Pierre Lassonde, who retired as chairman of the board at Franco-Nevada earlier this year, said that gold miners have “never had it so good” during a recent interview. He also said that he expects the Dow Jones Industrial Average/gold ratio to approach parity in the next 10 years.
When discussing gold companies seeing an increase in margins with prices moving higher, Lassonde said this situation is different from when gold prices ran higher in the early 2000s.
“This is very comparable to the kind of margin expansion that we saw in the early 2000’s. Don’t forget, gold bottomed in 2001 at $250 to rise to $1900 by 2011. So the rise in gold price, everybody thought would lead to enormous margin expansion. (But) they never got the kind of multiple you were expecting because there wasn’t any margin expansion.”
Lassonde said back then, companies weren’t able to increase their margins due to higher energy costs.
“There are two reasons for that. One, is the oil price kept going up, and energy as we know is 25% more or less of the cost of operating gold mines. So as the energy price went from $25 a barrel to $140 a barrel, the margins were not expanding as fast. And then because during the late ‘90’s the gold price kept going down, mining companies essentially stopped exploration and when the gold price started to come around what they did because they didn’t have any reserves, they dropped their cutoff grade. And so they were producing the same amount of gold but were moving twice as much dirt and that too costs a lot of money and you had no margin expansion.”
Gold, Gold Miners, and Oil
Today, gold companies are benefiting from stable oil prices and that means a huge increase in margins when costs aren’t increasing but profits are.
“The difference today is very, very different. Number one because oil prices are flatlining. When you look at oil prices today, $37 (a barrel), but when you look at the oil price for the next year, you can look at the contango, it’s almost nothing. So that’s a 25% component of the miners of their costs. The gold miners today have never had it so good. The margins that they are producing are the fattest, the best, the absolute unbelievable margin they’ve ever had. Ever.”
Not a Cause for Concern?
Investors shouldn’t worry that they’ve missed the move in gold prices as there is plenty more upside left, said Lassonde. He said the proof is by looking at who just took a major stake in a gold company.
“The answer to that was provided a couple of weeks ago when Warren Buffett bought half a billion dollars worth of Barrick Gold at today’s price. And what is Warren Buffett seeing? This is not an individual that bets on the gold price. He doesn’t bet on commodities. What he’s seeing is he can buy Barrick at a fraction of the kind of multiple that he believes is the right multiple. So no, you haven’t missed the boat at all, even though the gold stocks are up double from the bottom.”
He says this is just the latest secular bull market in gold, the seventh one he has been a part of , and they all progress the same way.
“You’ve got to think, at the bottom, six months, a year ago, the stocks were so cheap but nobody was interested. Nobody was interested. It’s the same old story in our space. At the bottom of the market, there’s never enough money and at the top there’s way too much. And we’re barely off the bottom at this point in time and there’s a lot to go before we reach the top.”