from the Speculative Investor, S Saville as of today. He is offering 1 month free trial subscriptions.
Durban Roodepoort Deep
A few people have e-mailed us asking for our opinion on Durban Deep
( NASDAQ: DROOY ) , so here it is.
DROOY has traditionally been a favourite of those who are bullish on the
gold price due to its extreme leverage to the spot gold price. Projections
have been made that show how a moderate increase in the gold price could
lead to a several-hundred percent increase in the DROOY share price. In
other words, the potential rewards are huge for investors who own DROOY.
The other thing to consider is the risk of owning DROOY. While we suspect
that the rumours of an impending Durban Deep bankruptcy are just that
( rumours ) , a quick look at the company's balance sheet raises a couple of
red flags. Firstly, current liabilities ( short-term obligations ) exceed
current assets ( cash and assets that can be quickly converted to cash ) by
US$17M. If a company is in good financial shape then its current assets
would generally be significantly greater than its current liabilities.
Secondly, 'cash + receivables' is approximately equal to 'payables'. This
means that if all Durban's customers paid their bills in full the company
would just have enough cash on hand to pay its own bills.
We've heard DROOY spoken of as a call option on the gold price with no
expiry date. This is not true. Due to the high-cost nature of DROOY's gold
production and its lack of financial strength, there is some ( not
insignificant ) going-concern risk with this company. It should more aptly
be considered as a call option on the gold price with an unknown expiry
date.
Due to its leverage we consider DROOY to be a reasonable speculation, but
it should not be a large investment. We recently purchased
out-of-the-money Feb 2001 NDY call options, being fully cognizant of the
fact that if a meaningful gold rally does not occur between now and next
February then the money 'invested' in those call options will be written
off. Investors in DROOY are making a similar bet and should only risk an
amount that could be written off without causing distress.
Another relevant point here is that there is no need to take a chance with
Durban Deep when Harmony ( HGMCY ) is so cheap. Harmony's current assets
exceed its current liabilities by a wide margin, it has US$60M in cash, it
is very profitable at current gold prices, it pays a healthy dividend and
has no hedge-book risk. With HGMCY an investor gets a financially-sound,
fast-growing company that is highly-leveraged to the spot gold price and
has a management team that have done almost everything right over the past
few years.
On a related matter, we would steer clear of any highly-speculative gold
stocks. There will be plenty of time to 'get on-board' some speculative
issues after a gold bull market has been confirmed, using profits from the
sale of shares in the major producers. |
