Gold yet to hit its peak, says Asante CEO
It’s simple, says Douglas MacQuarrie, president and CEO of Vancouver-based, Ghana focused junior gold explorer and developer Asante Gold Corp. (CVE:ASE): gold has great days ahead of it, while the greenback, on the other hand, is on its way out.
“Empires never last forever,” says the four decade mining veteran. “The U.S. is on a decline; China, Brazil, India -- the BRIC countries -- are all on a gain. Thirty years ago, Japan, the U.S. and Britain made up more than 80 per cent of world GDP; today they’re less than 40 per cent. These are long term trends.”
Gold ascendency trumps the struggling greenback
And in the years to come when the American dollar will no longer bestride the financial markets like a colossus, what does MacQuarrie consider likely to be the currency to take over as the arbiter of value?
Well, about that...“It will have to be a basket [of currencies] and in that basket will be gold.”
The formalization of the inclusion of a non-inflationary commodity will be a nice change of pace in a world where the value of currency is being consistently eroded by campaigns of monetary stimulus that boost the sheer quantity of legal tender in circulation.
“A country cannot get rich by printing money,” MacQuarrie says in reference to the US Federal Reserve’s stimulus program known as quantitative easing, an emergency measure that has done much to strengthen gold’s position, eroding as it does the value of currency while bolstering the yellow metal’s reputation as a hedge against inflation.
“Anyone who thinks wealth can be created by the government printing money is a fool. It’s a very short term, stop-gap to some sort of crisis management. They’ve turned it into a long term fix to the economy. That’s not the way it works.”
Then, as MacQuarrie says, this extra printed money “finds its way into the Dow, giving everyone the feel-good idea that quantitative easing is working because the stock market is going up.” The retreat of the American dollar as the world’s principal currency is the triggering event that MacQuarrie sees as heralding a new era of gold ascendancy.
Investors: go long in gold
“I think the next five years will be spectacular, as the U.S. dollar loses more and more influence as the world reserve currency, which means gold is going much, much higher. My opinion - you should get very long in gold bullion and the best gold stocks.”
And the message beyond that is that investors would do well to make the most of this time, to take advantage of the fire sale prices at which gold miners are trading these days. “I strongly believe that gold has a future, but fiat money, which is the ruler you measure it with, is going to shrink while gold is going to grow.
“The best deal is to find the right junior with the right management that’s cheap. The right one cent, five cent, ten cent, or fifty cent stock is going to trade at $1.50, or $5 in next cycle and I am convinced that the next cycle is coming.”
“High grade, low cost, low capital”
But in the interim, it’s time, the explorer responsible for assembling land packages yielding 7 million ounces of gold resources, says, for the industry – drunk for so long on the seemingly endless rise of gold -- to change its ways. Certainly, the tendency to take every uptick in the price of a commodity as a signal to commission ever-larger mines with steadily diminished grade cut-offs makes the veteran miner see red.
“You need mining companies that are profitable. We’ve got to go after better ounces and greater margins, while watching costs. Every time the price of gold goes up we should not lower the cut-off grade and build bigger mines. Its time for the shareholders to see some real returns.”
“If you look at the last 100 years of gold mining you’ll find that in underground gold mines, if you have a third of an ounce of gold [per tonne] you make money; at a quarter of an ounce [per tonne] it’s iffy, and if it gets down to the 0.15 of an ounce [per tonne] range, you lose money.”
“The majors because of cheap financing and over valued share prices were able to finance low grade high capital mines, but if you look at all the projects that have been cancelled in the last six months -- it looks like it doesn’t even work for them anymore.”
“We’re back to the time proven mining model of higher grades, lower operating and capital costs. We want to concentrate on this.”
And that brings us to the thorny question of costs, in an industry habituated to ever-spiralling expenses being off-set by similarly ascendant prices for their commodities.
MacQuarrie has no time for the old-style metrics used to measure production costs that leant themselves to a certain massaging of figures.
Or as he says, “I call it lying. Goebbels would be very proud of the spin doctors.”
“A few years ago everyone was [producing gold at] $500 an ounce, but when you take their balance sheets and their total earnings, and look at the total costs and then the number of ounces... the industry has been misleading the investor for years and now they’re being called on the carpet and rightly so.”
“At all in costs of $1,300 to $1,350 per ounce, there is no margin. Stocks trade at a multiple of earnings and if there are no earnings, therefore stocks should all trade at zero.”
The problem here, MacQuarrie emphasizes, is the drop not in the price of the commodity itself, but in the operational profit, or lack of it, put under such pressure by the need to satisfy ever-increasing expenses in an overheated market.
“If you were cynical you would say the industry is driven by the service providers. The service providers all made lots of dough [in the just-ended years-long gold rush], the problem is that the shareholders didn’t. Pull a 10 year chart on the major gold producers – where is the growth or any significant yield?”
Nonetheless, the future for the metal is bright, with MacQuarrie noting: “The bottom line is that demand is increasing, production is decreasing, exploration is nil.”
Royalties recover first
In the short term, there’s one precious metals model MacQuarrie sees as likely to benefit from any economic upswing first.
“The royalty companies are going to recover first, as they don’t have any exposure to the cost [of the actual mining]. Their money goes in and then assuming you’ve picked the right mine, [a royalty comes out.]”
For example, Asante – which also has a sideline in gold royalties – recently announced a one per cent stake in PMI Gold's (TSE:PMV) Obotan gold project in Ghana. The royalty currently in arbitration, is worth, MacQuarrie says, “$4 million per year at current gold prices– so if it triples, well you can do the math.”
From there, he says, the canny royalty company with cash on hand would be well-advised to hold off until commodities – ever the cyclical phenomenon – pull back again to sink some of that into purchasing “fantastic assets.”
Because if there’s one sure thing about gold, it’s that the future, ultimately, glitters.