A long time gold bull

Barry Dawes is the Executive Chairman of Martin Place Securities as well as a long time gold bull and gold expert. He knows what he’s talking about except that he’s always a bit bullish about gold and it hasn’t always been the best thing to do because Gold’s price hasn’t really moved in the past five years having fallen before that. I think it’s been a bit of a heartbreaking thing for Barry to have been such a gold bull during this period but he’s indefectible, he just keeps going and he is bullish still. He reckons the gold price is going to go a lot higher and he has got a lot to say about the Australian gold industry and in particular the gold that’s been discovered in the Pilbara region which is quite interesting and worth watching.

Perhaps more importantly for investors he reckons that more and more gold companies will pay dividends, I reckon they should be paying much more dividends than they are. There’s only a few of the companies listed here that are paying decent dividends and they’re all yielding not very much. 

Gold companies, in my view, should be paying a lot more dividends and should become income stocks because they have a solid price and a product that they can keep producing and there’s no reason why they shouldn’t, actually Barry says that that’s what’s going to happen. It’s worth keeping an eye on and always worth listening to Barry even as just a bit of a pick me up to lift our spirits.   

Here's Barry Dawes, the Executive Chairman of Martin Place Securities.

Barry, you’ve been a gold bull for a long time, the gold price hasn’t done anything for five years but you think now that it’s formed a base, I think.  The last time I read what you’ve written you think it’s now formed a base to go higher.  Why do you think so this time?

It’s really all about supply and demand, Alan, and the demand side is very robust into China and India and from what I can work out we’ve basically been delivering a lot of gold from the west, in excess of mine production, and consequently we’re left with a really tight market in the west of what is sort of freely available gold.  I think that’s become quite limited now and we can have trading on futures markets which sort of can come and go according to short term issues of let’s say fed policy or the level of the US Dollar or whatever else but I think if we look at the supply and demand side western inventory is declining and it’s very tight.

You’ve been studying this pretty closely, haven’t you Barry?  Take us through the numbers.

I think if you start with the total amount of gold that’s available in the world it’s about 180,000 tonnes that’s been mined over time and if you break that down you’ll find that jewellery is about half of that, so it’s about 90,000 tonnes and about half of that 90,000 tonnes is in India, so that’s 45,000 tonnes which just doesn’t come out, it’s very tight.  The amount of scrap that comes out of Indian jewellery is miniscule so it’s locked away.  China takes a lot more of that and then when we just look around the world most of the saleable jewellery has basically been sold as the gold price has risen over the last few years so there’s not a lot of inventory of that.  When we go and look at the other 90,000 tonnes we’ve basically got central banks with about 5,000 to 6,000 tonnes, individuals have probably got 30,000 tonnes and then by the time you take into account the coins and medals, and so on, there’s not a lot left as freely tradeable.  It’s really quite remarkable how little free gold is available and at the rate that we’re delivering it into China and India it’s just going to get tighter and tighter.

From supply and demand I can just see that there will be a pent up demand coming once we get a bit of weakness in some of the currencies as I anticipate over the next little while.  When we look at the gold price in the various currencies we’re pushing up against all time highs in many currencies, we’re certainly pushing the 2011 downtrend in most currencies like the Australian dollar, like the Canadian dollar, like the Yen, Euro, Pound, just wherever you look the gold prices are very high level and wanting, as far as I see it, to go much higher.  This basing period of five years is very long, we’ve seen relatively little volatility in the gold price, unusually low, and in the timeframes that we’re looking at every time we get this low volatility at a low price it tends to be a prelude for much higher prices in the future and I expect much higher prices going forward.  It’s not a matter of inflation or interest rates it’s supply and demand and the market will be very tight and so I think we’ll see a much higher gold price.  A much higher gold price does not have to reflect economic dislocation, it’s just purely supply and demand out of the rising middle classes in China, India and elsewhere.

Doesn’t there have to be a big increase in inflation for the gold price to rise, isn’t that why the gold price has been flat for so long?  Is because there hasn’t been any inflation?

I don’t think so.  It will be important I think when people in the west start to see inflation and say I would like to have some gold but then they’ll find that there’s not a lot for them to buy and that’s when we will see our gold prices rise because of inflation.  The demand we’re seeing out of Asia doesn’t have anything to do with CPI inflation that we see in the west in my view.

One thing that’s happened over the past couple of years at least is that the gold index in Australia has done really well even though the gold price has stayed the same and that, I think, is due to the gold miners here getting their act together on costs.  Is that right, take us through what’s been going on.

It’s a bit more than that, I think.  If we start with the fact that unfortunately about 10 years ago we ended up with probably two thirds of Australian gold production owned by overseas companies like the Newmonts and the Barricks and the Anglo Golds and Gold Field, etcetera, the stock market was denuded of the big producers other than Newcrest and consequently the production of gold in Australia declined from 1997 at 312 tonnes for that year down to about 250 when we bottomed in 2008.  Now, we’ve struggled on the way, or not struggled but we’ve gone up and I think we’re going to have a record year this year of probably 320 tonnes of gold production.  Now, that’s coming from these Australian stocks which have done very well in the Australian gold index.  Northern Star has taken some operations that were run by other parties, we’ve seen Evolution do the same thing and St Barbara in its own right has grown its output, we’ve seen Regis do very well.

There were companies that are developing new mines and growing production and we’ve got things like Dacian now onstream and Gascoigne, they’re adding to Australian production.  Sure, the currency being a little weaker has helped but it’s really been a matter of better managed companies and companies which are really quite outstanding.  The gold price has probably averaged 1,600 to 1,650 over the last five years as you point out and that’s a good price, costs have been held down but we’ve seen increasing output but it’s really been an extraordinary and impressive performance by the Australian – I call them the entrepreneurial geoscientists and they’ve done wonderfully well, there are dozens of other companies that are coming through with projects and starting production and so we’ll see the production grow and we’ll see our gold index move higher.

And at the same time the centre of gravity of the Australian gold industry, I think, is moving north from Kalgoorlie towards the Pilbara, is it not?

Yeah, Australia produces let’s say 320 tonnes and about 65% of that is in WA and of that probably more than two thirds is in the Yulgan.  What we’re finding is there’s some hard rock gold opportunities in the Pilbara and it’s quite impressive, the rate of increase in gold resources but not really in gold production there but the resources are growing.  Then we’ve got the potential of the Pilbara conglomerates.  I think that the promise shown in these companies late last year is going to be realised.  I’ve spent a lot of time looking at the mechanism of gold formation and the work that I’ve done to date is very strongly supportive of there being a very large gold resource in the Pilbara which we hope will be mineable, I’m fairly sure it will be.  It’s going to be difficult in terms of developing resources because of the nature of the conglomerates but I have no doubt there’s a lot of gold there.

What do you mean you’ve been looking at the formation of gold, tell us what you’ve been learning?

It’s very well known within geological circles that about 80% of all the gold that’s ever been in place has occurred during a period of 2,600 to 3,000 million years ago.  The earth was a very different place in those days.  The other 20% is coming from more recent things like porphyry coppers in South America, Western Europe and USA and in eastern parts of Australia.  For the most part most of the gold has really come at that period so some geological event took place there.  In the scheme of things there are two very old cratonic areas which are relatively unformed and one of those things is what we call the Kaapvaal in South Africa and the other one is the Pilbara in Australia.  It’s all relative but these are the two remaining areas that are under-formed so they’ve got a lot of study.  In addition to that there is a thing called the Witwatersrand Basin which sits within the Kaapvaal Craton and that is the source of the world’s largest gold deposit.  So far 54,000 tonnes have been pulled out of the Witwatersrand and there’s a bit of debate but there’s been another 40,000 tonnes of resources and reserves that have been identified.  Whether they will be mined or what is another thing because you need a lot of capital to develop those.

In addition to that overall there were 26 horizons of mineralisation in the Witwatersrand and not all those have been mined and not all of those will be mined.  We can probably say that we’ve got another 40,000 to 50,000 tonnes of – and that’s my estimate it may not be right – of mineralisation that will never be an ore.  Adding it all up there’s about 150,000 tonnes that’s been associated with the Witwatersrand Basin.  Coming to the Pilbara you’ve got the same granites and greenstones as they have in the Kaapvaal and then on top of that we’ve got the Fortescue Basin and the Hamersley Basin.  Because both the Witwatersrand and the Fortescue Hammersley Basins have got sediment piles which also are relatively under formed these are the only areas of that age that are under formed and consequently have been the study by a lot of academic geologists over the years.  Consequently, we know reasonably well the ages of these things are much the same.  We can look at what happened in the Witwatersrand. 

The view there is that the gold has really been precipitated from shallow continental seas, there’s a mechanism which will take a little longer to explain but that’s there and the evidence is quite strong.  The evidence is equally strong that the same thing has taken place in the Pilbara, in the Fortescue Basin.  They’re not twins they’re probably cousins but they are the same age and part of all of this academic study is they show that the geomagnetism, the paleomagnetism, suggests that these things were quite close together at some stage of about 720 to 800 million years ago.  The formations are similar, they tie in with this major gold event and when we look at the results that have come through from Novo Resources, which is a Canadian listed company that have done an extraordinary amount of work here and the results are very encouraging to my way of thinking.  Then we’ve got companies like Artemis and Kairos and Marindi.

What are the Australian stocks that have got the Pilbara gold, the ASX?

Artemis, De Grey, Kairos and Marindi, [Payoma] and these things are pretty interesting.  The Fortescue Basin gives us gold mineralisation over 400 kilometres, that’s a large length.  You’ve got stuff in the west and you’ve got it in the east and you’ve got remnants of the Fortescue formation sitting on top of the underlying greenstones and granites in the Pilbara to the north.  Very interestingly the Fortescue comes up in the south on the Bellary Dome a company called Marindi has found the same sort of gold buckets in the same area, 250 kilometres to the south.  Given that this is a basin without north, without an east/west, without a south, the probability of it going right across is high.  There’s probably local reasons for being here or not here, or concentrated here or not concentrated there.  It’s also very important that CRA in 1984 drilled a number of holes and one of those encountered the same conglomerates at 750 metres depth at 65 kilometres south of the discoveries in the Pilbara that Novo and Artemis have found.  It’s essentially continuous over 65 kilometres.  This gives a very large area and there’s a lot of work to be done before we get resources but essentially if we go back to the 150,000 tonnes at the Witwatersrand. 

If we look at any of these orogenic gold deposits around the world like in the Yulgan and the Birimian in West Africa the most I can come up with is about 18,000 tonnes each and Kalgoorlie even greater Kalgoorlie with 100 million ounces of production, that only works out to be 3,000 tonnes.  So these things are tiny compared to the Witwatersrand and if we think about the amount of gold that might exist in the Pilbara it could be very large indeed.

Gary Morgan has been boring me for years about [Payoma] and nothing has ever happened there.  Do you think something will?  Obviously, you do.

It will, look at the gold that’s been produced.  The evidence is the gold.  The methodology that he has used may not have been acceptable to some parties but we’re really learning a lot and the JORC code needs to think about these types of deposits and be able to accommodate them because in my mind it’s very significant.  Novo Resources did two bulk samples and gave the results in July last year.  I think they got one of 84 grams per tonne and another one of 47 and they averaged it out at 67 grams per tonne.  That’s a pretty high number.  Other areas are giving numbers of sort of two to three grams but two to three grams in this sort of material is very exciting and very valuable because it works out to be about $150 a tonne in ground value and operating costs in these types of things aren’t going to be more than $30 or $40 per tonne so they’re going to be very low cost operations.

Barry, looking at the list of stocks in the gold index, in the All Ordinaries gold index, XGD, a couple of things really strike me looking at it.  There’s a huge dispersion of them just for year to date performance.  If you were actually in the index you would have done nothing this year but if you’ve been in Silverlake or Ramelius or even Evolution you would have done very well but a couple of stocks have done terribly.  I just wonder what’s behind that dispersion and the other thing is that I would have thought that these gold companies ought to be paying dividends but only eight of the 24 stocks in the index are yielding.  I personally think that that’s crazy, they should pay a dividend.

I think they should pay a lot more dividends.  I think they’re going to be embarrassed by the riches, the Northern Stars and the Evolutions and the St Barbara’s and Regis, whatever, they should be paying 60% of their earnings as dividend, they should.  As far as I can see they can’t spend it fast enough on exploration and other things.

As much as they’d like to.

Yeah, so I can see more and more dividends coming through.  I’ve said for the last couple of years that holding gold stocks is going to be better than bank stocks for dividend investors, and I think that’s probably proven true. 

Barry, it hasn’t proven true yet.

Well you’ve had Northern Star and you’ve had Evolution and St Barbara and whatever, those things are paying dividends and they’re going to pay a lot more dividends as they go through.  There’s a structural issue in my view with that gold index because it doesn’t reflect the Australian gold industry at all and we’ve got stocks that shouldn’t be there.

You mean like Beadell for example?

That’s an Australian company with things offshore, I’m thinking more like Alacer Gold and Anglo Gold, they just shouldn’t be there.  I think S&P has done such an appalling job with these ASX indices, I’m so critical of them because the indices do not reflect what’s happening in the various industries.  If we look at the makeup of the gold index those stocks which have got overseas operations generally perform very poorly.  If we look at Perseus and if we look at Resolute these things should have done a lot better than they have because they’ve got good assets but because they’ve got assets offshore they’re not getting the rating that the Australian producers are getting even though they too would have had depreciating currencies against the US dollar.  Not enough thought goes into that index, we don’t have any explorers in there for example.  Coming to your point on the dividends I think you’ll find that there will be a lot more than eight within 12 months.

Well that’s good.  That was Barry Dawes, the Executive Chairman of Martin Place Securities.