Last week I saw a startling interview with Goldcorp's CEO.
To be honest, I don't normally listen to the talking heads on TV. But if the fools at CNBC want to throw a few softball questions to the CEO of a top-10 gold producer, I'm all ears.
What I heard, though, was a little disconcerting. As you'll see, it could signal another question mark above the heads of gold investors, especially when it comes to big gold…
The interview started out, right to the point…
When Goldcorp CEO, Chuck Jeannes was asked why there was a disconnect (in the past two years) between senior gold miners and the price of gold, he was quick to admit "it has been a quandary."
You can see this "quandary" in the 2-year chart below…
Jeannes was quick to ring this up to two factors:
1) He says it was "much easier to put some optionality value in the equities when gold was trading at three or four or five hundred dollars, than it is when gold is trading at $1,700." So in essence, the market had more to look forward to with gold prices sitting at multi-decade lows, than it does in today's gold market.
2) He also admits that "10-15 years ago you really had no choice but to buy physical gold or the [gold miners.]" Today with the advent of ETFs more investment cash is flowing away from miners.
Both of these responses shed some light on the situation. But like an election-campaign president, Jeannes failed to address the elephant in the room: skyrocketing costs for senior producers.
How much are costs rising? You may remember the chart that we shared a few months ago:There's the rub. Big gold has done a poor job of keeping costs down – total costs per ounce are up almost 70% since 2008. Wow.
And while some companies like Barrick Gold have come out with a more aggressive capital discipline plan (something that Byron King has covered in these pages), it was startling to notice that Goldcorp's CEO failed to mention cost control upfront.
While commenting on the trend of gold ounces getting more expensive to pull from the ground – a great opening for at least one comment on capital discipline if you ask me – Jeannes didn't have anything to say about cost-cutting.
Instead he made two last points:
First, he steered the conversation towards scarcity. Specifically saying increasing costs would create more scarcity for the metal and improve sales revenue.
Last, he quipped that with more expensive gold (due to higher costs), the senior miners will have "more leverage" going forward.
Yikes. Although this was a short snippet of an interview it really rings home a startling truth about the mindset of some big gold miners. Cost-cutting still isn't a priority for some of these guys!
Frankly, there's no reason why any CEO, let alone Goldcorp's, would want to cover up any cost-cutting initiatives. That said, you can I can only assume that Jeannes doesn't have any in mind, or isn't worried about costs!
We'll have to wait to see how this starts to play out. But I'm leery to say the least.
Meanwhile there is some good news. Since late July we've seen a nice run-up in all the big miners – Goldcorp (GG) up 28%, Newmont (NEM) up 16% and Barrick (ABX) up 16%.
But let's make sure we keep an eye on this situation. If this recent interview with Jeannes is any indication, equity investors may have some headwind.
Keep your boots muddy,
The Daily Reckoning