DROOY is a very high cost producer, and represents sort of an out of the money call. But, I doubt if anyone would argue that DROOY is a high quality producer? Arguably it is a dog. Can you make money in a dog in a strong gold bull market? Probably. And I won't dispute your point about valuation. However, at $325 DROOY will still be a marginal producer.
Everyone has their own approach to the sector and I certainly respect yours in terms of the possible leverage here. I'm conceptualizing the outcome of a gold rally a little differently. IMO attention is going to be quickly focused on developing low cost deposits that can be synergized with existing operations or be brought on stream to replace high cost production. I think at 300-325, companies will start bringing on lower capex projects with cash costs under 170, that are being deferred now. At 260, virtually everything is deferred. But, at the $300 threshold, those top 20 percentile projects will be at a premium. The successful model will have very low cost production only, and will be unhedged and uncapped to take advantage of high gold prices. Those are the companies that will get the extra valuation premium.
I'm also not so sure investor demand is going to clamor aboard existing old production like Harmony, DROOY or even Goldfields that has high costs?? In part this is because players will continue to hear the footsteps behind them of the old bear market. You pay your money and you take your chances, so hopefully we will get the rally that gives us the answers, and hopefully we are both right. I'm just betting on a different outcome. |
