Thursday, April 15, 2010
What's Gold in the Ground Worth?
"This March two of the world's biggest investors became believers in a company with next to no revenues and $352 million in losses over three years. ... Both Soros and [John] Paulson are seriously bullish on gold, but why did they bet on a Vancouver mining company with an unimpressive history? ... An Oxford-trained historian, [Thomas] Kaplan believes that the last 40 years, when gold was not the world's reserve currency, were an aberration and that gold will revert to the top of the store of value as it was for 5,000 years. He means it: Kaplan's family office, Tigris Financial Group, manages close to $2 billion in gold assets. ... Billionaires, big money managers and Wall Streeters are jumping in, even as few ways remain to play this game. ... But then, if you believe that government spending run amok and easy money will result in the decline of Western civilization, you don't need any multiples to look at. ... Kaplan's NovaGold deal started in January 2009, when his New York investment outfit, Electrum Strategic Resources, made a $70 million investment for a 28% stake and warrants for more. ... One, called Donlin Creek, is in Alaska. NovaGold says it has 29.3 million ounces of gold. The other is British Columbia's Galore Creek, with 7.3 million ounces of gold and 8.9 billion pounds of copper. But investors may be getting ahead of themselves. Both properties are remote and tough to develop. ... NovaGold's annual-return estimate on [Donlin] at $1,000 gold is 12.3%, which is marginal for a big mining project", Nathan Vardi at Forbes, 12 April 2010, link:
I think and have thought for about 30 years, gold bullion coins are the world's most conservative investment. What about gold stocks? For more leverage, why not? See my 1 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/gold-mines-and-operating-leverage.html. Look at NovaGold (NG-AMEX). Now at $7.79, NG has a $1.47 billion market cap (MC). What's NG worth? With 36.6 million ounces of gold and 8.9 billion pounds of copper "in situ" I get gross revenues of $74.8 billion for NG (36.6 million x $1,161 = $42.5 billion; 8.9 billion x $3.63 = $32.3 billion; $42.5 + $32.3 = $74.8). So NG will have $74.8 billion in gross revenues over the next say, 20 years. Assuming 50% operating costs, we have net cash inflows of $37.4 billion ($74.8 x 50%). Now, assume a 35% tax rate, we get $24.3 billion in net after tax cash flows ($37.4 billion x 65%). If coming in evenly over 20 years that's $101 million per month ($24.3 billion / 240 = $101 million). Discounting this at a 7% real rate, per Kenneth Arrow, I get a $13.03 billion value for NG. With NG's $1.47 billion MC. that means the market assumes NG has an 11.3% chance of developing these projects ($1.47 / $13.03 = .113). NG appears to be fairly priced to me. Eugene Fama, take a bow.