Submitted by The Gold Report as part of our
This interview was conducte by Sally Lowder of
The Gold Report
Gold equities are in competition with gold ETFs for shareholder
dollars. In this exclusive
interview, Goldman Sachs Managing Director Ian Preston discusses
the steps gold companies must take to pull investors back from the
ETF space and shares Goldman Sachs' outlook for the gold price over
the next year or so.
The Gold Report:
Your recent commodity price research shows a gold price of around
$1,811/ounce (oz) for 2013. Could you talk with us about how some
of the macroeconomic issues influence that forecast?
When we look at gold, we don't have in mind a specific
supply/demand balance going forward. It's easy enough to see the
supply side. In trying to forecast a price for gold, we tend to run
out a 4% per annum contango from the current gold price until we
think U.S. interest rate policy will reverse and rates will start
to climb. That stage just keeps on moving out?as it has with
Quantitative Easing (QE) 3.
We look at the gold price to forecast earnings, and over the
next 6 to 12 months, we'd expect $1,650/oz at the lower end and, if
it breaks through, $1,850?1,900/oz at the upper end. If
accommodative fiscal policies continue globally, it could go
significantly higher. But bear in mind that as equity analysts
we're trying to forecast earnings, and to do so we want to be as
close as possible to where the gold price will be for the next
three to six months, even if the range is quite broad.
And in your world, it's better to be conservative than
It doesn't do our investors any good if we use a $2,000/oz gold
price for the next six months and it ends up averaging $1,780/oz.
It's more meaningful to say we have a positive view around gold.
And we do. Considering such accommodative fiscal regimes, very low
interest rates globally and central banks buying gold where
previously they have been sellers, it's pretty difficult to take a
negative view on the gold price over the next 12 to 18 months.
Many analysts at the Denver Gold Forum last month echoed that
sentiment. They don't see any catalyst that would push the gold
price down appreciably. Let's talk about gold equities and
exchange-traded funds (ETFs) in the context of the backdrop you
From a risk diversification point of view, the ETF clearly gives
investors exposure to gold. So the gold majors aren't competing
with each other for investors; their competition is the gold ETF.
Over a 10-year timeframe, the correlation between gold equities and
the gold price is very strong, but more recently?say the last 12
months?gold equities, certainly for the majors, have underperformed
the gold price. That's partly due to the fact that, certainly among
the majors, earnings per share (
) hasn't reflected the leverage to an improving gold price.
Underperformance relative to the gold price actually goes across
the board, not just the gold majors. In fact, it's magnified in the
juniors and the smaller companies. Just to clarify your point,
though, what are some of the majors you're talking about?
We'd put Newcrest Mining Ltd. (NM:TSX; NCM:ASX) in there with the
likes of Barrick Gold Corp. (ABX:TSX; ABX:NYSE), Goldcorp Inc.
(G:TSX; GG:NYSE), Newmont Mining Corp. (NEM:NYSE), etc.
In the environment you described earlier?QE, European sovereign
debt issues, central bank buying and so on?what can these companies
do to make a more compelling case for themselves with
First, they must deliver on whatever guidance they've given the
market. That's an imperative to have investor confidence. They also
must maintain long-life reserves and be able to replace them on an
annual basis to keep a perpetual gold production chain going.
That's what the gold ETFs give investors.
But gold ETFs have grown dramatically over the past five to seven
years. What's given them such an edge?
An ETF costs investors a small amount to hold but carries no risk
as compared to a gold equity that comes with operational risk,
acquisition risk and potentially political risk. On the other hand,
ETFs cannot pay dividends, so meaningful shareholder returns that
offset a lot of the operational risks inherent in the gold equities
could bring back some of the investors who have gone to ETFs.
I think the gold seniors are aware that the return to
shareholders is among the key criteria. All of them were talking
about it in Denver. Whether the return takes the form of a payout
ratio or a percentage of the payout ratio or free cash flow or is
tied to the gold price, the majors got the message loud and clear
that they have to do more than rely on the gold price to see share
price appreciation and shareholder returns.
To be more attractive to investors than the ETF, the gold
seniors also must grow EPS. Increasing volume when gold prices
increase accelerates EPS growth, but volume growth must drive EPS
growth?not simply higher gold prices. With volume-driven EPS
growth, improving gold prices also give investors more leverage to
gold than they would have in an ETF. And I think perhaps we're
starting to see recovery in the gold equities. But it all starts
out with meeting the guidance they give the market.
Of the companies that you cover, tell us about those you feel will
In our markets, you'd have to start with Newcrest Mining, the
fourth largest gold company by market cap globally. Its resource
and reserve base put this company in a league of its own. It has
longer-life assets than any other major, and its four largest
operations each produce more than 400,000 oz gold per annum. But
despite that very good starting base, the company unfortunately has
not had a good track record recently of meeting production
guidance, nor shown EPS growth.
That said, it somewhat depends on the timeframe, but if you're
looking forward 20 years, this company will be around for that long
and potentially could grow through that whole period from the asset
base that they already have, let alone any new assets it finds.
Newcrest has been extremely successful in adding resource and
reserves to its portfolio.
The next biggest after Newcrest in our market is Regis Resources
), which is not well known in North America. The management team
that bought into this company changed the board, delivered one mine
already in Western Australia and is well on the way to delivering a
second. It has driven quite significant volume growth in a very
short space of time. Its share price performance certainly has been
very strong over the last three years and is likely to continue
growing provided Regis keeps meeting its targets.
How many producing mines does Regis have?
Two at the moment. Moolart Well was the first mine Regis developed
and it's been in operation just over a year. Garden Well, the
second, just commenced production. That means tremendous volume
growth with no EPS dilution.
Does Regis have any other assets?
It recently bought a third project, a joint venture between
Newmont's Australian subsidiary and Alkane Resources Ltd. (
), a small Australian-listed company. With this new project, called
McPhillamys, Regis will soon be producing 400,000-plus ounces. Two
years ago they weren't in production at all. Now, that's attractive
And in terms of cash flow, Regis certainly will be in a position to
become a dividend payer. That's also an attractive element for a
Do most of the companies you cover have North American listings or
are most of them exclusively listed in Australia?
I only cover the ASX-listed companies, although some?for example,
OceanaGold Corp. (OGC:TSX; OGC:ASX), Perseus Mining Ltd. (PRU:TSX;
PRU:ASX), Alacer Gold Corp. (ASR:TSX: AQG:ASX) and Teranga Gold
Corp. (TGZ:TSX; TGZ:ASX)?have Canadian listings as well, and
Newcrest is now listed on the TSX.
Oceana's growth profile has been an impressive one, similar to what
you described with Regis.
And Oceana's at the point now where it's about to commission the
Didipio project in the Philippines. That's a very big leg of
growth?a company-changing asset. My colleague just returned from a
site visit, and Oceana will be commissioning in this current
Going from mining low-grade refractory ore underground in New
Zealand, which is where Oceana's current operations are, to an
open-pit copper-gold project in the Philippines will dramatically
change its cash generation, and it's on the cusp of production as
The market has been skeptical about delivery because that
project has been around for a very long time and was supposedly
going to be developed a number of times over the years. Under these
circumstances, you'd expect the market to be looking at Oceana as a
This Philippine asset is a game changer for Oceana. Do you see the
Philippines more as an emerging gold district than in the past?
There's no question that the Philippines has the resource base that
might have hosted a lot more development over the last five or six
years. Given the resource endowment and a quite skilled labor
force, you would have expected the Philippines to have participated
more in the resource boom.
It's really starting to come to the fore now, though, because
mining companies have to go where the deposits are. I think
activity will increase in the Philippines as some of the global
majors get involved there. Xstrata Plc (
) has a controlling stake in the Tampakan project. In March, Gold
Fields Ltd. (GFI:NYSE) from South Africa exercised an option to
take a 40% stake in Far Southeast in the Philippines, and soon
afterward announced an option to acquire 100% of the Guinaoang
deposit. There are some major nickel operations in the Philippines
In another fairly major acquisition, B2Gold Corp. (BTO:TSX;
BGLPF:OTCQX) bought CGA Mining Ltd. (CGA:TSX; CGX:ASX), which has
an asset in the Philippines, the Masbate gold project. So it looks
as if quite a bit is bubbling in the Philippines.
And the government has done a lot of work in clarifying the legal
issues surrounding ownership rights. Once miners are comfortable
with that, you're on the road to more significant development. The
smaller companies usually start moving in first because they're a
bit more nimble. Then the midtiers and the seniors follow. Once the
whole spectrum is involved, you really start to see quite
Speaking of spectrums, let's move to another sector in the resource
arena and another company you cover?Lynas Corporation Ltd. (
). With North American interest in rare earths and specialty metals
magnified over the last few years, we've been watching Lynas's
story in Malaysia unfold.
Lynas has gone through everything necessary to be able to operate
the Lynas Advanced Materials Plant in Malaysia, the so-called LAMP
facility but one final challenge remains. It's a legal challenge
brought by parties who oppose the operation of that facility in
Malaysia. Under no circumstances do they want it to operate. Of
course, it's always difficult to make a call on legal
Everything Lynas has done in terms of the development has been
within in the Malaysian guidelines for a project of that nature and
also within the International Atomic Energy Agency (IAEA)
guidelines. I don't think anyone would say that Lynas has cut
corners, that it hasn't disclosed environmental information or that
it hasn't adhered to best practices globally. From that
perspective, the company has gone as far as it can.
If the court rules in Lynas' favor, the company will be able to
start importing the concentrate from the facility in Australia and
actually start producing the rare earths as early as December as
the final court ruling is due Nov. 7. It's that close. But at the
moment, investors are waiting to see a product actually being
produced from the plant.
So Lynas is facing the final hurdle in the race, and we'll be
waiting with bated breath. Do you have any suggestions for our
readers on the investment environment going forward?
We certainly sit in the camp that believes the commodity boom is
not over in the sense that volume growth will continue. Still,
we've probably seen the best of most metal prices already and each
of the metals will react differently over the next few years. For
example, in iron ore, we expect the seaborne-trade market to be in
oversupply probably in two or three years' time. Copper, in
contrast, could well have upside remaining because China's demand
will grow. Even though its growth rate has declined, it's off that
much larger base, so, volume growth for copper is still very much
intact?and the same goes for seaborne-traded iron ore.
From an equity investor's perspective, with a few exceptions the
easy part of earnings going up because prices were going up is
pretty well behind us now. But we'll still see earnings growth
driven by those companies that can grow volumes.
That suggests that investors have to be pickier.
Absolutely. You have to be much more focused on, first, the
commodity. Clearly, we think gold still has a very favorable
outlook. Then you have to focus on the companies that can grow
volumes without actually issuing fresh equity.
And volume growth without blowing out your per-ounce cost
Absolutely. But cynical clients would say, "Yes, everybody is
talking the talk. We need to see them walk the walk now."
Well put, Ian. Thank you so much for your time and your
Ian Preston is a resources analyst for Goldman Sachs' Global
Investment Research in Australia and New Zealand. In 2000, he
joined JBWere, a private wealth management firm that in 2003
partnered with the Goldman Sachs Group Inc., as a research
analyst covering the gold sector. Mid-cap base metal companies
came under his coverage umbrella later in 2000, and Preston
assumed responsibility for emerging small- and mid-cap mining
companies in 2004. He was named managing director in 2010.
Prior to 2000, Preston was a resource specialist, working on
both buy and sell sides of the financial services industry in
Johannesburg and Brisbane. Following graduate school, he spent
four years analyzing and implementing new mining projects in
diverse metals, and earlier in his career, he spent six years
working for copper and gold mining companies in operational and
Preston earned a degree in mining engineering from the
University of the Witwatersrand in Johannesburg in 1974 and a
Master of Business Administration from the University of Cape
Town in 1980. He is a registered professional engineer in South
Africa and an accredited member of the Securities and Derivatives
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1) Sally Lowder of
The Gold Report
conducted this interview. She personally and/or her family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are sponsors
The Gold Report:
Goldcorp Inc. and B2Gold Corp. Streetwise Reports does not accept
stock in exchange for services. Interviews are edited for clarity.
3) Ian Preston: I personally and/or my family own shares of the
following companies mentioned in this interview: Newcrest Mining
Ltd. I personally and/or my family am paid by the following
companies mentioned in this interview: None. I was not paid by
Streetwise Reports for participating in this interview.