Stockhouse Movers & Shakers: Why gold miners act like ‘hillbillies’

Stockhouse Movers & Shakers: Why gold miners act like ‘hillbillies’

6/2/2011 7:18:38 PM | Peter Kennedy

Goldcorp Chairman Ian Telfer says many of his gold mining sector colleagues are cautious by nature and have trouble accepting that sky high gold prices may be here to stay.

Goldcorp Inc. (TSX: T.GStock Forum) Chairman Ian Telfer says senior gold mining executives should stop acting like hillbillies and start to invest more of the industry’s profits on research and new exploration techniques.

In the last 30 years, Telfer said boom and bust cycles have been such a feature of gold mining that many senior executives are cautious by nature and have trouble adjusting to the newfound prosperity that goes with record high gold prices, and speculation that the good times may be here to stay.

In that sense, he said the industry reminds him of the Beverly Hillbillies, the television sitcom about a family of hicks who went to live in Hollywood after striking oil in a U.S. swamp.

“Those of us in the gold mining industry, we are like Beverly Hillbillies, we have been poor for so long,’’ said Telfer during an interview in Vancouver. “Now that the industry is extremely profitable, we are still learning how to deal with that.’’

As the world’s second largest gold miner, Goldcorp is a key beneficiary of the rising price of bullion, which has jumped to around US$1,500 an ounce, compared to $272 in June 2000.

In the first quarter of 2011, Goldcorp’s revenue rose by 69% over the equivalent year ago quarter. In the same period, net earnings rose by 150%.

“Goldcorp’s cash costs in the first quarter were less than $200 an ounce,’’ Telfer said. “There are very few industries in the world where your costs are under $200 and you are selling the product for $1,500.

But in Telfer’s view, this is no temporary phenomenon. “I think it’s permanent,’’ he said. “We can now plan for $1,500 gold, plan to pay dividends, and do exploration, and plan to upscale a lot of our expenditures, because I don’t see the price dropping for the forseeable future.’’

The Goldcorp Chairman says he is bullish in part because major mining companies like Goldcorp are having so much trouble finding the stuff. “We have spent literally billions of dollars on exploration in the past 10 years with minimal results.’’

The fact that mine supply has risen by only 1.6% between 2001 and 2010 (according to World Gold Council figures) is another reason for Telfer to feel bullish about the outlook for prices.

Goldcorp currently has five new mines in construction. But like most of the major gold mining companies, Goldcorp doesn’t have anything in its development pipeline that it has found on its own.

“It is almost unheard of that a major gold company would have a major discovery. It just doesn’t happen that way,’’ said Telfer. Instead, companies like Goldcorp get bigger through acquisitions that tend to be expensive and result in a negative stock market reaction if a purchase is deemed by the market to be expensive.

This is one reason why Kinross Gold Corp. (TSX: T.KStock Forum) has seen its stock price tumble from around the $20 level last October to $15.34 this week. The company was widely criticized for paying $7.1 billion for Red Back Mining Inc., a move that secured the Tasiast gold mine in Mauritania and the Chirano gold project in Ghana, West Africa.

One analyst described the company as “an indiscriminate and undiscerning buyer.’’

The high cost of acquisitions can be attributed in part to the fact that the industry hasn’t spent enough to research new exploration techniques that would help it find gold more cheaply. “That is an area that the industry will start to focus on,’’ Telfer said.

Meanwhile, he said Goldcorp has no aspirations to leapfrog over Barrick Gold Corp. (ABX: T.ABXStock Forum) and (NYSE: ABXStock Forum), which currently ranks as the world’s leading gold producer. “The largest companies don’t trade at higher premiums or have any physical advantage over some of their slightly smaller competitors,’’ he said.

While it has been Goldcorp’s practice to shed some of its older properties over the years as it bids to upgrade its portfolio, the 62-year-old Red Lake mine in northwestern Ontario remains the company’s flagship operation in terms of gold production.

The one black cloud on Telfer’s horizon has been the concern over the impact of its Marlin mine in Guatemala. In May 2010, the Organization of American States’ (OAS) Inter-American Commission on Human Rights ordered the Guatemalan government to temporarily suspend the Marlin mine, following alleged human rights violations around the company’s operations.

But Marlin remains in production.

“Our view is that most of the claims being made about water quality, or the mine’s impact on the community are not correct,’’ Telfer said.

“We test the water, the government tests the water, and we even have a third party that tests the water. We all come to the same conclusion, and that is that the contaminants that the activists say are there are not there,’’ he said.

“There is no chance that we will shut it down.”

At the age of 65, Telfer has seen all of the ups and downs that life in the mining industry can bring. But he sees no reason to retire.

“[Barrick Chairman] Peter Munk is 83 and still seems to be enjoying it,’’ he said. “So I certainly have no plans to do nothing. I have no plans to step down from Goldcorp. That’s for sure.”

In his role as Chairman of Goldcorp, Chairman of The World Gold Council, and Chairman of Uranium One Inc. (TSX: T.UUUStock Forum), Telfer sees lots of opportunities but remains focused on the jobs he has now.

“My wife married me for richer or poorer, but not for lunch,’’ he said.—shakers–why-gold-miners-act-l


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