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Pastimes : From A to Zeev" -- SI Sacks Zeev -- Ignore unavailable to you. Want to Upgrade?

To: Zeev Hed who wrote (481)	9/10/1998 12:38:00 AM
From: Zirao Zheng	Respond to of 708

Valuation problem I'd like to ask Zeev and everybody to consider how to value a hypothetical gold mining company. Let's say it has a reserve that will last about 40 years. It makes money most of the years, sometimes more sometimes less depending on the gold price. The PE is about 5. The management has bonus and stock options and is in no risk of losing personally. However, the company must invest a certain amount of capital expenditure to expand it's tunnel and to upgrade its equipment. The annual capital expenditure is, for the argument's sake, the same as the average annual net income. As a result, the cash per share number has not gone up over the years. It stays essentially zero. The company does have a positive book value. How should we value this company? Based on PE, book value, gold price, reserve, sales? The investors in this company are in it because a) it's a gold play, b) it has a low PE, c) it's great to have a nice tunnel in the end Some tech stocks might be viewed under the same light. The cost of staying in business can erode earnings significantly. We must take this into account when we talk about PE, IMHO. What do you think? ZZ