This presentation was delivered by John Doody, editor of the Gold Stock Analyst, at the New York Hard Assets Investment Conference, held 12-13 May 2008 at the New York Marriott Marquis on Times Square.
NEW YORK (Resource Investor Conferences) -- Let me just preface this a little bit by how I got into this business. I was a professor of economics for 20 years. And people say to me, how'd you get into this business? And then of course we all know that gold is money. And that was exactly the way I got into it, because gold is money.
And I started playing around with gold stocks in the mid '80s, and frankly, was not impressed by the research that was available at the time. It would tend to be kind of survival oriented, you know. Guns and ammo and tin goods and a shack in Montana to be ready for whatever's coming.
And yet there were companies that were mining gold and making businesses out of it, and I couldn't figure out which ones to buy. They all made exactly the same thing. This isn't like Coke versus Pepsi, where there might be a taste difference, and they spend billions telling you the different reasons to buy Coke and not Pepsi. They all make exactly the same stuff.
But if you look at their price, the stock prices are all over the place. The numbers of shares are all over the place. The productions are all over the place. The reserves are all over the place. And I just couldn't - I wanted to find - since they all made exactly the same thing, I wanted to find a standardized way of looking at these stocks that was at least a place to start.
It wasn't necessarily an end place, but it was a place to start. And that place to start is something we'll talk about as we go through today's presentation. And it leads you to an analysis that, to me, has been simple and quantitative and not too particularly difficult to understand. Since I'm not a geologist, I'm not interested in companies that are smaller than those that are in production or at least have a feasibility study.
So that - I cover 20 of the companies that are here, out of maybe 100 companies here. So most of the companies are a little bit smaller, but they're all trying to get to be the size that I could cover.
So today I want to talk a little bit about the macro case for gold. We all got some second thoughts. Certainly the CNBC people have second thoughts about gold at the moment. And I want to review some analysis techniques that we use, and in the course of those analysis techniques you'll learn 6 out of the top 10 stocks. If you want to learn all top 10, you'll have to come tomorrow. Tuesday is my newsletter presentation at 2:00.
But the only reason you buy stocks is you want to make money. And this has been our track record in the bull market since April of '01, until the end of last year. The top 10, we focus on what are the 10 best stock firms, was up an average of 785% versus gold being up 227, the XAU 275, dollar, of course, down, the S&P 500.
So basically, we've had a good track record. We have a pretty institutional readership, most of the funds and all that subscribe. The real readers, the base of the readers, are you people, retail investments. And I can't scroll this down but this is the top half of the most recent list.
We cover 75 stocks in total. Almost 60 golds and 15 silvers. So the golds we go through the list alphabetically. So this is a second sighting of Barrick [NYSE:ABX; TSX:ABX], so we did the first issue had AngloGold [NYSE:AU] and Apollo [AMEX:AGT; TSX:APG] and others in it. We may not like these stocks. We cover them, though, because this is how you learn who's undervalued.
And we might like them at a different price, but at the current price, we don't like them. But we're ready to buy - we're willing to own any stock on the list at the right price. And so I want to take the next slide - we're just going to look at this portion, this slide here.
And one thing, people think that the gold bull market is over. This is the bull market for the last - I don't know, since 2004 I guess. We've had a lot of setbacks. The big one, we all know, was from $725 back from $567. Right? That hurt. But we got over that. We recovered, we went all the way up to over $1,000. And we pulled back $853.
And that was a negative, we came down 15%. That wasn't as far as we came down from $725, when we came down 22%. So I think that we're over that slippage. Hopefully we are. And certainly we have to bear in mind that these pullbacks, this is how Mr. Market shakes out the nonbelievers. And this really sets up for the base for the next leg higher.
Now, why is gold going higher? Because, in my opinion - this is the professor of economics speaking - the dollars is headed lower. We've had - since the dollar index made a high of 92.63 - this is at the end of '95. Since then, we've had seven failed rallies in the dollar. Seven times the dollar has tried to rally higher, and it's failed every single time.
Now, when we're right around 73 on the dollar index, I think this is going to be failure number eight. Why is that? Because what's the big U.S. export? What's the single thing we export more to the rest of the world than anything else?
Dollars! That's exactly right. And we haven't stopped exporting them. The trade deficit, the current account deficit is running around $700 billion a year. Those dollars have to find a home. And if they don't find a home, then the original recipient, the car manufacturer in Japan, the clothing manufacturer in China - those dollars get sold until the price falls enough until they find somebody that wants to hold them either for their own domestic purposes or they want to use them to reinvest back in the United States, to buy stocks and bonds or to buy companies.
This is when Daimler should have bought Chrysler, not when they did, 10 years ago, when the dollar was a lot higher. So this export, the dollar, hasn't stopped. It's been $700 billion a year now for the last couple of years. It was higher; yes, it was higher. But it hasn't stopped. And the trade deficit, which is a major component of the current account deficit, hasn't turned around. Yes, our exports are up. But our imports are up, too, and oil is driving those imports higher.
Another way to look at why the dollar is not going to stop falling is real interest rates. This is a chart you don't see very often, but this is the gold price up on the top here, and this is the real interest rate. If you take a 3-month treasury bill, and you subtract from that the rate of inflation, you get a real rate of return of -2.8%, which means that people who have money invested are actually losing money, losing purchasing power on that invested money.
People who have CDs and that kind of stuff; they're losing money, losing purchasing power. And look where the real rate of return went in the late '70s: 5.7%, negative; 7.3%, negative. So we're negative now 2.8%, but we've got a lot lower to go. We know inflation's going to run higher, and these are different inflation numbers, right?
These are - this 4% inflation is probably really 8%, right? Because the government is making adjustments to the inflation data now that they didn't make back in the '70s. So, we've got a lot lower to go, I think, in terms of the real rate of inflation, and this is going to drive gold higher because gold is an escape from the dollar. It's an escape from the loss of purchasing power.
Okay. Now let's take a look at some of the analysis we do. The first question is why 10 stocks? Why not the 20 or 30 or 40? I see some of you coming up to me with your portfolios. And that's simply too many stocks. You can't possibly follow 20 or 30 or 40 stocks.
And we think 10 is the right number. You could convince me 8 or 9's okay. You could convince me 12 is okay or 13. But 30 and 40 is not okay. The more stocks you own, the more you're just going to duplicate the market. If that's what you want, buy mutual funds.
So why not one or two stocks? And I know there are people who come to these conferences looking for the one gold stock to buy. What's the one? And a lot of times it's the wrong one. Because what happens is that you have a risk of a blowup. If you just hold one or two stocks, look what's happened to Gabriel [TSX:GBU]. This red line, I just used the gold ETF because it's easier to put on the same chart than the gold price itself.
And this red line shows where the bull market really got started in May of '05 when gold finally got out of that high 300/low 400 doldrums and took off. Look what's happened to Gabriel. Big deposit in Romania. But tremendous NGO (non-government organization) opposition to permits even though the place is a mess. It'd be a superfund site in the United States. They just can't get that permitted. So people got excited about the permit-ability, and then they've lost permitting rounds of late, and the stock has come all the way back down. So anybody who bought Gabriel, probably, in the last couple of years has lost money.
(inaudible) used to be an exhibiter here. Remember how enthusiastic Fred was and blah blah? "We're going to make tonnes of money!" Blah blah blah. Well, the ounces are still there, but it's only recently - and we don't really know this for sure - but it looks like the mine's finally starting to work right. But the stock ran all the way into the 20s, low 20s, and then pulled back when the market or the mine didn't perform the way the management had told us it would perform.
So, blowups. Blowup on performance, Gabriel blew up on permits. You look at the next stock, Newmont, over the period of time since the market started going. It had been a lousy performer. Gold was up more than 100% and Newmont [NYSE:NEM] was up 30%. Right? They've had a change in management, shaking up, and it's looking much more attractive now.
So 10's the right number for us, anyway. And one thing that does is it forces you to discipline yourself. If you hear a good story somewhere, or you pick it up somewhere along the line, and you say, "I like this stock." That means you've got to like it better - if you have a 10-stock portfolio, that means you've got to like it better than the 10 you've already got. Because to put number 11 into the portfolio, you've got to kick somebody out. So that discipline helps keep you focused on the 10 best stocks.
So how do we pick the stocks? Well, one is the right stage of development. As I told you, we don't look at exploration stocks. I mean, we're interested in the stories and so forth, but there's a high failure rate in exploration. Just because they found ounces doesn't mean they're going to get permitted or they're going to be financeable or they're going to be economic.
And second, since I'm really a data-oriented guy, there's no data to analyze. Sure, results are nice, but there's no total ounce that comes out of that. There's no reserve, no production yet. So I like information that you can analyze. And I like companies - so in this mine-stage chart here, here we have the exploration stage, and stocks go up.
And no question, the stocks go up on exploration news and discoveries. But what happens is some fall by the wayside and don't go anywhere because the discoveries don't pan out. And second, when they do find something, and they go through a financing stage, and some dilution and so forth, and then they go into this quiet period, where nothing's going on. It takes a couple of years to build a mine.
So they're building a mine, and all the people who were in this stage early on, they ultimately leave, get tired and leave. And we go into this valley, when the mine is really hitting its stride in terms of being built, being developed. And then we get into sort of anticipation of production, anticipation of performance.
And on this upslope, this is where Minefinders [AMEX:MFN; TSX:MFL] is. Minefinders got an almost 5-million-ounce deposit in Mexico. They're going to be producing a couple hundred thousand ounces of gold silver equivalent at roughly $300 cash price per ounce. The stock's around 10 bucks. I think it's a $20 stock in production. And it's a top 10.
And the final stage, of course, up here, is when they get into production, and they either find out they've got to grow to do better or somebody takes them over. And it's almost buy or be bought.
The next way to look at companies is I like companies that have production growth and falling cash costs per ounce. And this chart - I'm sorry for the detail of it, but what you want to be looking at here is the top line is that Agnico-Eagle [NYSE:AEM; TSX:AEM]. Great production growth: 240,000 ounces to 1,300,000 ounces a year forecast in the year 2010 to 2012.
Okay, 440% production growth. But surprise, surprise: at Agnico-Eagle, which we've all known as a zero-negative cash cost producer due to its byproducts, is going to lose that byproduct equivalent here because they're expanding into real gold mines. Agnico's existing gold mine is not really a gold mine. The gold is so low in grade, it's 0.13 ounces per tonne.
If it was only gold there, it wouldn't be producing. But it's the byproducts that make that mine, LaRonde, such a great mine. But here, the new mine, they're going to have a cash cost of $50 an ounce this year. But that cash cost is going to increase by the $225 an ounce and the 2011-2012 time period.
That's going to shock, I think, investors who don't really realize that the cash costs are going to be rising. And people are going to start seeing positive cash costs when they've been used to seeing negative. So Agnico-Eagle may not be the performer in the future that it's been in the past.
Yamana [NYSE:AUY; TSX:YRI] - great stock. We had that stock at $2 for a long time; sold it when it got to $12. It's still a great company. We basically looked at their production expansion. It's going to be from 900,000 ounces to 2,200,000 a year. But again, they've got a rising cash cost. It'll be a -$20 an ounce this year, but in the 2010 or 2011 to 2012, they'll be a positive $120 an ounce.
The only one of size that's got big production growth, Goldcorp [NYSE:GG; TSX:G], rose 74% from 2.3 million ounces to 4 million ounces a year, and their cash costs, which will be $250 this year fall to $175 an ounce in 2011-2012. So I think that's a winning combination. Big growth, falling cash cost.
There's no major that'll be producing 4 million ounces a year and that'll have a cash cost anywhere within $100, $150 of Goldcorp's cash cost. This is driven, of course, by byproducts (inaudible), Alumbrera, and the copper and zinc and silver in Pe~nasquito, which is one fantastic mine.
Okay. Next. Now, this is unusual: safety of results. Safety and gold mining don't go together unless it's an occupational safety kind of thing. Because there's certainly no safety in the risk associated with gold mines. But this is the way I think about royalty companies, though.
And the two here that I've listed, Royal Gold [Nasdaq:RGLD; TSX:RGL] and the Silver Wheaton [NYSE:SLW; TSX:SLW], they're both top 10 stocks. And the beauty of them is that they have a profit interest. They don't have an operating interest; they do have price risk. Every mine has price risk. But these guys don't have to operate the mines. They don't have the risk of the cash costs rising. The mining cost rises because basically if you're Royal Gold, you have the royalty on production like a sales tax on production. Royal Gold's biggest producer mine is going to be Pe~nasquito, which at current prices is going to generate about a billion dollars a year in revenue for Goldcorp.
But of that billion dollars, there's going to be a 2% tax on that, effectively, that Goldcorp will pay to Royal Gold, $20 million a year royalty income, which is about 80 cents a share to Royal Gold. So anyway, I think that Royal Gold in 2010 is going to be earning $2.50 a share, and typically royalty companies, based upon what the old Franco [TSX:FNV] sold at, typically sold at 20 times gross income per share, which gives us a $50 target for Royal Gold.
Silver Wheaton, same kind of thing. They bought production; we all know the Silver Wheaton story. They bought production at a fixed cash cost, they make a big capital payment up front. They're at $18 silver price in 2010, their royalties will generate $1.27. And I've got a $20, $25 target for them.
Franco, first report comes in this issue. I don't know if I like it or not yet. So we'll see. It does have about 30% of its royalty revenues in oil. I have to decide if that's worth the same in gold or not.
Okay. Cheap versus its peers. This is where we do a lot of our quantitative analysis. And basically, what we're looking at how is each stock valued versus how its competitors - everybody makes the same ounces. So we'll get into the market capital for ounces in a minute.
But basically, the industry average for an ounce of gold was $4,400 an ounce. And Northgate [AMEX:NXG; TSX:NGX], which is one of our top 10, was selling for about $1,700 an ounce. And on our ounce of reserves, the industry average is $221. And Minefinders is selling at $109, less than half of the industry average.
So, that plus a lot of other analysis gets them both into the top 10. And I want to take a little bit deeper look at this market cap ground thing. You don't have to write that down. But basically, this is one of the tables that we update every month. And we're looking at companies - this is a company, the stock data, the price, the dividend, the number of shares, the market cap, and so forth.
And let's just look at that a little bit differently. If we're trying to figure out which stocks to buy, and they all make the same product, the way that you reduce them to the same common format is that you calculate their market capitalization. Market cap is simply the stock price times the number of shares. That equals the market capitalization. And if you take that number and the total market cap for companies that have production in reserves right now is $178 billion. Divide that $178 billion total market cap by 40 million ounces that these companies will produce - these are the companies that we cover. The average market cap for an ounce of production is $4,400, roughly. And market cap for an ounce of reserve - total market cap, again, same $178 billion - total movement of probable reserves is just over 800 million ounces.
Divide one into the other, and you get an average market cap of $221 an ounce. Now, if we go back to that last chart, I threw out a whole bunch of columns, I threw out a whole bunch of companies trying to whittle it down to something that you can see from sitting in your seat.
And I circled a couple of companies. When the top one here in black - this is that Agnico-Eagle - got 16.6 million ounces of reserve, their market cap is 8.3 billion. That's $58 a share on 429 times the number of shares is 8.3 billion, divide by that by the 16.66 million ounces of reserve, each of Agnico's ounces is valued by Mr. Market at $500.
Now, here's another company down here that's got 16 million ounces of reserve. But their market cap per ounce of reserve is only $16. Now, I wonder why that is. Well, we know the answer to that, right? The answer is that Crystallex has those 16 million ounces, and they're in Venezuela, and we don't even know if they still have them.
But the companies in red, they're a little bit different story. Sentara is a miner, a good miner, that has a mine in one of the 'Stans and another one in Mongolia. Both places none of us ever want to visit, or most of us don't want to visit. But they're good miners. They're well financed and certainly know what they're doing in production.
They produce 600,000 ounces a year. And they've got almost 7 million ounces of reserve. And each of their reserve ounces is worth $270, says Mr. Market, based upon their stock price. Well, here's another company down here, European Goldfields [AIM:EGU], they've got 9 million ounces of reserve. Their reserves are in Greece. Where would you rather be? Greece or Mongolia?
Not personally. I mean, where would you like your investments to be? Greece, I vote for. But Mr. Market's not voting for this company yet because their reserves are only valued at $106. European Goldfields is a top 10 stock -just made this issue. And we think this is an underevaluated situation that doesn't have a big presence here in the States. The headquarters is in London. But it trades on the TSE and also trades over the counter. And if we go to their report - here's a typical company report. And European gets the whole page. Basically, here's the balance sheet; here's the cash cost.
They've got two producing mines: one produces silver, small mine, a million ounces a year - silver stream they sold to Silver Wheaton. And they have a stockpile at another mine that they're reprocessing the gold from the stockpile. So their actual production is about 60,000 ounces a year. But they've got three mines that they'll be bringing online over the next couple of years.
And next year or in 2010, we see them at 200,000 ounces a year. A summary of these three mines. And in 2011, when other money comes online, we see them at 450,000 ounces a year. Cheap. On a market cap reserves basis, they have in the bank, they have $218 million. There may be some issues on permitting in Greece, but 20% owner of the company is Greece's largest construction company, Aktor, that built the Olympic stadium, that built all the subway systems, the train system.
So they have a 20% owner of the company - not of the deposit, of the company - that's a major investor in European Goldfields that is well experienced in dealing with Greek governments and permits. And these mines, which are in the same general area, the one mine is currently producing and the company's earning kudos from the locals that live in the area.
So this is something we do on every company. It's an interesting chart. Usually you would expect to see price and volume on this chart. Well, that you can get anywhere. And what we do for each company is we take a look at where the stock price has been. These are the stock prices on the vertical axis, and these are the various gold prices on the horizontal axis. And we run a regression line through that. Basically, we fit a line.
And the red line is the line that fits the data from May 1 of '05 to date, the part when there's been a strong bull market for gold. And so that red line is there. The current stock price, the last reading is this big red blob here. That's the last combination where we're $871 was the gold price when we did this on the 29th of April. The stock price at that time was $5.30. That's the price that it made top 10.
Based upon the past trading history, based upon this regression line and all these dots of combination of stock price and gold price, the stock is currently at $5.30. The stock was trading at 80% of the expected value it should be trading at based upon its past trading history.
And so 80%, if we just follow that line up there, that straight line right up into the red line, with the regression line, follow that across, the stock, if for nothing else, should be trading at $6.63 based upon its past history relative to gold. So, it's undervalued based upon where it is now. It's undervalued based upon where it's going to be in the future.
And we do this for every company. Some companies are overvalued, some are undervalued. But then we get to do one more analysis from this, and when we combine all the valuations that we do for all the companies, we can then do a chart of where the market is in general. Are we overvalued or undervalued, where it should be, based upon the current gold price?
And at the end of April, when we last ran this, gold was $871 an ounce, and gold stocks in general were 19% on average undervalued - 19%. And we can see that this valuation goes over and it goes under. So this is a pretty good indication. Whenever we've been significantly under, we always get a good rally out of that.
So I expect we're going to get a good rally out of this coming soon, and stock up. Okay. Last slide: top 10 review. We're going to go over 10. I gave you 6 in the presentation; I'm going to go over all 10. Lots of Q&A tomorrow at 2:00 in the Gramercy Room.
Somebody had a question. Go ahead, tell me the question. I'll repeat it.
JOHN DOODY: Oh, I don't read Ted, though, so I can't comment on Ted Butler's commentary. Go ahead.
JOHN DOODY: Probably. I haven't done it though. The question was, could I do the same analysis with gold and the surplus going to the ETF versus what we did for silver. Well, there's no question the ETFs are a big factor in the gold market, and it may be that they're reason that the stocks aren't doing so well because they've made it so much easier to buy gold than it has been in the past.
I happen to think that it's also because gold stocks haven't done so well because they haven't earned much money. And that Newmont is showing us the way and Barrick, too, at $900 gold, these companies can make a lot of money. When the gold miners start making money, other investors who aren't so crazy about gold, that are just interested in owning shares of companies that make profit, they get interested, too.
And as they come in and buy the big ones, it all filters down. The juniors get a lift out of the buyers coming into the big ones. Yeah. He's got a mike right here. Thank you.
AUDIENCE: Your work is well taken because you really are one of the finest analysts in the business.
JOHN DOODY: Thank you.
AUDIENCE: My question would be Gartman, Dennis Gartman, has come out in print saying to sell all your gold. He sold his. So I'm wondering what his thesis would do to your thesis.
JOHN DOODY: Well, I guess Dennis is speaking tomorrow morning, so you can ask him that more in detail. But Dennis is more short-term oriented. I'm not short-term at all; I'm big picture, long-term oriented. And I basically look at gold at $100 an ounce at a time.
I think that we're going to see $1,100 by the end of this year. We may not have a great summer, may be in the doldrums over the summer because summer is typically slow time of the year. But I don't try to time stuff in and out and whatever because you end up either missing opportunities...
So Dennis, he's got a daily newsletter; he's a trader. And I think of myself - I'm twice a month. I think of myself as an investor. Question over here.
AUDIENCE: Question about cash cost per ounce. Is that an income statement item, roughly equivalent to the operating expenses for the accounting period? Or what is it exactly? How do you arrive at it exactly?
JOHN DOODY: Well, basically the company takes all of its expenses that have to do with the producing of the ounces: labour, materials, fuel, explosives. And you add them up and you divide by the number of ounces. It doesn't include the management time, it doesn't include exploration. So it's a cash cost associated uniquely to each mine in producing the ounces at that mine. Question next door.
AUDIENCE: Could you comment a little bit on financing options going forward for the industry, discussions at silver streams, etc., in particular, debt-financing options? I wanted to bring this question earlier to the panel you had, but we ran out of time. It seems to me that most debt-financing options that have been taken on by certainly more junior explorers and have been very much secured in a sense by forward sales, which has come back to bite more and more of the people.
What, in fact, are the true debt-financing options going forward?
JOHN DOODY: Well, it's not my forte to figure out how to help these guys finance their mines, but the tradeoff is you can do all equity, and then as soon as you start adding any kind of debt, then the lender is going to want some assurance that they're going to get repaid.
And typically, a company might do 50%, 60% debt and equity, but those kinds of percentages require hedging because the lender doesn't want to be - particularly if it's a single-mine company. I mean, I'm thinking about Western Goldfields, a company that was top 10. We had a nice ride out of it.
And last year when it came time to finish off the financing of their mine, they took out 660,000 ounces, they hedged it at $800 an ounce. And at that time, they needed to raise - I forget what the number was - $70 or $80 million. At that time, the choice was, should we sell 50 million more shares in order to do it all equity? Fifty million more shares would have increased their shares outstanding by about 50%. Or do we take the evil path and take on some hedging?
Hedging turned out to be about - they're producing 165,000 ounces a year, they were hedging 65,000 ounces of that, so whatever that percentage is. Forty percent of production they hedged. So I agreed with them, even though I hate hedging; it was a lot better than selling 50 million more shares.
So that's the tradeoff, particularly all these single-mine companies. If you're a big miner like Barrick or Goldcorp - not that I'm saying that they would hedge - but they don't have to rely so much on hedging. If Barrick hedged as a way to lock in price, whereas most miners out today don't do that because they want to be exposed to the prices.
But if you're a single-mine company, you want to get off the ground; it's either sell more shares or do some hedging. Another question.
AUDIENCE: I've got two questions. It seems to me the gold-producing company got a lot better return than just the gold. And I kind of observed that similarly in oil. Look at the oil sector, the oil service recruitment company, the winner, does a lot of it in oil. The second question is as an economic professor, the general, the equity stock exhibited some mean reversion type of a thing. Do you observe a similar type of thing in the gold-producing company stock?
JOHN DOODY: What was the first question?
AUDIENCE: Does the gold-producing company that the performing stock -
JOHN DOODY: Oh, that they do better. Okay. Well, the reason the gold-producing companies do better is that, when the price goes up, not only do they make more in profits right away, but all the ounces that are still in the ground are now worth more. So what you're doing is you're raising the value of everything you haven't produced yet. So that's obviously going to give you a bigger income stream in the future.
So, if the stock price is a discounting mechanism for future profits, that's why you get the leverage to gold - better from gold shares and not from metal. Last year, though, the metal did better than the average gold shares. So it's not always true every year.
And the second part of your question had to do with reversion of the mean for - are the stocks going to revert to the mean?
JOHN DOODY: Well, they did last year. The metal did better than the stocks last year. I think this year it's going to be the opposite, though, because the stocks are now going to be able to show the profits, not only make this year more productive, but all the future. One more question over here. We're missing cocktail hour.
AUDIENCE: We hear reports that the gold companies will experience increased costs. Can you comment a little bit about the increased cost related to the juniors and to the seniors, and will these companies continue to be able to increase their profits with these increased costs long term?
JOHN DOODY: Well, I think the increased cost of - energy is about 25% of the cost of running the mine. And there's no question that nobody was budgeting $125 oil. But they were all budgeting $80 and $90 oil. Because, remember, they do their annual budgets at the turn of the year. So that is what the prices were then.
So nobody was using the $50- or $60-barrel-a-year oil prices. So I think there's going to be some hit on that. But they've also done a lot to conserve on energy uses, so they're cutting back. So I don't - we had a big jump when cash costs went from $200 to $300 to $400. A lot of that was driven by oil.
I think less of it will be driven by oil now because they've gotten much more sensitive to the price of oil. But labour is a big problem for these guys. The schools don't turn out any more graduates for any geology or mining degrees. And as a result, the skilled people, they have to bid against other users of the same skill. So a mining engineer can basically write his own ticket anywhere now.
And that's true for all the way down to the shovel operator in the pit; these guys are worth a lot more money. But they've been competing. At that level, they've been competing against the people working in the oil sands in Canada, where a shovel operator can make $100,000-$150,000 a year.
And so I think a lot of that cost is built in, but no question, there's going to be more of it.
AUDIENCE: But if the gold price increase enough to overcome (inaudible).
JOHN DOODY: Well, it certainly has this year. We once thought $200 an ounce was a standard cash cost. And then, in this millennium, $300 became the standard. Now we're at $400 being the standard. Now, that's okay, because gold is $900. And it may be that $500 becomes the standard. But if gold is $1,100, then we'll make it work.
And that's why I don't think we're going to see the big pullback that some people think we're going to get in gold - there really is no expansion in production. A lot of mines are going out of production. There are obviously new mines coming in, but they're not expanding at such a rate - we're not going to jump from 80 million total ounces in the total gold sector to 100 million ounces a year. It just isn't going to happen.
All right. So we'll look forward to seeing you all or as many of you as possible tomorrow at 2:00. Thank you very much.
An economics professor for almost two decades, John Doody is a gold stock analyst and editor of Gold Stock Analyst. He is a regular guest on Jim Puplava's Financial Sense Internet radio broadcast, presenting an update on gold.
Through 2006, the Gold Stock Analyst Top 10 Stocks portfolio has an average gain of 30% per year. Doody has a BA in Economics from Columbia, and an MBA in Finance and PhD in Economics from Boston University.
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