Earlier this month, I had a chance to catch up with Fronteer Development Group (AMEX:FRG) CEO Mark O'Dea. Given all that has changed on Wall Street in the intervening weeks, the following interview provides both a fascinating look back and an insightful glimpse forward. Let's see what O'Dea had to say about gold, commodities, and the mining industry at large.
Christopher Barker: Many investors sensed that a correction was inevitable after gold marched through the $1,000 mark, but the depth of this correction, and particularly its impact on the shares of miners, has taken everyone by surprise. Do you expect the precious-metals sector to mount a recovery soon, and what could provide a catalyst for that recovery?
Mark O'Dea: I don't think the majority of the resource sector expected the broader conditions to be what they are in the context of high gold prices, so I think it has caught a lot of people by surprise. I do think all the indications are pointing to us being at or near the bottom right here. I think we're seeing indications of acquisition cycles starting. We're seeing companies like Aurelian and Gold Eagle, and even some of these in the uranium sector starting to get acquired like Kintyre ... the asset in Western Australia. I think overall, that sector catalyst is going to be the acquisition cycle, and that's going to see some rebound in investment interest.
[Aurelian Resources has since been purchased by Kinross Gold (NYSE:KGC), Gold Eagle Mines will be acquired by Goldcorp (NYSE:GG), and the Kintyre uranium asset shifted from Rio Tinto (NYSE:RTP) to a joint venture between Cameco (NYSE:CCJ) and Mitsubishi.]
Barker: Do you expect that to coincide with more joint venture activity with the major miners as well?
O'Dea: I think so. I think majors are sitting on lots of cash; they're looking around at their pipeline of development projects -- not growing -- and looking out for quality assets in quality places and where they can acquire them.
Barker: While the operating cost of production is an important guiding metric, I have been very interested in tracking the all-in cost of production as a true gauge of the profitability of gold mining. Barrick Gold (NYSE:ABX) CFO Jamie Sokalski has estimated the industry average all-in cost of production at between $700 and $800, while Gold Fields (NYSE:GFI) CEO Nick Holland has offered $700. What is your estimate of the industry's average all-in cost, and what does that mean for the price of gold?
O'Dea: Well, I think it's a trend that we're seeing that's not restricted to gold. I think it's across all commodities, really. The escalation of the all-in operating costs has actually outpaced the rise in commodity prices in a lot of cases. You're seeing a lot of margins reduced, and companies not nearly as profitable as they thought they'd be, given the commodity prices. I think what that's telling you is that if we want these commodities to come out of the ground, then commodity prices are going to need to go higher. We're going to need to have long-term, sustained higher prices. That goes for gold, it goes for uranium, and it goes for metals across the sector.
Barker: Several CEOs and industry insiders have gone on the record with specific price targets for gold. The former CEO of Gold Fields, Ian Cockerill, has said he is "comfortable" talking about $1,200. Tanzanian Royalty Exploration CEO Jim Sinclair sees $1,650 as a conservative target. Jim Rogers is looking for $3,500 gold, while Rob McEwen sees it reaching somewhere between $2,000 and $5,000. What is your view on how high gold is likely to go before this multiyear bull market reaches its peak, and what sort of a timeframe do you foresee for such a peak?
O'Dea: One thing that seems to be universally true in predicting the price of commodities is that everybody is almost always wrong. I can throw out a number: I think over the next 12 months we're going to see -- I'm not going to go crazy -- but I think we'll see $1,200 gold easily. I think that's a long-term, sustainable price. I think it's going to be linked to cost of production, which is fundamentally linked to the cost of oil, and I think it's going to be linked to ongoing problems in the U.S. economy.
Barker: That $1,200 price may seem conservative to you, but given the sentiment right now, it's comforting for investors to hear that industry CEOs are targeting numbers well over $1,000.
O'Dea: Well, we're still looking to build out our gold pipeline, and we're not doing that because we think gold is going to collapse.
Further Foolishness:
- The gold ounce bounced the week after this interview
- This correction has been a serious gut check
- More on rising gold production costs
