Rashid, these are very exciting money making times...too bad the general public won't get into gold stocks until bullion hits 400 and we have already banked 200-500% on our money..
Here is an interesting article on why South African gold stocks are valued at 1/2 the value of North American companies..With all the terrorism threats here in the U.S., I wonder if that perception will change...Maybe Africa will be a safer place to live than U.S. oneday...Hope not..Toward Overcoming the Misperceptions That Hinder Investment in South Africa
Presentation to Indaba 2002 Mining Conference in Cape Town, February 14, 2002, by Lawrence Roulston, editor Resource Opportunities
Mark Wellsley-Wood, the CEO of Durban Deep, showed a startling slide in his talks yesterday. He ranked the major gold companies of the world according to their enterprise value per ounce of annual production. In other words, he showed the value placed on the major gold companies of their market caps plus debt, adjusted for size. The results of the ranking are very, very disturbing. At the low end of the scale, at $21 for $22 per ounce of annual production are Durban and Harmony.
Now, it's easy enough to say that Durban and Harmony generate less income per ounce, so they deserve a lower valuation. First, according to the latest quarterly results for both of those companies, that is no longer true. Their profit is quickly moving into line with the other major producers. But, let's look at AngloGold. The profit of this company is in line with other major producers around the world. Yet, investors place a value of only $41 per ounce of annual production on this company -- less than half of the value of the North American based producers at the other end of the ranking.
At the top end of the scale is Franco-Nevada, at $340 per ounce of annual production -- eight times the valuation applied to AngloGold. Franco, with $1 billion of cash, is a bit of an anomaly. Barrick, Normandy and Goldcorp range from $109 to $185. Those values are 2.5 times to 4 times higher than AngloGold, a South African company of equivalent quality. Placer Dome, itself with half of its asset value in South Africa, still rates more than twice the value of AngloGold, and 4 times the value of Harmony and Durban.
Ladies and gentlemen, why do investors value a South African company at a half or a quarter of the value of an equivalent North American based company? The answer, to very large extent, is public perception. Investors in North America in
particular have an extremely inaccurate perception of Africa. To a very large extent, the perception of Africa in North America is based on media reports.
In North America, the public perception of Africa is dominated by the TV image of a farmer with a bloodied face who was thrown off his farm; by the massacre in Rwanda; by
the civil war in Sierra Leone; by the violent crime in Johannesburg. There is no strong voice to stand up and say that this is not all there is to Africa. The North American media report on the political violence in Zimbabwe. They discuss Somalia as the next target for America's war on terrorism. Just last week, CNN used the term "war ravaged Africa". Did anyone here see a war last week?!?
Unfortunately, the popular media has always, and always will, focus on the bad news.Wars attract higher ratings than mine openings. We will never change that negative bias in the popular media. But, it is vitally important to the well-being of this region that everything possible be done to stop the inaccuracies and overcome the misperceptions. Let the media report on the civil war in Sierra Leone, if they must. But stop calling Sierra Leone Africa. In the last few years, I've traveled all over the world. I've been to some of the places where the North American-based gold producers are mining gold. Believe me, I would far rather be doing business in this country than in many of those other places.
Yet, the difference is one of public perception. And that public perception, as we saw a moment ago, makes African companies worth a mere 25% or 50% of what investors pay for equivalent companies operating in other parts of the world.
Before I throw out a couple of ideas that might help to begin to overcome these misperceptions regarding Africa, let's look at why it matters how the world perceives
Africa and African based companies. One very vivid example is the recent bidding war for Normandy. AngloGold's bid was
equivalent in dollar value to the bid for Normandy and carried some other benefits, yet it only attracted 6% of the shares of Normandy. Newmont's paper, even though having a
similar value, was seen as preferable to AngloGold's paper by the Normandy shareholders. Newmont has now supplanted AngloGold as the largest gold producer in the world. More
important than whatever honor comes with that distinction is the tens of millions of dollars of annual savings generated by the synergy of the combination and the enhanced growth potential of that company.
On one level, there is no shortage of money for African mining development projects. Some of the African companies rank among the largest in the world, and find the cash they need, largely in London. Martin Rosser and some of his smart London colleagues come down here and see this place first-hand. Having done that, they are happy to invest their clients' money in African projects. Placer Dome is here in a big way. Barrick is turning Bulyanhulu into another African
success story.
But let me remind you that Bulyanhulu was discovered and advanced to a multi-million ounce reserve by a little company called Sutton Resources. Many of the discoveries in
the Lake Victoria green stone belt were made by junior called Pangea Goldfields. A little company called Golden Knight played a big role in the early stages of Tarkwa. I could go on and on with important projects in Africa that were initiated by junior exploration companies.
Those junior companies that make the initial discoveries are finding it extremely difficult to raise dollars for exploration in Africa. It has been tough for many companies to find money for any projects over the last few years, but the taps have been turned on again. Money is flowing into projects in many places, but investors have placed Africa at the bottom of the list. It's also important to touch on the mid-size sector of the mining industry. I'm personally aware of tens of excellent projects that should be immediately developed to create jobs and prosperity. Yet, the smaller companies find it extraordinarily challenging to raise the
money needed to advance projects located in Africa.
Obviously, it will take an enormous effort to put the image of Africa right. However, that effort is not just worthwhile, it is vital. Tens of additional mid-size mines could be producing, putting thousands of people to work. And some of your biggest companies could double or quadruple in value by simply overcoming the inaccurate perceptions of
Africa. Higher valuations would give those companies access to capital on more favorable terms, and allow them to develop new projects at a faster pace.
Of course, it is far easier to define the problem than it is to prescribe a solution. I would like to throw out a couple of ideas that I hope will begin to make a contribution to the process of fixing the public perception of Africa in other parts of the world. First, Its very useful when people from Africa go to North America and talk to groups of people over there. Its even more effective to get people from North America to spend some time in Africa. For example, Canada has a program where media people from Asia come to Canada for a few months, and Canadian reporters live in Asia for a few months. That exchange program has had a very positive effect on relations between Canada and Asia. I believe such a program could have an even more significant effect with Africa.
Most fundamentally, it is absolutely vital that the mining industry throughout this continent develop a strong and unified voice. I made this same comment here a year ago, and was heartened to hear that the African Mining Development Association was recently established. Unfortunately, I can't give you any details. Brigit Radebe is spearheading this effort. Mark Wellsley-Wood of Durban can perhaps put you in touch.
The various tourist associations throughout Africa should be involved in this effort. My vision for what that group could become is the Prospectors and Developers Association of Canada. That group does a marvelous job of working with the media on a proactive basis to ensure that there is a more balanced view of the mining industry in the public media.
I have spent enough time in Africa to know that African companies deserve a valuation on a par with companies in most other parts of the world. Overcoming the misperceptions
that keep money out of Africa will take time and money. However, I believe that effort could be a very effective way to increase shareholder value, and even more importantly,
to improve the prosperity of the region.
Lawrence Roulston
Editor, Resource Opportunities
3389 Radcliffe Ave.
West Vancouver, BC CANADA
604-618-4756
Fax: 604-608-3506
lroulsto@uniserve.com
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