Page 7 - NOVAGOLD 2015 Annual Report
P. 7

The reason, I presume, is that fundamentals take time to gestate and usually reveal themselves when they are least expected. After all, they don’t ring a bell to say it’s time to buy or sell.
The renewal of gold’s long-term uptrend doesn’t require any specific event to happen. That is not to acknowledge that there are plenty of triggers that would favor gold over almost any other asset class, as happened during the last financial crisis. Indeed,
if one needs an example of how well gold has shown it can perform as a diversifier, we needn’t look back very far. When my company, Leor Energy, exited energy in 2007, oil was trading over $100 a barrel and gold was $600 or so an ounce. What followed has been quite an amazing performance for a financial asset that is often miscast as a commodity. Moreover, as a currency itself, who can gainsay the performance of gold since then against practically all other currencies including the dollar? Astonishingly, gold’s naysayers will argue that equities have outperformed gold. But that’s not correct. If you bought gold before the financial crisis, you’ve made more money on the metal than in the broad market. When the Dow peaked in 2007 at 14,000, gold had a six- handle. Imagine that: since the onset of the financial crisis, gold has outperformed commodities, the dollar and even equities. How can a fiduciary, or “prudent man,” not own some of that for his clients ... especially when one remembers that the expression “prudent man rule” itself was originally defined as a means to assess the risk of an investment against the most prudent of assets: gold? I dare say he will ... assuming he can buy enough
of it when he needs it.
What is so interesting about gold, however, is that none of the black swans which darken our skies need to alight for
precious metals to resume their uptrend. What’s necessary for that to happen is already underway, and in a fashion that does not appear to have to disturb the life, liberty or happiness of anyone other than a few miners ... and perhaps those who have intemperately eschewed diversification and prudence. The best case for gold, and investing in gold miners, is indeed that the industry’s most gaping wounds are extrinsic to the gold price. Really well-managed gold companies can perform admirably. Mark Bristow’s Randgold, for example, has returned 19% annually over the last decade, far outpacing the broader market. Most of its peers have not delivered, however, due to the misallocation of capital, ill-considered acquisitions and a series of crippling compromises and false assumptions on jurisdictional risk and mine quality. And most will continue to not deliver ... though,
as with the oil industry earlier in this century, higher prices for their products or an increase in demand could well bail them out before the day of reckoning.
What follows are four charts with which everyone should become familiar as they show that peak gold production
is becoming very much a reality. The first two charts are straightforward: despite a marked increase in exploration spending over the past decade, new discoveries have been increasingly rare and size and production are set to decline (fig. #1 and fig. #2). This is going to worsen as expenditures
on exploration collapse ... from the “Majors” on down to the bombed out “Juniors” that most often incubated the pipeline.
At a time when the “Majors” are producing gold faster
than they can replace reserves, and when projects in exotic jurisdictions are finding it particularly hard to raise development
Discoveries fig. #1
Three-Year Running Average (Moz)
(US$ in millions)
$7,200 $6,000 $4,800 $3,600 $2,400 $1,200
150 125 100
Peak Discoveries
0       $0
Gold Discovered
Gold Exploration Budget
Goldcorp corporate presentation, 11/14 (SNL Metals & Mining, CPM Group, GFMS, and Metals Focus)
Production fig. #2
Annual Production (Moz)
100 95 90 85 80 75 70
+20 years average development time
Peak Production
Goldcorp corporate presentation, 11/14 (SNL Metals & Mining, CPM Group, GFMS, and Metals Focus)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

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