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Reserve rundown will 'come home to roost', says Letwin

Toronto-based miner Iamgold (TSX:IMG) is a firm believer that higher gold prices are on the cards, as failing reserve replacement efforts will inevitably catch up with producers.

Reserve rundown will 'come home to roost', says Letwin Reserve rundown will 'come home to roost', says Letwin Reserve rundown will 'come home to roost', says Letwin Reserve rundown will 'come home to roost', says Letwin Reserve rundown will 'come home to roost', says Letwin

Iamgold CEO Steve Letwin

Henry Lazenby in Toronto

The company believes current investor malaise towards gold largely stems from the industry's value destruction of the recent past years.

CEO Steve Letwin told Mining Journal in an interview in Toronto the gold industry was not yet fully focused on sustainable business strategies and that peak gold would give way to a scramble to consolidate the market in the quest to replace depleted reserves. This, in turn, could translate to better market values for gold producers.

"In 2011, the gold industry in Canada was able to raise C$48 billion in new financing to help fund new exploration. Today that number is close to zero," he said. "For juniors it's even more acute. We have a very serious problem in the space that goes unrecognised really."

He painted a dire scenario where the current production rate of about 107 million ounces of gold per annum could not be replaced. In fact, the industry at most only managed to replace about 20% of what it produced.

"That is a number that is going to come home to roost one of these days, as companies that are running their reserves down can't replace them. I suspect that is more of a three-year time line, but in 2018, we're seeing a peaking of gold production."

He is not expecting to see a gradual decline, but a precipitous fall. "A lot of the majors are not going to be able to sustain what they produce today."

Letwin believes the cycle of lower gold prices would end abruptly, as Eastern jurisdictions continue to invest heavily in physical gold stocks while the West, where the pricing is driven, nowadays owns scant bullion reserves and trades somewhere between 300-400 times on paper what it produces physically.

"This could create a very serious problem for paper traders when the gold reserves drop low enough, that they can't tie their paper trading to something that's physical," he said.

Getting it right

Letwin said the gold industry, like any other commodity sector, time and again made the same mistake of overinvesting at the height of the cycle and creating too much capacity.

"We probably should be sitting more at annual production of 80Moz/y and not 107Moz/y. So, when the gold price moved from $300/oz at the end of the 90s to $1,900/oz, everybody rushed into the space, with way too many single-asset companies that had projects with bad economics. So, we've lost our way because there was greed on both sides."

According to Letwin, people on the equity side wanted to see more ounces at any cost and the gold producers did not even blink about costs and just responded in kind by building new mines. "We had our reckoning because we overbuilt."

Letwin believes there are too many gold companies in the market today. "We have around 10 majors, 30 mid-tiers and 100 juniors. We should probably have something more like three majors, 12 mid-tiers and 50 juniors. That's what a right-sized industry should look like," he said.

There are too many marginal companies and this sets the stage for more consolidation to take place.

However, what complicates this seemingly simple process is the fact that the market does not currently give adequate credit for development assets.

A gold company in development has a price to net asset value (P/NAV) that is "far inferior" to that of a producer. "They're out of whack because of what shareholders think their true value is. If more deals were done on a P/NAV basis, you'd have more deals being done like the Barrick Gold-Randgold Resources deal.

"I applaud that deal simply because they managed to drive it off P/NAV - there was no premium. That's very difficult to do. It's very difficult to convince somebody with a high P/NAV to do a deal with a developer on a P/NAV base, because people won't pay for the intrinsic value of the development project."

He said it was all about capturing the synergies.

However, one of Letwin's concerns is that a high P/NAV company might make a run at Iamgold. "We have a low P/NAV of about 0.6, and there are a lot of companies out there for a variety of reasons that are sitting at one or above. We have this huge reserve base and we have this huge growth phase ahead of us that the market is not giving us credit for and we are vulnerable to that kind of approach," he said.

"The concern I have is that the proper P/NAV gets reflected for our shareholders in such a scenario."

Letwin said the industry needed to be more disciplined and realise that the market could turn its back very quickly if one did not stick to basics. Those basics entail acceptable returns on capital deployed and maximising cash flow per share.

Bridging the gap

Gold-backed exchange traded funds need physical gold to link to, which Letwin sees as a positive for bullion.

New technologies such as blockchain that underpin the suite of crypto currencies hold the potential to connect the company's gold production to more consumers.

"Crypto gold may have a future for us and we're working on it. Right now, millennials don't care about gold. They've been exposed to a fairly robust global economy, except for the global hiccup in 2008/09, when gold went through the roof, but for the most part millennials had seen nothing but technology, so the fintechs are much more attractive to them than gold.

"That's something where blockchain might come in and help market it to this important group," he said.

Iamgold has entered collaborations involving blockchain with Tradewinds and Emergent Technology Holdings.

"I think that is one possible way for us to control our destiny. We produce so much gold and then lose track of it. As an industry, we really don't have a brand that we market in a meaningful way."

Letwin said if investors were better able to link up with miners that were producing environmentally friendly, socially acceptable gold bullion they could bank that electronically and have a deposit of gold that sat somewhere in the world in a vault through a blockchain mechanism, people would become more engaged and interested in the gold industry as a whole.

"This is still a distant connection. A lot of young people simply do not know how to connect with gold. Blockchain can help us get there and that's what we want to do," he said.

"Right now, there's no sense of demand other than from the central banks and jewellery. If millennials were able to look at buying gold on their phones, they'll probably be interested. They'd want to hedge, since everybody is betting so heavily on the US dollar."



IAMGOLD is listed on the Toronto Stock Exchange (trading symbol "IMG"), the New York Stock Exchange (trading symbol "IAG").




IAMGOLD is listed on the Toronto Stock Exchange (trading symbol "IMG"), the New York Stock Exchange (trading symbol "IAG").