Gold's persistent weakness isn't over yet, according to the incoming chief of the world's most valuable gold miner.
David Garofalo, who takes over as chief executive officer at Goldcorp Inc. in April, says the precious metal is still emerging from the end of a long period in which it benefited from interest rates that declined to near zero.
Gold, which pays no dividend, shines as a store of value when other investments also produce no yield in real, or after-inflation, terms. However, it loses lustre as competing assets begin to offer higher payouts.
"Right now, gold prices reflect the reality that real interest rates have nowhere else to go but up," Mr. Garofalo said. He added: "Gold prices over the next couple of years may struggle because of the reality of the interest-rate environment."
The executive, a former winner of the Northern Miner's Mining Person of the Year award, emphasized that he remains very bullish on gold in the medium to long term. However, his wariness about what the next year or two may hold isn't restricted to just precious metals.
Base metals such as copper and zinc are also under pressure, he says. Investors who are hoping for a quick bounce-back in raw materials prices after a horrific 2015 may want to think again.
"I wouldn't think there will be a rebound [in 2016] to be honest with you," he said. "Particularly in the base metals space, we probably have got a couple of years of grinding ahead of us."
On a brighter note, the current depressed market provides ample opportunities for astute companies to hunt for new projects, he points out. He predicts mergers and acquisitions in the gold sector and asset deals among base metals producers.
While Mr. Garofalo doesn't say it, those trends play to his strengths. He has demonstrated a penchant for building value through astute acquisitions, countercyclical mine development and rigorous cost management.
Over the past five years, as CEO of Toronto-based HudBay Minerals Inc., a mid-sized copper and zinc producer, he compiled an impressive record of building mines on time and on budget. He also earned a reputation for doing smart takeovers – notably the acquisition in 2014 of Augusta Resource Corp., owner of the Rosemont copper project in Arizona.
Now, he has a chance to transplant his skills to Vancouver-based Goldcorp, the world's largest gold miner by market capitalization.
Following the company's annual general meeting in April, he will take over from Chuck Jeannes, who announced in early December that he is retiring after leading the company for the past seven years.
"I've always admired Chuck and he's put Goldcorp in the pole position," Mr. Garofalo said. The company has high-quality assets and a low cost structure. It is also significantly less leveraged than many of its competitors, meaning that debt is not going to constrain its ambitions.
"The companies that are going to struggle are those that have high cost structures, that are carrying significant amounts of leverage on their balance sheets," Mr. Garofalo added. "So that is going to present opportunities for Goldcorp in a falling gold price environment … to pick up opportunities and populate the pipeline."
That said, he sees little appeal in trying to boost production by acquiring operating mines. "Buying operating assets has always been a very tricky proposition because the market is quite accurate at valuing them," he said. "There are no bargains out there.
"If you look at some assets that have traded lately, they have done so at very, very fulsome prices. What that tells you is that there is a perceived scarcity of de-risked operating assets out there. It seems to me that some producers are quite desperate and willing to pay premium dollars for them."
Instead of overpaying for mines already in production, he would like to get involved in projects early while they're still in the development process. "Drilling and building is where all the value creation occurs," he says.
His goal is to prepare Goldcorp for the next upswing in gold prices, which he says will happen in two to three years when central banks begin to once again lower interest rates to stimulate economic activity.
"I think we're going to have a couple of years in the $1,000 [U.S.] an ounce territory," he said. "That ultimately means some significant consolidation will have to occur in the gold space because some companies are highly levered and they're going to have to restructure their balance sheets either through recapitalization or mergers."