Here's a great post from the GOLD-EAGLE FORUM: gold-eagle.com:3128/cgi-bin/gn/get/forum.html?date=2000%3A04%3A12%3A17%3A00%3A00
Some valuation thoughts on DROOY...
(Zelotes) Apr 12, 19:44
As DROOY is a material position in my portfolio (10k+ shares), I, like many readers of this incredible forum, have a vested interest in seeing DROOY do well. Lately, there have been questions asked about why DROOY is unchanged or down even on days gold moves up slightly.
In order to address these questions in my own mind, I decided to do some financial modeling with DROOY and the price of gold.
At Durban's website, www.drd.co.za, they have posted financial results for the world to read. As of this morning, the most recent results where for calendar Q4 of 1999, so I used these numbers as the basis for my analysis.
Using DROOY's consolidated income statement, I ran various iterations of gold prices to see what effect they would have had on DROOY's numbers in Q499. I was hoping to see at what point the price of gold would have to trade to justify various price levels of DROOY.
Being a conservative investor and a conservative person, I had hoped for a doubling of my initial investment in DROOY and dreamed of a 10-banger. (My basis is $1.50 per share) I was pleasantly surprised by the results of the modeling, and thought some of the other DROOY owners on the forum would be interested in the numbers.
First, the assumptions... These numbers are all hypothetical using Q4 numbers to project the price of DROOY while using various gold prices. I did NOT modify the ounces produced or any other financial number. The only number changed in the projections was the market price of gold. These projections assume DROOY is completely unhedged, which is not true. They could be adjusted downwards slightly for DROOY's dwindling hedge commitments going out into the future. Not knowing how the South African corporate tax system works, I just assumed a corporate tax rate of 34%. Finally, the numbers are adjusted to show the per share results on the US ADRs.
I valued DROOY, based on earnings per share in the different gold price projections, using two different Price/Earnings ratios. The first is the historical average market P/E ratio of 13.5. The second is an arbitrary mania P/E ratio of 100.
(Wouldn't a gold mania be grand!! <grin>)
DROOY has negative earnings presently, so I hoped to see where the price of gold needs to be to make the stock much more attractive to the non-goldbug mindset. (N/E means negative earnings at this price level in the projection.)
Here are the results, changing NOTHING but the gold price using Q499 numbers...
Price of Gold ... US ADR (Share) Price at 13.5 P/E ... US ADR Price at 100 P/E
283.73 ... N/E ... N/E
290.00 ... N/E ... N/E
295.00 ... N/E ... N/E
300.00 ... N/E ... N/E
305.00 ... $.25 ... $1.84
310.00 ... $.77 ... $5.70
315.00 ... $1.29 ... $9.56
320.00 ... $1.81 ... $13.42
325.00 ... $2.33 ... $17.29
330.00 ... $2.86 ... $21.15
340.00 ... $3.90 ... $28.87
350.00 ... $4.94 ... $36.60
375.00 ... $7.55 ... $55.91
400.00 ... $10.16 ... $75.23
600.00 ... $31.01 ... $229.73
I was pleasantly surprised at these results, especially since a rise in the gold price to $325 is not improbable short-term. If I take the $600 gold price, like the legendary Veneroso has supposed as the true market equilibrium price for gold, the results are even more appealing... maybe my ten-banger dreams for DROOY are too modest!
I hope this helps answer the valid questions of the posters who wondered why DROOY wasn't moving up with the narrow moves in gold. Until we get a gold price above $320, or so, DROOY could be pretty indecisive. At that level, however, the booster begins to kick in and the prospect of truly legendary gains exists.
I decided to run another analysis as well, because DROOY had a very large non-cash depreciation expense in Q4 99, $5.8m. Depreciation is not relevant to investor cash flow because it represents phantom traces of cash already spent in the past, so I ommitted it. I also am ommitting $6.4m of hedge restructuring costs, assuming they are non-recurring items (at least at that magnitude) for DROOY's income statement.
The plot thickens...
Price of Gold ... US ADR (Share) Price at 13.5 P/E ... US ADR Price at 100 P/E
283.73 ... $3.42 ... $25.34
290.00 ... $4.41 ... $32.67
295.00 ... $5.20 ... $38.53
300.00 ... $5.99 ... $44.38
305.00 ... $6.78 ... $50.23
310.00 ... $7.57 ... $56.08
315.00 ... $8.36 ... $61.94
320.00 ... $9.15 ... $67.79
325.00 ... $9.94 ... $73.64
330.00 ... $10.73 ... $79.49
340.00 ... $12.31 ... $91.20
350.00 ... $13.89 ... $102.90
375.00 ... $17.84 ... $132.17
400.00 ... $21.79 ... $161.43
600.00 ... $53.40 ... $395.52
Not bad for a stock trading at $1.20, eh?
I hope this helps everyone understand why DROOY shouldn't be expected to rocket until $320+ gold and I hope it helps quiet the nerves of jittery and worn-out goldbugs.
If anybody wants to play with the financial model or review my math, I have a user-friendly Excel 97 spreadsheet where you can just plug in numbers and easily do "what if" scenarios. I'll be more than happy to send it out to anyone who wants it.
Bottom line...
If you think gold could go to $320+ near term, if you have RISK-CAPITAL you CAN afford to lose, and you like to speculate, DROOY may be an excellent opportunity for you at these prices.
God bless everyone, and enjoy the continuing NASDAQ fireworks tomorrow!!
(sorry for the long post)
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