FDR and the future of gold miningOr, why exactly don’t we go after those tailings of ours?
I’ve thought about that, off and on. The answer might lie in the realm of “Monetary Science”, which is the proper title given (by the tiny handful of brilliant heretical economists) to the study of gold as money.
What follows in this comment needn’t alarm FDR shareholders, as the alteration in the gold mining industry it anticipates would not diminish our ultimate buyout price. Arguably, it makes our shares more valuable. But it is a different way of looking at the gold majors who might be bidding to take us over one day soon.
Back in ~2004 I read a persuasive paper arguing a gold mining company best maximizes its shareholder wealth by mining only enough gold to cover corporate overhead plus further exploratory drilling on its property. In those days, remember, gold was around US$400. The author argued that any mining (and delivering into the market) of gold beyond those limited amounts would merely delay the arrival of a stronger dollar gold price.
Long time gold bugs will recall how a cryptic reference to “Deep Storage Gold” in the US Government’s description of its official gold reserves once sparked some spirited discussion. Some people observed at the time that this perhaps unintentional classification hinted at the emptiness of Fort Knox… while implying all proven reserves of private mining firms on US soil “belonged” to the US Government. Newmont’s CEO likely would not have been happy to think NEM’s Nevada resources were merely Federal property “stored” far underground.
Yet remove the specter of state overreach, and we are left with an intriguing concept. Sprott Physical Gold Trust is a parking place for people wanting to own easily liquid bullion. Why shouldn’t mining companies seek to emulate this business model?
They will never get the full and exact value per ounce Sprott PHYS shares receive… but what is the alternative? Continuing the attempt to bring their reserves into the light of day? Gold mining, as others have observed, is a lousy business model. Between environmental restrictions, legal uncertainty in some jursidictions, high capital requirements, unpredictable cost structures, and uncertainty about the future dollar gold price itself, it’s no wonder so many gold miners have destroyed shareholder value, net, over the decades.
None of this is FDR’s problem, happily. Even if every gold miner suspended production tomorrow, our company would still be an attractive take-out candidate. But it answers the question of why our wise management is choosing to ignore the Antino tailings for now. And possibly forever.
The tailings still count towards the value of our Founders shares. They’ll still be there on buyout. And meantime, their existence still delivers bargaining leverage in future financing negotiations. And all this doesn’t cost a dime.
Will this kind of “hoarder” philosophy ever take hold at Newmont, Barrick etc.? Don’t hold your breath.
Their bankers expect the loans to be serviced. Most mining CEOs are loathe to shrink their personal empires to eliminate debt. But it’s an interesting possibility for any enterprise that perceives value in precious metals in these days of regular new dollar gold highs.
As to whether the banking system *likes* a lower gold price… that’s a question to which most of you already know the answer.