<<Gold equivalents or value per ton.>>
Your answer is very correct, I'd just like to add further to it.
Shares of all extractive resource companies (and all companies of any kind) are options on the underlying business - extracting gold, silver, copper, etc. in the case of mining companies.
The heaviest weighting in the Black Sholes option pricing model is volatility. Gold prices are, or used to be, much more volatile than prices of other commodities. Hence, an option on gold (a mining share) commanded a higher premium than did an option (or a stock) on a base metal or other resource. This phenomenon used to cause the gold stocks to sell at about 2 times the projected Net Present Value of the life-of-mine stream of free cash flow whereas shares of producers of low volatility metals sold at just above NPV. All the companies' net long term assets are the basis for earning cash flow and to value the assets is to double count. Hence, just add net working capital to NPV of free cash flow and you have the value of a mining company.
The use of gold equivalent was a ruse to get the investor to pay 2 times NPV of the cash flow earned from the low volatility by-product metals. A careful analysis of smelter contracts often shows that precious metals producers earn more from their base metals than from the precious metals so its more than a question of pretending that the non-gold metals are worth anything at all.
Regardless of whether the other metals can be produced at a profit, the use of equivalents is deceitful and, as an ex-analyst, I lately found most reputable companies declining to quote equivalents for reasons of good ethics. In the final analysis, good ethics is the only thing that protects investors.
Regulators are not sufficiently versed in market and securities analysis to see the wrong being done until the damage is done. In fact, with specific reference to Bre-X, Canada's RCMP Fraud Unit told me they weren't responsible for detecting fraud, only investigating it. Hence, calling for more regulation may not protect investors. Further, an honest analyst could get into major trouble with employers for telling the truth - only the fear of law suit stops me from remarking about who was trading for what certain notorious mining CEO. I can personally tell you about the many CEO's who tried to get analysts fired for pointing out the realities.
So, if regulators don't know enough, and analysts won't tell, and the role of police is largely to investigate crime after the fact, how does the public get protection? You don't. Unless you've got the knowledge, time, experience and inclination to get into the industries' communities and hear the "barstool" talk about what's really going on, good or bad you are at mercy and always will be.
You can't regulate honesty. Do you know that the earliest exploration of Canada's east coast was finance through a mining fraud perpetuated in London through a fraudulent metallugist?
Enough, I got to go see what Chicken Little is yelling about.
RH |
