Within 2011, the world has experienced the most popular and valuable commodity’s price rising extremely fast, from $1330 per troy ounce to $1738 currently, the advance of nearly 31%. And dated back 05 years, when the gold price stayed at $658 area, it has marked the increase of more than 167%. The increase in the gold price has helped a lot of gold producer, since the outputs of those companies are marked by the gold price standard. CNBC recently got the good interview with the top guy leading one of the biggest gold producers globally, Richard T O’Brien at Newmont Mining (NYSE:NEM).
In the interview, Richard said that the company is seeing the big demand in the mining business, even though the economy in the US seems to be stumbling along in the mining business, but it is still accelerating, It doesn’t matter whether it’s the gold segment or the copper segment, but he sees the big investment, and the opportunities would continue to add production around the world. And for the output, to sell the products into meaningful, developing countries who are looking for infrastructure. As the nature of the mining business, it was very expensive to not only find it, but to permit it, so it takes the company probably 05 years to find the good deposit, normally it should be 10 years. When it got the initial exploration rigs into the ground, and once the company start producing, they will go very quickly. So it is intensive business, and it does deplete every day. The gold production over the last decade has been down around 3% compounded annually until this year, when it is starting to increase. In Newmont he is seeing the production increase over the next several years potentially, but right now it is flat – so it’s the business which is having difficult replacing its reserves.
On NEM’s operating performance, its margins are expanding as quick as or quicker than gold price. When anybody looks at its operating cost, the cash cost today. But when looking at the capital cost to the business in addition to that, it is probably tracking gold. Richard reminds the audience to look back at the past peak of gold price in 1980s as the indicator. In the peak of 1980s, the gold price was at $800, if we escalate it till today, $2,300. Costs have been compounding at 15% a year, while gold price has accelerated to over $1,700, the company’s margins on total cash cost basis plus capital have not doubled.
One of the key success factors for the mining business is to replace its depletion of its reserves. So Richard mentioned that when the company goes into the developing country, there are several things to happen. First is the capacity buildings. A lot of countries are not prepared to help permit big mines, they do not have the legal infrastructure, and they do not have the people and the expertise. So one thing as the mining business, Newmont needs to do is to help building capacities so those countries can weight in an assist. In addition, full environment impact statements would take years and years to complete. So the company needs to make sure that it can do its best to sustain throughout the full life cycle of the mine. Richard’s advice: Baseline, come up with a plan, get approvals, get community involvement, get government involvement, it takes time. But it’s worth it at the end of the day because we can get more support and we can get that support in the way where we can stay engaged with the local community.
For the gold and commodities price, as well as the interest rates, Richard thinks each of the central banks is trying to talk down the inflationary pressure, so we might see some stability. The fed said that they are going to try to be stable for the next couple of years. But this is where he thinks we are in gold price, in the cycle here, which inflation is already built in. We have already put more currency into the world, and that currency is going to inflate, no doubts. Gold will continue to be in the bullish environment. According to the CEO, going forward, what it means to the infrastructure business themselves is that it enables us to put capital to work, and we do have the employment opportunities, connecting that capital with employment and developing nations to help assist those economies. Those are really goals for the mining business that he wants to see succeed. And the company is going to put capital to work in this environment.
Readers can see the video of the interview here.
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