Recently RBC Capital Markets held its ninth Annual Gold Conference in London – hosting CEOs of the world’s largest gold companies. RBC reports the reoccurring themes from its ‘In Conversation With’ forum and audience polls.
Dividends – Investors demonstrated a clear preference for a higher level of capital return from the gold industry with a majority showing a preference for a yield of >3%. Keynote speaker Graham Birch argued for the opposite, that miners should invest in exploration when gold prices are high.
Exploration – There was a debate on whether greenfield or brownfield exploration yields more effective results. Whilst there seemed to be a recognition of the importance of greenfield exploration, the majority of companies retained the view that targeting brownfield areas surrounding existing mines represented the most cost effective way to delineate new ounces.
Margin sustainability – The presenting companies recognised that they were currently benefiting from both higher gold prices and a record level of cash margin. It was felt that as inflation re-asserted itself that the miners could see margin compression even in a strong gold price environment. Two key areas of concern were rising fuel and labour costs that in aggregate represent 40% and 30% of costs, respectively. Over the longer term, the gold grades at nearly all of the companies’ mature mines are declining, so that the cost per ounce is expected to rise.
Tier II/IIIs over-priced – The Tier I CEOs present indicated that they believed that at current equity prices, it would not be value accretive to acquire Tier II and Tier III companies and that cash would be better deployed on investment in their own exploration pipelines. Any M&A activity would probably therefore be focused on companies operating in current core regions and not a “shotgun” approach, with a preference for more early-stage pre-development projects where most value could be added.
Investors bullish – 89% of the audience expected their gold equities exposure to be the same as current or higher over the next three months; this number was 63% on a 12-month outlook. Some 54% expect the gold price to close at >$1,400/oz in 2010; 41% said >$1,600/oz in 2011. Finally, 61% had a strong preference for gold equities over bullion/ETF products.
The general mood was clearly bullish on the gold price outlook, given likely macroeconomic scenarios going forward. Investors were slightly more cautious on owning the equities in the longer-run.
