Gold

Fascinating interview with Aaron Regent the CEO of Barrick Gold on CNBC (TSE:ABX).  He is one of the more interesting guys “running” Canada, honest about his company and his industry.  First and foremost, is the scope/size of the business, total market cap for all gold stocks, and gold ETF is around $600-700 billion.  Which is lots of cash, but if you consider this is one extraction business not that much.  So the arrival of new capital, even in reasonable amounts, can have a rather dramatic impact on the industry.

That gold trades near $1,300/oz gives firms like Barrick a tremendous amount of  free cash flow, and one of the more interesting comments from Regent was the fact that finding new reserves is difficult and bringing a new mine to a “exploitation level” can easily take a decade or more.  This is the interesting bit, Barrick’s legacy mines are high cost producers, the newer ones operate at lower costs, therefore balancing the equation.  However, Regent indicated that is reserve attrition is about 1% per annum, and he see’s little chance of turning that around in the short term (5 years) – in fact his comment was that reserve attrition was a fact of life in the gold mining industry going forward.

Why gold prices are rising is the result of several elements:  (1) governments which had been selling gold, at a rate of 400-500 tones per annum are now net buyers. (2) Countries such as China, which had almost no gold demand 10 years ago, are now large buyers.

One question (Jack Welsh) was what would prompt gold prices to falter as it had in 1987:  Regent though that only a major Chinese recession could cause a dramatic fall in price.  According to Regent gold price in terms of staple goods is well within its historical range:  against oil and copper in particular, it falls within historical boundaries.