* Gold sector needs to stop chasing volumes
* Capital discipline has been “appalling”
* Cash costs misleading, “all-in” costs needed
By Clara Ferreira-Marques
LONDON, Dec 4 (Reuters) - The gold mining sector could end a period of dramatic underperformance by ceasing to chase volumes and improving returns to shareholders, according to BlackRock , the world’s largest money manager.
The price of gold bullion has soared roughly 500 percent since 2000 - from less than $300 per ounce to around $1,700 - but global gold equities have grown at virtually a quarter of that rate, failing to keep pace.
BlackRock, which along with several other institutional investors has campaigned for better returns from the sector, pointed to production that has remained flat over the past decade, while quality has deteriorated in the race for ounces.
“It is easy to blame Mother Nature, but... if you look at capital discipline in the industry, it has been appalling,” Evy Hambro, BlackRock’s investment chief for natural resources, told a London conference.
Most production growth since 2008 has come from emerging players in countries such as China and Indonesia, not the established giants, whom BlackRock criticised for “serially disappointing”, chasing lower-grade supply and using cost measurements that fail to include the full price of production.
“It is not rocket science. It really is very simple,” Hambro said. “It just requires a greater element of discipline, for management not to chase volume growth, and delivering returns for shareholders - the people who really own the company.”
Hambro pointed to poor dividends. The oil sector pays out 45 percent of profit, while gold pays out only 25 percent.
“We are starting to see some bright spots, dividends are starting to rise, but it is only a very narrow group that is doing this,” he said.
“So show us the money, as the famous movie phrase (goes).”
Up to about 2005, gold mining companies were accustomed to valuations that were more than twice those of other mining companies.
The forward price earnings (PE) ratio of gold miners was 30-35 in 2005-2006, compared to less than 15 for world equities, but the situation has flipped, with gold miners at 10 versus around 12 for global equities, according to Datastream.
Some companies blame the decline in valuations to the growth of exchange traded funds (ETFs), which have made it easier for investors to put money into gold bullion without having to buy physical metal.
“The first ETF was launched in 2003, real liquidity didn’t start until post financial crisis. I don’t think we can blame just the ETFs. And fundamentally, if gold prices could provide you with a better return over the long term, then why wouldn’t you buy a gold share over and above the gold price itself?” said Blackrock portfolio manager Catherine Raw.
Gold firms have been raising funds by issuing new shares, with outstanding shares in the sector having jumped 40 percent since 2006 while output and margins have been stagnant, Hambro said.
“It’s just a really appalling record of value destruction,” he said.
He demanded that gold companies stop “misleading” investors with their focus on cash costs and come up with new measures that show the total “all-in” costs including capital.
Hambro said a spike in the gold price would be negative at the moment.
“The worst thing that could possibly happen is if the gold price went up because that would take the pressure off management to take hard decisions,” Hambro said.
“It would be great to see all the hard decisions to be taken and then for the gold price to go up.”
The spot gold price has slipped about 5 percent since Oct. 5 and was trading just under $1,700 per ounce on Tuesday afternoon.