PDAC: Mining industry dogged by get rich quick mentality says Franco Nevada (T.FNV) CEO

Peter Kennedy Peter Kennedy, Stockhouse
0 Comments| March 2, 2014

TORONTO - A get rich quick mentality on the part of the investors is putting undue pressure on the resource industry to achieve results that are often unrealistic, a mining conference was told Sunday.

Speaking to the PDAC’s annual convention in Toronto, Franco-Nevada Corp. (TSX: T.FNV, Stock Forum) Chief Executive Officer David Harquail said the global gold mining industry wrote off losses of $60 billion last year, even though there was no accompanying crash in commodity prices.

Harquail said part of the reason is that mining CEOs are struggling to meet the expectations of profit-hungry investors with short term horizons and a poor understanding of the hard realities associated with mine development.

“Too much capital is being deployed without a realistic understanding of the chances of success,’’ he said.

Harquail was speaking on the second day of the PDAC mining conference, which is expected to attract a crowd of 30,000 to the Toronto Convention Centre this week. Much of the talk will focus on the challenges facing a sector that was forced to swallow large writedowns last year..

An industry veteran and member of a well-known Canadian mining family, Harquail said the industry has seen significant changes in the amount of regulation that companies have to deal with following the Bre-X gold scandal in 1997.

The introduction of the National Instrument 43-101 standard of disclosure has eliminated some of the larger fraud and excess promotion that was feature of the sector 20 years ago, he said.

However, he warned that despite more regulation, mining companies still require long lead times to develop orebodies, that can be extremely costly, and more often than not, produce weak rates of return. It's why Harquail's former boss Seymour Schulich once  described mining as "a mug's game.'

“As an equity investor in this business, you have to be really selective if you want to make any money,’’ he said.

Harquail said little has changed in the way that orebodies are assessed, meaning that the industry is still dependent on the drill bit to determinel the value of the rock.

Due to the way that capital is allocated these days, he said, CEOs find themselves dealing with intermediaries such as hedge fund managers, who may be “scaring the hell’ out of companies that need financing. That marks a big change from the days in the 1960s and 1970s when companies tended to directly with investors.

“It’s not healthy for the industry,’’ he said.

Indeed, Dundee Capital Markets analyst Martin Martinbeeld said the get rich quick mentality helped to drive the gold price down last year as Exchange Traded Funds switched from physical bullion into equities during the S&P 500’s record breaking run.

Murenbeeld had been expecting the price of gold to average US$1,600 an ounce last year.

However, he said the sale of 881 tonnes of gold by Exchange Traded Funds in 2013 weighed heavily on prices, and after starting the year at US$1,700 an ounce, prices fell as low as US$1,212.75.

Murenbeeld is expecting prices to average around US$1,320 an ounce this year and US$1,420 in 2015.

Jeffrey Christian of the New York-based CPM Group LLC was equally cautious about the prospects for silver, which he saidwill a verage US$20.37 an ounce in 2014, down from the 2013 average of $25.75.

“It’s going to be a tough year,’’ said Phil Newman, CEO of CRU Strategies, a U.K.-based metals consulting group. “There are a lot of companies still running on fumes.’’

That view was shared by some of the other analysts who are scheduled to speak at the conference this week.

At the junior end of the market, the recent 15% rise the in the TSX Venture Exchange has lifted spirits in the industry, said Rick Rule, Chairman of Sprott U.S. Holdings, a fund management group.

However, he doubs that the TSX Venture index will go much higher in the coming months. “I think the summer will be tough,’’ said Rule. “We are seeing insufficient opportunities to deploy capital,’’ he said.

Tags: GOLD

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