Last week I saw a startling interview with Goldcorpâ€™s (GG) CEO.
To be honest, I donâ€™t normally listen to the talking heads on TV. But if the fools at CNBC want to throw a few softball questions to the CEO of a top-10 gold producer, Iâ€™m all ears.
What I heard, though, was a little disconcerting. As youâ€™ll see, it could signal another question mark above the heads of gold investors, especially when it comes to big goldâ€¦
The interview started out, right to the pointâ€¦
When Goldcorp CEO, Chuck Jeannes was asked why there was a disconnect (in the past two years) between senior gold miners and the price of gold, he was quick to admit â€śit has been a quandary.â€ť
You can see this â€śquandaryâ€ť in the 2-year chart belowâ€¦
The three big gold producers that we follow here on a regular basis (for no other reason other than being a great litmus test for the sector) have failed to keep up with the price of gold over a two year period.
1) He says it was â€śmuch easier to put some optionality value in the equities when gold was trading at three or four or five hundred dollars, than it is when gold is trading at $1,700.â€ť
So in essence, the market had more to look forward to with gold prices sitting at multi-decade lows, than it does in todayâ€™s gold market.
2) He also admits that â€ś10-15 years ago you really had no choice but to buy physical gold or the [gold miners.]â€ť
Today with the advent of ETFs more investment cash is flowing away from miners.
Both of these responses shed some light on the situation. But like an election-campaign president, Jeannes failed to address the elephant in the room: skyrocketing costs for senior producers.
How much are costs rising? You may remember the chart that we shared a few months ago:
Thereâ€™s the rub. Big gold has done a poor job of keeping costs down â€“ total costs per ounce are up almost 70% since 2008. Wow.
And while some companies like Barrick Gold have come out with a more aggressive capital discipline plan (something that Byron King has covered in these pages), it was startling to notice that Goldcorpâ€™s CEO failed to mention cost control upfront.
While commenting on the trend of gold ounces getting more expensive to pull from the ground â€“ a great opening for at least one comment on capital discipline if you ask me â€“ Jeannes didnâ€™t have anything to say about cost-cutting.
Instead he made two last points:
First, he steered the conversation towards scarcity. Specifically saying increasing costs would create more scarcity for the metal and improve sales revenue.
Last, he quipped that with more expensive gold (due to higher costs), the senior miners will have â€śmore leverageâ€ť going forward.
Yikes. Although this was a short snippet of an interview it really rings home a startling truth about the mindset of some big gold miners. Cost-cutting still isnâ€™t a priority for some of these guys!
Frankly, thereâ€™s no reason why any CEO, let alone Goldcorpâ€™s, would want to cover up any cost-cutting initiatives. That said, you and I can only assume that Jeannes doesnâ€™t have any in mind, or isnâ€™t worried about costs!
Weâ€™ll have to wait to see how this starts to play out. But Iâ€™m leery to say the least.
Meanwhile there is some good news. Since late July weâ€™ve seen a nice run-up in all the big miners â€“ Goldcorp (GG) up 28%, Newmont (NEM) up 16% and Barrick (ABX) up 16%.
But letâ€™s make sure we keep an eye on this situation. If this recent interview with Jeannes is any indication, equity investors may have some headwind.
Keep your boots muddy,
Source: Daily Resource Hunter