[miningmx.com] — THE gold industry is starting to recognise that
investment cannot be sustained while returns remain low, according to Gold Fields
CEO Nick Holland.
Holland, delivering a presentation at the Denver Gold Forum on Wednesday,
elaborated on the company’s recently announced strategic review of its operations,
motivated as an effort to chase margin over volumes.
He said that there has been a sector-wide realisation that growth cannot be chased for
the sake of growth alone, adding this approach was the cause of gold equities’
lacklustre performance compared to the gold price over the last decade.
“Back in 2003, when the ETF was launched, we were hoping to get around 500 tonnes
of demand into ETF, and, in fact, today we’re sitting at around 2,500 tonnes,’ Holland
said.
“We ask ourselves, what has happened to the gold industry over the same period of
time? Well, unfortunately it has not been as rosy. Gold stocks have in fact
languished.’
Holland said part of the problem was that despite the industry’s intentions to grow,
production among the world’s top eight producers has declined by 2% per year over
the last six years, while operating costs have increased by 12% per annum on
average. At the same time, grade has declined by around 5% over the same period.
When capital expenditure was added to the cost mix, Holland said that the total rise in
costs has exactly matched the rise in the gold price (21% per year since 2006).
“The real picture is that we don’t really make that much money, so we don’t kid the
investors,’ said Holland. “We don’t kid the sales side; they also understand all this
stuff.
“The people we’re really kidding are the governments around the world who think that
they can tax us a lot more and communities who think that we should be paying a lot
more than we are.’
He said another problem facing gold equities was the fact that forecasters
continuously under-estimate their gold price predictions. Some long-term estimates of
a gold price of around $1,300 per ounce was already on par with the existing all-in
costs averages of the same amount.
“If the analyst’s forecasts are correct, we don’t have an industry going forward,’
Holland said. “That is I think really hurting the perceptions of generalist funds that are
coming into the gold industry and looking to get exposure. It frightens them away and
a lot of them end up buying the ETF.
“What we’ve got to do as executives in the industry is to give you the returns that we
should have given you over the last ten years and we haven’t given you.’
Holland said that change was already starting to happen as players like Barrick and
Newmont were starting to re-evaluate capital projects.
“I think it is going to end up in a situation where there is going to be a much more
sobering view as to what future gold production is going to be,’ he said. “And possibly
what we should consider is that gold production may be reasonably flat for the
industry – which will still be an improvement on where we’ve been – and we can open
up the margin to investors.
“It doesn’t mean that we stop growth, but we’ve got to be very careful about chasing
growth for growth’s sake. We have to chase growth that really has fundamental
value.’
Holland said the major players would have to look at every single asset in their
portfolios and make sure that projects give real returns with reasonable paybacks,
while also reporting and highlighting the all inclusive cost of doing business.
Decent dividends would also draw more investors into the sector, Holland said.
“Let’s make sure that we can give people a reasonable annuity out of our existing
operations.
“We’ve put our stall out by saying that we’re going to pay 25% to 35% dividends out
of existing assets. That is going to encourage investors to come into the industry.’
