From his keynote address to the Denver Gold Forum, September 2012.
I’ve entitled my presentation “It Was the Best of Times, It Was the Worst of Times” and it has to do, really, with where we are in the industry. When you look at the last 30 years – this bull market in gold started in 1971 – gold went from $35 to $800 in the '70s.
It took about seven years for the industry to respond, but then respond it did. Production more than doubled over the following 20 years while the gold price kept going down for 20 years. But we see the same pattern again. We’ve had seven years of downturn in the production, but then finally last year – in 2011 – we are back up now at the same level as we were in 2000.
So, are we going to see production double again from here? And what’s happened with the gold mining companies and the equities? Well, in the '70s the equities responded directly with the gold price and even at the very end they did far better than the gold price, and I remember buying [gold stock] in 1975 at $5 selling it at $108 in 1980.
That was the kind of return that you expected in those days and look at what’s happened this time around: the opposite. The gold equities in the last seven years have essentially – if you look at it in broad aggregates, if you look at the gold exchange rate (XAU) compared to the gold price – the gold price is up 250%, the XAU is flat.
So, to use an old Chinese expression, “Wha' happened?” I’m going to try to tell you exactly what happened. And it all starts with grade. With the gold price going up, what do you think mining companies have done? Well, they’ve dumbed down the grades. The reserve grade is down 60% in the last 10 years. That has an impact on costs.
And everything else is up. If you look at the production costs, they’ve more than tripled. If you look at the capital costs, the capex, they’ve more than tripled in that period of time and if you look at even [GNA] which used to be $20 an ounce is now $100 an ounce, it’s more than gone up by five times.
Why costs are up? I think that there are people in the audience that are far better than I am to answer that question. But bigger projects, more complex projects and, of course, when you go from a 5-gram deposit to a 1-gram deposit to produce the same amount of gold, you got to have five times the size.
And so, the projects have gone from $300-, $400-, $500-million in capex to $1-, $2-, $3-, $4-billion, if not even higher. Well, the bigger the project, the more complex, the more time you need to permit, all of that has had a real, real impact on costs.
Tomorrow: Pierre Lassonde considers the gold exploration sector.
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