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Friday, February 24, 2006 2:58:57 PM
Gold versus Google
Gold versus Google
Vic De Klerk
Posted: Fri, 24 Feb 2006
[miningmx.com] -- “ARE gold mines supposed to make profits?” my 22-year-old asked me the other day after the release of their latest lot of poor quarterly reports. I couldn’t help thinking back 26 years, when the gold price reached US$800/oz.
Some, like Kloof and West Driefontein, then sometimes made a profit. But the investors’ favourites, such as Village and even Harmony, were never able to make a profit – even though the gold price rocketed at the time. Higher costs and lower ore grades simply wiped out the higher gold price.
So whether gold mines are supposed to make a profit remains a valid question. Surely the purpose of any business is to make a profit? It’s only Section 21 charity organisations that don’t have to make a profit. However, the JSE – or any other share market worldwide – doesn’t require companies to have to make a profit to remain listed.
Investors in gold shares place little store on the profit recorded by a gold mine, let alone a dividend. They’re apparently more interested in things such as the US dollar price of gold. The quantity of gold reserves seems to be more important in determining the share price than the profit made by the mine.
The question must surely be: Is it necessary for a gold mine to make a profit before investors go for it? The answer is an easy “no”. It’s a long time since Harmony last made a profit and it doesn’t look as if it’s likely to make a decent one soon. Nevertheless, its price rose from R37 to R112/share over the past eight months. After the appearance of its latest quarterly report, in which its umpteenth loss is recorded – this time with a new set of excuses – investors showed a certain amount of displeasure and the price fell to R90/share.
To the question of whether a gold mine has to make a profit to remain an investors’ favourite, the answer is also an easy “no”.
About two weeks ago, Google – American investors’ sweetheart for the past two years – said that its profit growth for the next year or so could perhaps be slightly lower than the 50% to 100%/year generally predicted. Investors didn’t like that and Google received a sharp slap. With the result that the technology giant’s price fell by 27% to $345/share over the past six weeks.
Some commentators even feel it could drop to $200/share.
Unlike gold mines, Google is earning a profit. It’s only the profit growth that’s lower than investors’ expected. Google is currently trading at a price:earnings ratio of 68. That’s expensive and means that investors are prepared to pay now for the next 68 years’ profits.
Good SA shares are trading at a p:e of 12 to 14. In fact, the 50 largest companies in Europe – which are included in the Dow Jones Euro Stoxx 50 index – are currently trading at a p:e of only 15.
But if you think a p:e of 68 makes Google expensive, take a look at some of the gold mines. Harmony is trading at a negative p:e of 23. That kind of calculation means the share is trading at a price equal to 23 times its loss. Watch out if Harmony perhaps halves its negative loss. Then the negative p:e (loss) ratio will double.
Let’s assume the loss is only R1/share for the full year, then its negative p:e will rise to nearly 100. Supposing the loss fell to only 1c/share, then the negative p:e (loss) ratio would rise to 10 000 – which would throw all the statistics for the average p:e on the JSE into a complete muddle.
AngloGold is already trading at a negative p:e of 130. Thanks to a minute profit the ordinary p:e of Gold Fields is still 152.
Let’s forget things like a negative p:e for the moment. It’s a mathematical abortion and only confuses the calculation of the average p:e on the JSE.
But back to the gold mines. Investors want to know whether gold mines make a profit. In the long term the answer is always “yes”.
Our gold mines have just enjoyed a quarter with an extremely favourable operating climate. The gold price in dollars rose to its highest level in 25 years. The stronger rand dimmed some of this shine, but the current gold price of nearly R90 000/kg is still high. Inflation is low and domestic cost increases are under control.
Nevertheless, the three big guns couldn’t do much. Harmony produces more excuses than gold. AngloGold Ashanti has sold so much of its gold forward that it’s now receiving about $200/oz less than the gold price. What’s happening lower down with mines such as Western Areas – which is sitting on much of the gold ore of Southgold – makes purists wonder.
Compared to Google, our gold shares still look expensive. But then we return to our original question: Are gold mines supposed to make a profit?
LINK: http://www.miningmx.com/mining_fin/909824.htm
Gold versus Google
Vic De Klerk
Posted: Fri, 24 Feb 2006
[miningmx.com] -- “ARE gold mines supposed to make profits?” my 22-year-old asked me the other day after the release of their latest lot of poor quarterly reports. I couldn’t help thinking back 26 years, when the gold price reached US$800/oz.
Some, like Kloof and West Driefontein, then sometimes made a profit. But the investors’ favourites, such as Village and even Harmony, were never able to make a profit – even though the gold price rocketed at the time. Higher costs and lower ore grades simply wiped out the higher gold price.
So whether gold mines are supposed to make a profit remains a valid question. Surely the purpose of any business is to make a profit? It’s only Section 21 charity organisations that don’t have to make a profit. However, the JSE – or any other share market worldwide – doesn’t require companies to have to make a profit to remain listed.
Investors in gold shares place little store on the profit recorded by a gold mine, let alone a dividend. They’re apparently more interested in things such as the US dollar price of gold. The quantity of gold reserves seems to be more important in determining the share price than the profit made by the mine.
The question must surely be: Is it necessary for a gold mine to make a profit before investors go for it? The answer is an easy “no”. It’s a long time since Harmony last made a profit and it doesn’t look as if it’s likely to make a decent one soon. Nevertheless, its price rose from R37 to R112/share over the past eight months. After the appearance of its latest quarterly report, in which its umpteenth loss is recorded – this time with a new set of excuses – investors showed a certain amount of displeasure and the price fell to R90/share.
To the question of whether a gold mine has to make a profit to remain an investors’ favourite, the answer is also an easy “no”.
About two weeks ago, Google – American investors’ sweetheart for the past two years – said that its profit growth for the next year or so could perhaps be slightly lower than the 50% to 100%/year generally predicted. Investors didn’t like that and Google received a sharp slap. With the result that the technology giant’s price fell by 27% to $345/share over the past six weeks.
Some commentators even feel it could drop to $200/share.
Unlike gold mines, Google is earning a profit. It’s only the profit growth that’s lower than investors’ expected. Google is currently trading at a price:earnings ratio of 68. That’s expensive and means that investors are prepared to pay now for the next 68 years’ profits.
Good SA shares are trading at a p:e of 12 to 14. In fact, the 50 largest companies in Europe – which are included in the Dow Jones Euro Stoxx 50 index – are currently trading at a p:e of only 15.
But if you think a p:e of 68 makes Google expensive, take a look at some of the gold mines. Harmony is trading at a negative p:e of 23. That kind of calculation means the share is trading at a price equal to 23 times its loss. Watch out if Harmony perhaps halves its negative loss. Then the negative p:e (loss) ratio will double.
Let’s assume the loss is only R1/share for the full year, then its negative p:e will rise to nearly 100. Supposing the loss fell to only 1c/share, then the negative p:e (loss) ratio would rise to 10 000 – which would throw all the statistics for the average p:e on the JSE into a complete muddle.
AngloGold is already trading at a negative p:e of 130. Thanks to a minute profit the ordinary p:e of Gold Fields is still 152.
Let’s forget things like a negative p:e for the moment. It’s a mathematical abortion and only confuses the calculation of the average p:e on the JSE.
But back to the gold mines. Investors want to know whether gold mines make a profit. In the long term the answer is always “yes”.
Our gold mines have just enjoyed a quarter with an extremely favourable operating climate. The gold price in dollars rose to its highest level in 25 years. The stronger rand dimmed some of this shine, but the current gold price of nearly R90 000/kg is still high. Inflation is low and domestic cost increases are under control.
Nevertheless, the three big guns couldn’t do much. Harmony produces more excuses than gold. AngloGold Ashanti has sold so much of its gold forward that it’s now receiving about $200/oz less than the gold price. What’s happening lower down with mines such as Western Areas – which is sitting on much of the gold ore of Southgold – makes purists wonder.
Compared to Google, our gold shares still look expensive. But then we return to our original question: Are gold mines supposed to make a profit?
LINK: http://www.miningmx.com/mining_fin/909824.htm
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