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Harquail on how to alleviate gold equity discount
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6th March 2012
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TORONTO ( – Gold miners have a Faustian bargain with exchange traded funds (ETFs), and will not outperform them until companies cease disappointing investors, Franco Nevada CEO David Harquail said on Monday.

While other gold-mining executives have attributed the low valuations of their shares to low expectations for future gold prices among analysts, Harquail said the blame lies squarely on their own shoulders.

The recent gold miners’ earnings announcements had highlighted some “spectacular multibillion-dollar mistakes” on the part of some management teams, and investors respond to this.

While he did not mention any names, companies like Canada’s Kinross Gold announced massive write-downs last month, sending stock prices sharply south.

It is well know within the gold sector that ETFs have been vacuuming up a lot of investors’ money that may otherwise have gone into the producers of the metal.

While miners have struggled to contain capital and operating costs, while also struggling with governments seeking greater shares of profits, exchange traded products are essentially only exposed to pricing risk.

Even soaring gold prices, which should provide producers greater profit leverage, have failed to attract investors to their stocks.

Harquail noted that since the summer of 2010 gold stocks have remained flat, despite the gold price rising by $400/oz.

While mining executives, such as Barrick Gold’s Aaron Regent, have said stocks have lagged gold price improvements as analysts have factored much lower bullion prices into their financial models, Harquail does not buy this.

“The reality is no-one buys a gold stock assuming $1 200/oz gold in the future,” he said.

“The math is there – it’s not because people expect lower gold prices. I think people in general are optimistic or they wouldn’t be buying other [gold] products.”

He calculates gold miners are trading at a 30%-plus discount to the ETFs that buy their product.

Were the money in these gold-backed investments to instead flow into the producers themselves, share prices would be 42% higher, Harquail told an audience at the Prospectors and Developers Association of Canada 2012 commodity outlook lunch in Toronto.

But therein lies the Faustian bargain.

The ETFs – which have a value of $135-billion – are partly to thank for a higher gold price, as well as for putting the yellow metal on the radar for a wider investment audience.

And dealing with the devil often has its pitfalls.

“The scary thing is, what happens if these ETFs start becoming net sellers of gold? Then we’re going to have a huge hangover in the future,” Harquail commented.

How can mining companies improve their rating with investors?

Find a great discovery in the vein of Newmont’s massive Yanacocha mine, in Peru, one of the biggest gold mines globally.

“Those things drive the industry because then we get exploration optionality back in our stocks,” said Harquail.

In absence of that, gold producers need to earn the trust of investors, taking up the old mantra of under-promising and over-delivering.

“It’s great to have stretched goals, but if you don’t hit them, it’s a huge disappointment to investors,” he pointed out.

On top of this, companies should be focusing on bringing greater technical prowess to the bargaining table with governments looking for a bigger piece of the profit pie.

Toronto- and New York-listed Franco Nevada is a gold-focused royalty and stream company, which funds projects in return for future royalty payments or production at a set cost.

Edited by: Creamer Media Reporter


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