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%)
Industry Estimated Gold Production
- Significant increases in capital have spurred little production growth
- Share issuance has severely diluted equity holders
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
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 Operating Costs
- Cash costs have been declining recently due to beneficial foreign exchange rate movements, lower input costs, and increased productivity
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
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
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.