ounces over the last sort of 25 years and you can see something here that is frightening to some extent: the peak of discoveries of this industry was in the early 90’s and since then our exploration efforts have just not produced the kind of deposits that we’ve seen back in the 80’s. Where are the gold strikes, you know, 500 million ounces of gold at 3 gram? Where are the (sounds like: Yanna Coaches), 1 billion ton of heat bleachable material? Where are those deposits? We certainly have not found any of those in the last ten years.

So, is it a shade of peak oil? Are we seeing peak gold? I don’t think so. I’m not in that camp, but I think what we are seeing is that the industry is going to have, in my view, a very, very challenging time in trying to grow over the next ten years. I think we’re going to see some growth in 2012, 2013 because there’s a number of projects that have been put into construction and whatnot over the last few years.

But then looking past that, projects that will have a real impact on our industry, the 1 million-, the 2 million-ounce producers, I don’t see them. And I think that until we see a paradigm shift in our industry’s exploration effort, this industry is going to continue to be challenged.

And when I say paradigm shift, think of the oil business. What happened in the oil business? They invented 3D seismic. That changed the whole game where before they had success rates that were, like, 1 in 20, they were down to a success rate of 7 in 10. It changed the entire game for the oil industry. We haven’t had any of that in our business.

So, what’s happening today? The majors are throttling back exploration. The Greenfield Exploration is being throttled back. Not good. And the juniors, they’re not getting funded. Well, why? Well, here’s why: I’ll tell you. If you look at $1 invested in exploration and what you get out of it, in the 60’s and the 70’s you were getting $100. And let me remind you, gold was $35 an ounce. And in the 70’s and 80’s that came down to $83 and then $57 and then $23 and then in the last ten years at a record gold price $11.

Is that really the kind of return that investors in junior mining companies want to see? No. What do they do? They’re voting with their money, they’re out of the deal and I think that, again, we have to find something in exploration that will change these factors.

It’s the juniors are going to suffer, but until the majors put the money in exploration technology and get a new paradigm shift, this industry, I repeat, will be challenged.

And now you look out, where are the project being built? Interestingly enough, it’s at the opposite end of the spectrum. The companies, they are going into very high risk areas and they mitigate that with putting projects into production in very, very low risk areas and the areas where the production is actually declining is in the medium risk area, interestingly enough.

And the other thing that affects the valuation of companies very – at a big impact is the length of time it takes to bring projects into production. Look back to the 80’s. If you found something three, four, five years, you had your project into production. Today you’re looking at ten to 12 to 15 years.

Well, do an MPV of 5% of anything that’s 15 years out and what do you get? Bupkis? Okay? So, you can have the best project in the world in your company, you put it on a 5% MPV 15 years, it’s worth nothing. And that’s a problem.

What can you do about it? Not a whole lot unless you can find projects that are smaller, higher grade, less impact, easier to permit in good countries. Otherwise if you’ve got the $4 billion thing that will take five years to build, it will take five years to permit.

The complexity of the projects, the location of the projects; try to permit something at 14,000 feet with no water and no electricity. A lot more difficult than if you got paved road and paved highway. But if you’ve got too many people, not so good.

So, those are all issues that are very directly affecting the mining companies today.

And then the last one—which is my best one; I always save the best for last—is analysts, friends or foes? If you look at the chart on the right-hand side, it’s the analysts’ prediction of the gold price over the last seven years and guess what they do? Well, next year the gold price will be up, but then after that it’s all over, it’s going straight down.

Now, why, as a shareholder, would you want to buy any gold stock if the gold price is going to go down? You wouldn’t. So, you know what? I say to them, please stop predicting, okay? Just use current gold price. And even better, why don’t you just use the spot gold and maybe the (sounds like: Contango)? It’s in the paper; it’s quoted every day; you don’t have to defend it, it’s right there. And be our friends instead of our foes because they’re brothers and on the oil side they keep predicting that oil’s going to go up.

Twenty to 25% of our costs is energy. So, essentially, they are both saying that we’re going to have margin compression. Now, why would you want to own any stock of any companies that is going to have margin compressions and headline commodity of price going down? You wouldn’t.

So, any shareholders here who talk to analysts, please get the message across: either you hire Nostradamus or just use the spot price, okay?

Now, let me give you the flip side of why you want to be in this business, and that’s the demand side. Look at what’s happened to demand over the last ten years. In dollar terms, we have gone from an industry that had a terminal demand of $30 billion to over $220 billion last year of terminal demand; an increase of ten times over ten years. Now, what other industry has had such an incredible growth rate in dollar value over the last ten years? Not very many.

We have a phenomenal run. And also, when you look at the composition of demand, it’s the best we can ask for. Before it was 90% jewelry, the central banks were sellers, our big companies were hedging, selling out under the shareholders and the only other people who were buying was industry for your cell phone.

Look at it today: about 40% jewelry, 40% investment demand, central banks are back buying about 15% and then another 5%-10% of industrial demand. A really well-balanced, diversified demand at a record level.

Now, if you just kind of look at each component very briefly, you look at central banks. Of course for 20 years they’ve been selling their gold. They had no clue why they held it in the first place; now they’re learning. Central bankers are relearning that all paper currencies are suspect. Every single one of them in today’s environment, every single paper currency is suspect.

And they look around and what are they doing with cash? Today cash is trash; you’re getting nothing for your cash. And you look at the euro, you look at the dollar, you look at the yen; everywhere you look they’re suspect. So, what are they doing? They’re buying back gold.

Oh, do I love it; I absolutely love it. And if you look at how much they can buy and what is likely to happen, when the ECB, the European Central Bank, was created in 2000, after doing all kinds of work on how much gold they should own, they decided that the right proportion was 15%.

So, if you just use that number for the bricks if you want central banks and say, “Okay, you guys want to be in the club of real central bankers and you got to own 15% gold,” essentially they would have to buy 17,000-plus tons of gold which at 1,000 tons a year, which represents always 40% of today’s production, they would have to do that for the next 17 years. It’s looking good, looking good.

The next part of it is investment. As you all know, the launched the gold ETF in November ’04 and since then the gold ETF have ballooned to in aggregate $129 billion. But you know that that $129 billion only represents 8% of all the gold that is held personally as investment because the total number is closer to $1.2 trillion.

You say, “Wow.” I mean, that’s a lot of money. But that’s nothing because that $1.2 trillion only represents about 2% of (investible) asset minus corporate agency debt, money market fund, commodity, real estate, hedge fund. If you add it all up, it’s less than 1%.

But then you look back at history. I remember when I started going to Switzerland in the late 70’s, early 80’s, every portfolio manager had something like 5% to 10% of their portfolio in gold. Let me tell you something, that’s where we’re going. We’re going back to the 5% to 10%.

And to do that, you’re going to have to probably take out 66,000 tons of gold and if it happens over the next ten to 15 years, where is that gold going to come from? I don’t know. But I do believe that it’s going to happen.

Now, when you look at the aggregate demand, where is it coming from? Warren Buffett said you shouldn’t buy gold because only people are buying it to sell to bigger fools; they’re going to sell it at a higher price. Is he wrong; he’s just so dead wrong.

Look at this year. China and India in 2002 were at 23% of the market. Today they are 47% of the market. That’s one-third of the world population going from $600 a day to $3,400 a day in GDP. And when you look at the next ten years and you look at India, the growth in gold consumption is directly related to GDP growth and I think it’s going to continue in India and I think it’s going to continue in China.

And you’re looking already at 2,000 tons of gold a year and I think it’s going to continue to go higher and they’re buying the gold to put in their earrings and bracelets and jewelry, but also some of it in investment. So, my feeling: good solid growth, fundamental demand from these countries.

Now, in the last two minutes I want to talk to you about the bigger picture, the really, really big pictures. This is the commodity super cycle going back 200 years. A couple of things that are interesting on this chart: one is that if you average out the commodity cycles, they average about 21 years.

But, like human individuals, some live to be 100, others die at 60. Here you can see that the shortest bull market was 12; you had a few that were 14, 15, one at 21 and then a very, very long one at 42. We’re 10 years on.

I think it’s safe to say that with the industrialization of the BRIC countries, you’re talking about half of the world population going from now $2,000-$3,000 in GDP per year going to $6,000, $8,000 to $10,000, I think you’re looking certainly a minimum at 5 to 10 years. So, I feel pretty good.

But why are commodity prices a little soft? Every single one of these bull markets—look it up—has had a mid-cycle correction. I think we’re in a mid-cycle correction. You see it in the iron ore market; you’re going to see it in all of the commodities. We haven’t seen it in gold and I think the only reason is because of the central banks.

I was fully expecting gold to be lower this summer; it didn’t happen. Central banks came and bought 156 tons of gold between May and July; otherwise, I think we would have seen lower prices. But we are in a mid-cycle correction and the final chart, and it’s one that anybody who’s ever seen me speak I always keep for my last slide, it’s the Dow Jones Gold Industrial Average chart.

And the reason I put it up, very simple, it’s a simple chart, is that at the top of every single commodity bull market we’ve ended up with a ratio of the Dow to gold approximately 1:1.

So it was in 1980 when the gold price was $800 and the Dow was $800 and so it was in 1933-1934 when the gold was $35 and the Dow went down to $37.

So, now we’ve gone from 42:1. In 2000 it took 42 ounces of gold to buy one unit of the Dow; now we’re down at 8:1. So, people look at it and says, “But it’s over.” It sure isn’t over; think about it.

To go from 42:1 to 8:1, the gold price has gone from $250 to $1,650: $1,400. If I’m right on the 1:1, the gold price has got to go to $13,000 which means it’s got to go 8 times more than what it’s already done over the next ten years.

Now, which one do you like best, the last ten years or the next ten years? And not only that, but where – why would we have a gold price that is so high? Well, I was reading in the Financial Times last week that the European central Banks have now created a new monitoring instrument. It’s called OMT, the outright monitoring transaction which, in effect, they can buy now in the secondary market the debt of Spain and all of the flunky countries and monetize it.

Well, you know what I call it? OMG, okay? And it stands for, yes, “Oh My God,” but it stands “On Your Mark, Gold” because you’re going to go because the QE3 in the US is coming over. In Japan they’re going to also have to print money because they’re over 200% debt to GDP. How are they going to get out of it? Printing money. And that, in the end, is what’s going to make the difference for gold and that’s why I believe at the end of the day are we going to see 1:1? I don’t know. 2:1? I would bet a lot of money on that one.

And with that, ladies and gentlemen, thank you very much for your attention.

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