DAILY NEWS Nov 13, 2012 4:00 PM - 0 comments

GUEST OPINION: Pierre Lassonde on gold, Part Two

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By: Pierre Lassonde, chairman, Franco-Nevada Corporation
2012-11-13

From his keynote address to the Denver Gold Forum, September 2012.

The elephant, in our room, in our industry, is the [low number] of new gold finds in millions of ounces over the last sort of 25 years. The peak of discoveries of this industry was in the early '90s and since then our exploration efforts have just not produced the kind of deposits that we saw back in the '80s. Where are the gold strikes of 500-million-ounces of gold at 3-grams? Where are the Yanacochas – 1 billion tonnes of heap leachable material? Where are those deposits? We certainly have not found any of those in the last 10 years.

I think what we are seeing is that the industry is going to have a very, very challenging time in trying to grow over the next 10 years. I think we’re going to see some growth in 2012-'13 because there’s a number of projects that have been put into construction over the last few years.

Past that, projects that will have a real impact on our industry – the 1-million-, the 2-million-ounce producers – I don’t see them. And I think that until we see a paradigm shift in our industry’s exploration effort, this industry is going to continue to be challenged.

And when I say paradigm shift, think of the oil business. What happened in the oil business? They invented 3-D seismic. That changed the whole game where before they had success rates that were one in 20. Now they have a success rate of seven in 10. It changed the entire game for the oil industry. We haven’t had any of that in our business.

So, what’s happening today? The majors are throttling back exploration. The greenfield exploration is being throttled back. Not good. And the juniors, they’re not getting funded. Well, why? Well, here’s why: If you look at $1 invested in exploration and what you get out of it, in the '60s and the '70s you were getting $100. And let me remind you, gold was $35 an ounce. And in the '70s and '80s that came down to $83 and then $57 and then $23 and then in the last 10 years at a record gold price, $11.

Is that really the kind of return that investors in junior mining companies want to see? No. What do they do? They’re voting with their money, they’re out of the deal and I think that, again, we have to find something in exploration that will change these factors.

It’s the juniors are going to suffer, but until the majors put the money in exploration technology and get a new paradigm shift, this industry, I repeat, will be challenged.

And now you look at where are the projects being built? Interestingly enough, it’s at the opposite end of the spectrum. The companies are going into very high risk areas, and they mitigate that with putting projects into production in very, very low risk areas and the areas where the production is actually declining is in the medium risk area, interestingly enough.

And the other thing that affects the valuation of companies at a big impact is the length of time it takes to bring projects into production. Look back to the '80s. If you found something three, four, five years, you had your project into production. Today you’re looking at 10 to 12 to 15 years.

Well, do an NPV of 5% of anything that’s 15 years out and what do you get? Bupkis? Okay? So, you can have the best project in the world in your company, you put it on a 5% NPV 15 years, it’s worth nothing. And that’s a problem.

What can you do about it? Not a whole lot unless you can find projects that are smaller, higher grade, less impact, easier to permit in good countries. Otherwise if you’ve got the $4-billion thing that will take five years to build, it will take five years to permit.

The complexity of the projects [is due partly to] the location of the projects. Try to permit something at 14,000 feet with no water and no electricity. A lot more difficult than if you got paved road and paved highway. But if you’ve got too many people, not so good.

So, those are all issues that are very directly affecting the mining companies today.

Analysts – [are they] friends or foes? Look at the analysts’ prediction of the gold price over the last seven years and guess what they do. Well, next year the gold price will be up, but then after that it’s all over, it’s going straight down.

Now, why, as a shareholder, would you want to buy any gold stock if the gold price is going to go down? You wouldn’t. So, you know what? I say to them, please stop predicting, okay? Just use current gold price. And even better, why don’t you just use spot gold? It’s in the paper; it’s quoted every day; you don’t have to defend it. And be our friends instead of our foes because we're brothers, and on the oil side they keep predicting that oil’s going to go up.

Twenty to 25% of our costs is energy. So, essentially, they are both saying that we’re going to have margin compression. Now, why would you want to own any stock of any companies that is going to have margin compressions and headline commodity of price going down? You wouldn’t.

So, any shareholders here who talk to analysts, please get the message across: Either you hire Nostradamus or just use the spot price.

Tomorrow: Pierre Lassonde on gold demand.

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Franco-Nevada Corporation

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