Have Pierre Lassonde and I been talkin'? Nah. <g>
Only difference is he assigns a higher capex number than I do. I see more potential for lower cost simple heap leach projects that shouldn't cost as much. Plus there's a lot of cheap second hand mining equipment out there, but he is probably using the "big company" production model. Still the same logical conclusion.
RW version:
Message 16086375
Note last paragraph:
Message 16114018
On Brancote:
Message 16141735
Pierre Lassonde version (Minesite.com):
Pierre Lassonde Pulls No Punches On Future Of Gold Industry
A fascinating article by Pierre Lassonde, president and co-chief executive of Franco Nevada, has been published in the latest edition of Alchemist, the organ of the London Bullion Market Association. Mr Lassonde has one of the most acute brains in the gold industry so his comments attract wide attention and in this case he has debated whether a mining company today is better off buying a ready made project, or spending money exploring for itself.
As Mr Lassonde points out this is a question every chief executive asks himself at every annual planning meeting. There is no perfect answer, but there is a strong case for mergers and the consolidation that has gone on recently in the mining industry with the disappearance of Rio Algom, Asarco, Cyprus, Alaamax, Reynolds and North bears this out. However the one commodity that is crying out for consolidation with seventeen companies producing about 40 per cent of the world's gold production.
The lack of action, according to Mr Lassonde, is not surprising as not one single company, with the exception of Franco Nevada, came close to achieving a return close to its cost of capital. In other words for every ounce of gold that these companies produce they actually destroyed shareholder value. And he is not impressed by the hedgers as he points out that "while they seem to be doing better, in reality , their gains are financial and just mask the poor returns of their mining assets." This is confirmed by a chart produced by Mr Lassonde which shows that AngloGold, Barrick and Placer have now become financial companies making more money managing the float on their hedge book than actually mining.
The trend, he reckons, stems from the 80s when a gold price of US$400/oz encouraged over-investment. The pain is now being felt and would be worse if more companies were honest with themselves and calculated reserves at US$270/oz rather than US$300. Mr Lassonde then focuses on the basic truth that if a company cannot make a decent return on its existing assets, how on earth can it do so on assets purchased at a premium to value. And therein lies the difference between an investor's view of value as exemplified by analysts' projections and value as seen through the eyes of an operator. This was exemplified in the UK market by the lack of a bid for Brancote when originally put up for sale with analysts forecasting a take out price from 225p to 250p.
The case against acquisitions is taken further in his analysis of a number made by leading companies of which only two, Homestake's Veladero and Barrick's Bulyanhulu, have shown good upside in exploration success. Even so it will take the acquirers 13-14 years to pay back the capital and the return on capital is very low. In these circumstances there is a temptation to write-off the asset and justify construction on the capital to be invested alone - a recipe for financial disaster.
Probably the most fascinating deduction he has made is that the share prices of all the biggest gold producers are standing at premiums to net assets varying from 0.9 times for Goldfields to 2.6 times for Newmont. In other words investors are willing to pay, on average, twice what a stock is worth in the hope that the gold price will rise significantly despite the fact that the bear market has persisted for 21 years.
The corollary of this is that the gold producers should use their over-valued paper for acquisitions of companies. The trouble is that most of them are strapped for cash and this might be revealed by such a move. They also have to look forward to the day when environmental liabilities come into play as all of them will be closing mines in the next five years.
The alternative is exploration on their own account, but here again Mr Lassonde's figures are not very encouraging. He found that Barrick, Newmont and Normandy were the most efficient at US$12.50 per new ounce as they tended to explore around their existing mines, but Placer's exploration costs were US$37/oz. Viability then depends on whether they are close to existing infrastructure, or form a new deposit. If the latter, Mr Lassonde reckons that they can only be economic at an all-up cost of US$225/oz, or a cash cost of US$135/oz. These figures alone shine a bright light on these companies which insist on only revealing cash costs.
He ends up with some hard facts which are worth taking on board. First, exploration does not guarantee success for major or minnow. Echo Bay and Battle Mountain have never found a world class deposit despite spending zillions of dollars. And it will not matter whether future reserves are acquired or explored as Pierre Lassonde predicts most companies will have hit the rocks within the next five years if the gold price does not rise to at least US$325/oz.
05 September 2001 |
