The gold industry is in need of more high-quality deposits, Pierre Lassonde, chairman of Franco-Nevada (TSX:FNV,NYSE:FNV), told industry professionals at AME BC’s Mineral Exploration Roundup. He reminded them that fulfilling this need is their job and asserted that the industry is falling short because miners have not invested in new technology. He believes that challenging years lie ahead if companies continue along this path.
The message Lassonde delivered last week in Vancouver is not new. He has issued this call to action before, including at the Denver Gold Forum, an event he sees as one of the most important for the industry.
Perhaps miners will take this consistency as an indication of how critical Lassonde believes the situation to be. He insisted that miners’ lack of innovation is — and will continue to be — a major problem for the gold industry.
Lassonde did not shy away from using history to point out gold miners’ shortcomings. Recalling gold’s bull run in the 1970s, he said prices rose from $35 to $800. And though it took the industry seven years to respond, when it did, production more than doubled.
People debate why gold equities are so drastically underperforming bullion prices during this bull run, which has lasted for a decade. Exploration and development spending have soared, yet the industry lacks a discovery record that reflects these conditions.
Gold miners have spent enormous sums of money on low-quality projects. Cutoff grades in some cases are now as low as 1 gram per metric ton. “The next cutoff is dirt,” MINING.com quoted Lassonde as saying.
He also pointed out that many projects are in risky, undeveloped countries, which contributes to rising costs. Furthermore, moving projects to production once took about three to five years. It now takes 10 to 15 years, and Lassonde believes that time frame is eroding value.
Investors are fed up and Lassonde seems to empathize with them. He said that in the 1960s and 1970s, when gold was about $35 per ounce, $1 in exploration spending would yield $100 in return. Despite record gold prices during this bull run, over the last 10 years $1 in exploration spending has returned only $11.
“Investors are voting with their money. They are out of the deal,” he said during his presentation in Denver.
Lassonde placed much of the blame for the current state of affairs on the lack of new technology. To drive home his point, he compared the gold and oil industries, commenting on game-changing oil-related developments such as 3D seismic technology, fracking and horizontal drilling.
Responding to a question at last week’s Roundup, he said “[w]e’re nowhere. I mean give me a new technology that has really shaken our world in the last 30 years. I mean we’re still using the same stupid drill rigs that we’ve used for 100 years. Maybe they’re a little faster. The oil is better. But there’s nothing dramatically new.”
Challenging times lie ahead if the gold industry — especially senior companies — fails to invest in technology that will create a paradigm shift, Lassonde warned.
He is a firm believer that gold’s bull run is not over and could continue for another five to 10 years.
With gold demand sitting at $220 billion, growth is ten-fold higher than it was a decade ago, Lassonde pointed out. He questioned if any other industry can make such a claim. Furthermore, he projected that inflation and demand from India and China will drive further growth.
Cash is trash and central banks are realizing that all currency is suspect, he said. He foresees a growing trend of central bank gold purchases and he thinks money managers will return to a tendency of holding five to 10 percent of their portfolios in gold.
Not to mention that history appears to support Lassonde’s outlook for a longer bull run. He noted that over the past 200 years, the average bull market has been 21 years.
Another indicator Lassonde used in support of his argument for the longevity of this bull run is the Dow to gold ratio. Lassonde said that the top of every bull market has been met with a ratio of 1:1.
When he spoke at the Denver Gold Forum, he noted that the ratio was about eight to one. He said if he is correct about this relationship, that means gold will go to $13,000 over the next 10 years.
“I’m not so sure about one to one,” Lassonde said. “But two to one, I would bet a lot of money on that one.”
Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.
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