Myopic gold CEOs get a tongue-lashing from Randgold's Bristow

A gold industry obsessed with containing costs and minimising risks will find itself at the edge of a cliff by 2020 as supply tightens, according to one of the most profitable producers.

Despite prices recovering from 2015 lows, the industry has been slow to reinvest in exploration or sustaining capital, Randgold Resources Chief Executive Officer Mark Bristow said. Half of the gold coming out of the ground isn’t profitable to mine based on the true extraction costs, he said.

“The one thing this industry does very well is mine gold at a loss,” Bristow told analysts at a breakfast meeting in Toronto on Friday.

The weakening outlook is being masked by a focus on all-in-sustaining costs rather than cash costs, he said. While companies can lower AISC and boost earnings by reducing spending to sustain operations or tightening exploration budgets, the tactic erodes asset quality in the long run, the CEO said.

Similarly, severe damage has been done by high-grading, which shortens the life of a mine by focusing on the best quality ore. Since 2007, grades have dropped from an average of 2.5 grams a ton to about 1 gram, Bristow said.

In a wide-ranging chat with analysts, and during an interview afterward, Bristow was characteristically frank, saying bitcoin should be viewed as the “underworld of currencies” and criticizing the world’s largest producer of gold, Barrick Gold, for it’s record in Tanzania.

But most of his remarks involved what he sees as a systemic failure by the gold mining industry to do its job properly. It’s not the first time Bristow has warned the industry is effectively producing at a loss. Two years ago, as prices hit a five-year low, he told analysts that half the metal coming out of the ground wasn’t profitable. That hasn’t changed despite a 20 per  cent-plus improvement in prices because it was accompanied by a drop in grades, he said in the interview.

In addition, large producers have re-focused on the developed world to minimise risks at the expense of asset quality, he said: “If you want to find elephants, go to elephant country.”

Meanwhile, Bristow blamed the widespread use of proxies by fund managers for the failure of executives and boards to be held accountable. He’s not the first to call for a reckoning within the industry. In September, billionaire John Paulson’s firm called for the creation of a coalition of gold investors to curb years of value destruction.

Paulson’s presentation cited $85 billion in lost value in the gold industry since 2010, but listed Randgold as offering the best shareholder total returns.