Buy-side attendance drops at Denver Gold Forum (September 24, 2008)

Attendance was up 10% at this year’s Denver Gold Forum due to a 19.4% surge in sponsor representation, but a 6.5% drop in buy-side participants was a clear sign that the volatile markets and fragile economic times were keeping at least some people at home.

During the three-day conference, the price of gold dropped from $801.50 on Sept. 8 to $756.40 on Sept. 9 and to $752.00 on Sept. 10.

“In all my years at the Denver Gold Forum I probably haven’t seen anything like what we’ve seen here over the last two days,” Mike Jalonen, senior analyst at HSBC, said in his introduction as a session monitor on the final day of the conference. “The price of gold can’t go too much lower or there will be a lot of red ink. We’re very near the bottom.”

Nick Holland, chief executive of Gold Fields (GFI-N, GOF-J) pointed out that the all-in cost for the industry worked out to about US$780 per oz. gold. “So at the gold price today nobody is really making any money,” he concluded. “US$800 per oz. gold is a reasonable floor for planning purposes.”

On the sidelines of the conference, mining executives could be seen checking gold and stock prices on their blackberries and on computers in the ballroom lobby between sessions. “It’s carnage out there,” one executive was overheard muttering to a colleague during a coffee break.

One mining executive from a gold producer in Africa, speaking on condition of anonymity, noted that the number of one-on-one meetings he had had was down sharply from the year before.

Corporate presentations touched on issues ranging from the importance of operating in “safe countries,” to labor shortages, mining costs and price inflation, lengthier permitting times, and equipment backlogs. Reducing exposure to rising energy prices and the challenges of mining lower grades at higher costs also featured in most discussions.

The most common refrain however was that gold companies are hugely undervalued, despite compelling fundamentals for the sector.

Barrick Gold‘s (ABX-T, ABX-N) Alexander Davidson, vice president exploration and corporate development, noted that while the price of gold has moved up nearly US$500 per oz. from three years ago to the 2008 year-to-date average of US$900 per oz., with gold’s retrenchment from March the company is only trading at about 14 times earnings.

“These are very attractive levels,” he pointed out. “It’s surprising when you consider the depth of our pipeline and our leverage to the gold price. We have all long-life, low-cost assets, and an A-rated balance sheet.”

On a positive note, low interest rates and inflation are good for the gold price, and strong demand figures coming out of India, Turkey and Dubai in August should be cause for optimism. Even at US$800 per oz. gold, he noted, Barrick’s cash cost margins would be 50% higher than last year.

Richard O’Brien, president and chief executive of Newmont Mining (NMC-T, NEM-N) said he is a gold bull over the long run and believes the metal could climb to US$1,300 to US$1,400 per oz. over the next year.

“If people think financial concerns related to the U.S. are gone, they should just read the newspapers,” he said. “There will be volatility [but] over time I think we will continue to see a stronger market.”

Kevin McArthur, president and chief executive of Goldcorp (G-T, GG-N) predicted that the gold price is undergoing a correction and is going to turnaround and move above $1,000 per oz. and possibly US$1,500 per oz. over the next twelve to fifteen months. “Supply and demand is going to drive us because the industry just isn’t growingand supply just can’t meet that growing demand.”

But perhaps Tye Burt, president and chief executive of Kinross Gold (K-T, KGC-N) summed up the prevailing sentiment best: “Do not lose hope. This is the gold business. This business is cyclical.”

Supply fundamentals have never looked better, the supply of scrap is drying up, and new mine supply has a lot of friction in the pipeline, he argued. “Not only are new mines not coming into production [but] it’s never been tougher to permit [and] finance a new gold mine.”

And all of that adds up to a tremendous opportunity.

With industry-wide capital costs rocketing skyward, dramatic people shortages, cash costs rising at 25% per annum, Burt said, “that is symptomatic of an industry that is going to be in severe supply constraint so that’s a time to buy good stories.”