Gold: Escape From The Matrix by John Hathaway, Tocqueville – slides from Grant’s 2015 conference

(I) The Business of Gold Mining: Coping with Nuclear Winter

Gold Mining Industry has Carpet Bombed Investors with Paper

  • Aggregate debt increased from $1 billion in 2005 to $41 billion at year end 2014
  • Common shares outstanding more than doubled (2.07x)
  • Estimated gold production rose from 38 Moz to 43 Moz ( +13%)
  • Gold production per share declined from .38 oz to .21 oz (-45%)

Gold

Industry Estimated Gold Production

  • Significant increases in capital have spurred little production growth
  • Share issuance has severely diluted equity holders

Production

Gold Discovery Rates

  • Gold discovery rates will likely remain low without a positive change in the gold price or a change in exploration methodology/technology

Discovery Rates

Mine Life

  • Mine life in the gold industry is currently 13 years, which is one of the lowest levels over the past 30 years

Mine Life

Mine Operating Costs

  • Cash costs have been declining recently due to beneficial foreign exchange rate movements, lower input costs, and increased productivity

Mine Operating Costs

Cost per Ounce to Buy vs. Build

  • It makes little sense to develop new gold mines today because you can now buy producing ones at a similar cost
  • Industry is retrenching; M&A, asset divestitures on the increase

Cost per Ounce to Buy vs. Build

Silver Linings

  • Industry is not monolithic; it is possible to identify value creators
  • Renewed focus on balance sheet and capital allocation discipline
  • Current environment allows accretive deal making

(III) The Gold Market: A Worm That Must Turn 17

  • Fed credibility
  • Gold mine supply drought
  • Gold drain from West to East
  • China ??? SGE withdrawals
  • ETF AUM ramp
  • Market psyche

Option Value – NovaGold Resources Inc. (NG – $3.76)

  • Exploration projects in a safe jurisdiction with a large in situ gold resource can provide long-term and low cost option value to the gold price
    – NovaGold’s primary asset is a 50% interest in the Donlin project located in Alaska, which could produce 550,000 oz/yr of gold (attributable) for 27 years if developed
    – Also owns 50% of the Galore Creek project
  • A 10-year call option to purchase 100,000 oz of gold with a US$1,340/oz strike would cost US$394/oz today
    – This contract is illiquid and potentially unattainable in the market

NovaGold Resources

Value Added – Torex Gold Resources Inc. (TXG – C$1.39)

  • Torex is adding value by exploring for and developing gold projects in Mexico
    – Production at El Limon/Guajes will begin in Q4 2015 and is expected to realize 360,000 oz/yr Au @ US$530/oz Au (or US$637/oz AISC) over its 10 year life
    – Its second potential mine (Media Luna) has a significant resource adjacent to El Limon/Guajes and could share the infrastructure
  • Development is likely to take ~4 years and cost US$482M to achieve production of 313,000 oz/yr AuEq @ US$572/oz AuEq (or US$636/oz AISC) over its 13 year life
    – Potential exists for further organic growth through exploration
  • Gold companies typically experience a re-rating as they transition from development to production
  • Market cap. = US$800M; cash = US$143M; debt = US$228M; 2017E P/CF = 5.8x

See full presentation below.