On the day the WGC office in Houston is closing, I thought the attached
piece by Pierre Lassonde carries some ideas we could hopefully hear more of
coming from our industry leaders.
Best of luck to you guys in Houston...
Ken
Mining must become smarter
by Pierre Lassonde; PDAC 2000
In a speech that many called a wake-up call to the mining industry, Pierre
Lassonde, president and CEO of Franco Nevada Mining Corporation, told a
Mining Millennium 2000 audience that the industry is the author of its own
misfortunes.
It has made poor business decisions, he said, failed to do what is best for
shareholders and done little to attract or retain top talent. In a dot.com
world it is no longer business as usual for mining companies, and it may
never be again, he warned.
Speaking at the convention's opening Mineral Outlook luncheon, Lassonde said
the information technology sector is acting as a giant vacuum cleaner,
sucking money from all other sectors, particularly mining. Four years ago,
he said, the combined metals and mineral and gold and silver weighting on
the Toronto Stock Exchange was more than 22 per cent. Today, it is only six
per cent.
The dedicated core of investors is also melting away, Lassonde said.
In Europe, the old-time money managers are gone and the new younger managers
feel no historic allegiance to mining stocks, while in the United States,
most resource and gold funds have been under performing to an embarrassing
degree. "A combination of post-Bre-X losses and investors redeeming their
dollars out of those funds has decimated some of the high-flying funds,"
Lassonde said. "It took our industry 20 years to build up a specialized
institutional base. In less than four years, we have dismantled two-thirds
of it."
Franco-Nevada itself has had dramatic evidence of the changing investment
world. Some U.S. funds have told it that despite a US$2.5 billion market
value that places it as the fifth largest gold company in the world, Franco
Nevada is too small for them to consider.
In a dot.com world, Lassonde warned, fund managers investing in mining are
going to buy only one or two stocks that are brand name leaders. Investment
capital has learned to put a premium on firms such as Microsoft that can
dominate and manage their respective niches, he said. Lassonde told his
audience that a typical mining strategy has been to strive to be the lowest
cost per quartile producer with the idea that the competition will go
bankrupt first.
Another strategy, when metal prices decrease, has been to increase supply in
order to lower unit costs. "Any rational industry would do the opposite," he
commented. Lassonde said that by not adopting rationalization strategies,
the industry has served its shareholders badly. Why are two diamond
processing plants being built virtually next door to each other in the
Northwest Territories, he asked, and why were three separate mines developed
at Hemlo?
"The oil and gas industry wouldn't have thought twice about unitizing it as
one operation," he said. Experience has shown that corporate strategies in
the mining sector have come at a cost of low returns to investors and a loss
of talent, Lassonde continued. And little has been done to attract new
talent.
"What bright kid in his right mind would go into mining when dot.com
companies are where it's at?" he asked. There are signs, however, that some
sectors of the mining industry are moving beyond being mere commodity
companies. As an example, Lassonde pointed to Alcan, which is developing new
uses for its product with major auto customers, and to companies that have
become market leaders, such as Cameco in uranium and DeBeers in diamonds.
"All of these companies reduce supply in periods of oversupply and are
investing to increase the long term demand and value of their products,"
Lassonde said. "They all deservedly have a global investment following."
He warned that unless the mining industry becomes bigger, smarter and more
profitable, it risks being seen simply as a collection of low-margin
momandpop commodity producers in small stagnant market niches.
And, he concluded, if mining executives are not proactive, institutional
shareholders will force the changes on them.
Condor Consulting, Inc.
St. 206, 4860 Robb Street
Wheat Ridge CO 80033
Tel: 303-423-8475
Fax: 303-423-9729
www.condorconsult.com
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