HardAssetsInvestor

Written by Drew Voros  |

January 30, 2012

2012 Gold Price Report: Miners See Peak Gold Price Of $2,000/oz This Year

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Despite rising prices, gold producers are frustrated stock prices not keeping pace with metal.

The 2012 Gold Price Report would seem on the surface to be a positive report for gold producers. But once you get past the continued bullishness of gold prices, the report outlines many of the head winds facing gold producers, such as rising costs, falling stock prices and the pressure to pay more dividends in order to attract investment capital. HAI Managing Editor Drew Voros spoke with one of the report’s authors, John Gravelle, who’s a partner at PricewaterhouseCoopers LLP and the company’s mining industry leader for the Americas in its Toronto office.

Hard Assets Investor: The consensus in your report from the gold producers is that they're seeing a top price for gold in 2012 at around $2,000 an ounce. Why do you think the miners are so bullish?

John Gravelle: They've had quite a few years of gold price increases so far and they're hoping it will continue. Gold really took off with the Federal Reserve’s so-called quantitative easing. With that scenario, people don't see a favorable outlook for the U.S. dollar. If the U.S. economy comes around, that might help a bit. But the last year or two, you're looking at an economy that was printing more money and still not being able to turn things around that much. There is also what’s happening in Europe regarding their debt crisis. Whenever there were any signs of bad news in Europe, investors would turn away from all equities including mining companies.

HAI: What price does gold generally have to be for mining operations to be profitable?

Gravelle: Certainly if gold's over $1,000, most mining companies are going to be good with that. They're doing their planning now on a long-term price of $1,200. If you're investing in gold exchange-traded funds and you're buying in at $1,600 and it falls to $1,400, you're saying, “Whoops, I really didn't do very well there.” But the gold companies, if gold falls to $1,400, they'll be very happy, or $1,200, they'll be pretty happy.

HAI: Going forward, according to the report, the miners' forecast on price seems to be a down-line trend. Is that an optimistic outlook on the economy, or is it the idea that any impact of quantitative easing would be exhausted by that point?

Gravelle: It's hard to say. In one sense, they look at the prices as just being so good and there's been so many years of increases, it's hard to forecast gold prices being at this height forever. Their general nature of being is a little conservative. It's interesting. Mining companies have to be so aggressive and take so many risks in their business in order to find mines. But when it comes to things like forecasting, they tend not to be overly aggressive.

HAI: What's the No. 1 cost for miners? Is it still fuel prices?

Gravelle: There are a few things. Fuel price is certainly one of them. Then the declining U.S. dollar has been another one. If the U.S. dollar's decreasing, it increases cost. Labor costs are very high. A lot of these mines tend not to be located besides big cities. So even many countries, like take Canada here, the unemployment rate is not low, there's a lot of people looking for jobs. However, finding somebody who's willing to go up to the Arctic and work, it's a little different story. You need to pay them a lot. That's a global story, too. The mining companies are having a lot of issues dealing with the high wages they have to pay to get skilled workers to the remote locations.

HAI: What's the outlook for gold production in 2012?

Gravelle: I'm not sure where that one is going. I would have thought that it would go up. I'm surprised that gold production didn't seem to really increase as much as I would have thought over the last couple of years.

HAI: That's been the way pretty much throughout gold’s 11-year bull run, right?

Gravelle: The lead times to get the mines into production have been a challenge. The time to get permits is increasing rather than decreasing. It's very difficult to get the gold into the market.

HAI: In sort of the same vein, if you will, with peak gold prices; many would have expected more M&A activity in the gold-producer space. Why hasn't that been the case?

Gravelle: I think depressed equity prices are part of it. When it comes to major acquisitions, companies that have had their stock prices decrease 20 or 30 percent last year are not willing to issue their stock to do an acquisition at those prices. However, interestingly, the actual number of acquisitions is up in the year.

HAI: Really?

Gravelle: The value's way down. Gold mining companies are focusing on the smaller, strategic acquisitions, looking for the properties that are nearby their existing property so that they can get some synergies. The multibillion-dollar transactions just have not been as common.

HAI: The report states that only 5 percent of gold miners said they would use cash for acquisitions. How does that number compare to the previous year?

Gravelle: It has increased slightly compared to last year.

HAI: Let's talk a little bit about dividends. In 2011, miners paid something like 40 percent more in dividends. Do you see that kind of growth continuing in 2012?

Gravelle: Last year gold’s price is up 10 percent while gold stock prices were down 10 percent. The issue gold companies have been trying to deal with is that investors who want to invest in gold now have options. They can buy all kinds of other financial products out there that track the price of gold. So what the gold companies are doing is trying to determine a way that they can get those investors back. And one thing that they can use to differentiate themselves from these financial products is that mining companies can pay dividends. It’s interesting some of the bells and whistles they're putting on them. Some, for example, are linking their dividend payments to the price of gold. Again, this is a way to try to get the investors to look more favorably on gold mining company stocks, rather than the other options that are out there for them.

HAI: Is that what the report meant when it said producers will be more creative with dividends?

Gravelle: Yes, exactly. There's a company talking about paying dividends with physical gold. I can see that the logistics of that would be very difficult because you're going to have some very small shareholder who's going to be entitled to, I don't know, $3 worth of gold. It's pretty hard to carve gold into so many different sizes. But is there a way that you can financially engineer it so that you can get that sort of concept? I think there is. Little things like this I think will get the interest level up in the company.

HAI: Are gold ETFs pulling significant investment capital away from gold miners?

Gravelle: Mining companies prefer not to have ETFs in a position to act as an alternative to investing in mining companies. As well, companies are working to increase their dividends to improve their share prices.