Related article in today's Globe & Mail:
Only diehard investors left in the ever-shrinking world of gold bugs
07:05 EDT Saturday, October 07, 2000
DENVER -- The president of gold miner Cambior Inc. said this week that the past year was the worst of his life. The chief executive officer of Franco-Nevada Mining Corp. said many of the world's gold producers simply can't make money.
It's little wonder that Stephen Mitchell, the chief investment officer for Ohio's $57-billion (U.S.) State Teachers Retirement System, finds himself among an ever-shrinking group: gold investors.
Stocks of gold-mining companies have plunged as the price of the precious metal lingered near its lowest level in two decades. Investors have removed an estimated $8-billion, or two-thirds of their money, from gold mutual funds since 1995. Only the most optimistic gold bugs or long-term investors are staying put.
"We knew we were going to have to be patient because we didn't go into this with the idea that gold was going to rebound immediately," said Mr. Mitchell, who spent $30-million from the pension fund he helps run for 400,000 teachers on shares of companies such as Newmont Mining Corp. and Barrick Gold Corp.
"We just felt that gold was trading at historically low levels, and that maybe it was overdone," Mr. Mitchell said. "The important part is that we've been buying on the way down."
Of course, buying on the way down only helps if prices go up. So far, that hasn't happened much. The price of gold, which fetches about $270 an ounce now, is half of what it was in 1980, and it's dropped almost 30 per cent in the past five years.
"The past year has been the worst 12 months of my life," said Louis Gignac, president of Montreal-based Cambior, which made a wrong-way bet on gold prices last year and saw its stock drop 86 per cent in the past 14 months. The company now has $165-million of debt and a market value of about $27-million.
Others in the industry have fared little better, although some remain profitable. The Standard & Poor's gold index of leading gold mining stocks has fallen during eight out of the past 10 years, losing half its value since 1980.
"If we have another 10 years of low gold prices, the industry won't exist as we know it," said Trevor Steel, who manages the $10-million Mercury Gold and Mining Fund, a London-based mutual fund that is part of Merrill Lynch & Co.
At the 13th annual Mining Investment Forum in Denver this week, the turnout by investors was "pretty depressing," said Bernard Swanepoel, chief executive officer of South Africa's Harmony Gold Mining Co. "It looks like the attendance is at an all-time low. It's difficult to be optimistic."
Just $4-billion is left in gold-stock mutual funds worldwide, down from $12-billion five years ago, said Robert Van Doorn, a mining analyst at research firm Loewen Ondaatje McCutcheon Ltd. During that period, the market value of the industry fell to $40-billion from $60-billion, he said.
To stay profitable, gold mining companies from South Africa to Canada to Australia have slashed production costs and tried to boost output.
Still, just two of the six biggest producers in North America, Barrick and Placer Dome Inc., will be profitable this year, said Lehman's Mr. Ward.
"This industry is in shambles," said Seymour Schulich, chief executive officer of Toronto-based Franco-Nevada Mining. "None of these producers can make money at current gold prices. This industry is sitting on Deck 8 of the Titanic. Nobody believes they're going to get wet."
Indeed, many producers expect gold prices to rise, although they are quick to point out they have no idea when that will occur.
"We believe in gold," said Jack Thompson, chief executive officer of Homestake Mining Co. "We believe gold will rise again. I am not going to make a prediction about gold because I've been disappointed too many times. I've been humbled."
Franco-Nevada's Mr. Schulich says he expects gold to reach $400 an ounce "in a couple of years," and his company wants to increase its leverage to gold through mergers and acquisitions of mines.
With many companies expecting price rises, "you still get a sense there's a 'don't worry, be happy' sentiment out there," said Douglas Pollitt, an analyst at the brokerage Pollitt & Co. in Toronto.
So who's left to invest in gold companies?
August Von Fink of Germany, one of the world's richest men with a net worth of $5.2-billion, according to Forbes magazine, has spent $33-million since 1997 buying a 13-per-cent stake in Homestake, Mr. Thompson said.
Mr. Von Fink, who spent $9 a share for a stock that now fetches $4.63, wanted exposure to gold "because he is quite concerned about the European monetary union and the stability of currencies in Europe," Thompson said. Gold, since it's priced in dollars, rises in value when other currencies fall. "This is a defensive investment," he said.
At Ohio's State Teachers Retirement System, Mr. Mitchell lumps his gold holdings with the $850-million he considers "alternative investments," the ones that he hopes will deliver 15-per-cent annual returns over 10 years.
Mr. Mitchell declined to disclose returns on his gold holdings, but said they have tracked the Philadelphia gold and silver index, which is down 28 per cent this year and reached a record low this week. |
