One of the market sectors I covered was mining. I had to look for other angles and themes in the sector because I didn’t have a crystal ball and I had little belief in myself or others’ ability to predict future commodity prices.
One disparity I noticed was the relative assessment of large and diverse miners such as BHP and Rio Tinto with gold and silver miners such as Landgold and Fresniro.
Diversified miners have consistently traded at lower price-earnings ratios than precious metals.
The $ 1 million profit from copper or iron ore mining was estimated to be worth less than $ 1 million from gold or silver mining. The stock market has always been more bullish on the outlook for gold prices than copper, or gold mines were considered less risky.
Examining the discounted cash flow (DCF) valuations and price targets of brokers was truly spectacular. For diverse miners, the discount rate used was typically 8% and the price target was 0.7-1.2 times the DCF value. As far as I’ve tried, I couldn’t convince analysts that their price target should simply be 1.0 times the DCF valuation.
But it was in the gold mine subsector that common sense really left the town. First, the commonly used discount rate was 0-5%, then the price target was 1.5-2.0 times the DCF valuation. The combination of bullish gold price forecasts and low discount rates has produced a high DCF rating. Then multiply this by 2 to get the stratospheric price target.
Gold miners usually traded below these insane price targets, but still received a much higher rating than the diversified ones. When I asked a gold mine analyst to explain why they were using such a low discount rate, they were told that the valuation method in Vancouver, gold, was a “risk-off” asset.
At that time, the largest gold mine stock cited in London was Randgold Resources.
All its production was done in three African countries. Mali was invaded in 2012 by a group supported by al-Qaeda. Côte d’Ivoire, which caused a civil war in 2011. And the DRC, which has had multiple armed conflicts in the last 25 years. There are few risk-free environments to operate.
The last nail in the casket was the gold price.
Unlike other commodities, they tend to trade at a higher price than marginal production costs. This premium is caused by investors buying as insurance against the end of the world, not just industrial users. To me, it looks like expensive insurance that may never be paid.
This unattractive combination of high gold prices, optimistic DCF ratings, ridiculous price targets, high P / E ratios, and low implicit future returns has made me own a single gold mine stock for over 30 years. It meant that there was nothing. I left the gold subsector to the gold bug. The Gold Insect was considered a crazy fringe, a conspiracy theorist.
Going back a few years, these gold bugs suddenly look like conservative investors.
Two new fads-cryptocurrencies and non-fungible tokens (NFTs) -have attracted the attention of gambling scammers and conspirators while the World Gold Council is talking about taking a 200-year outlook.
Some vitcoin supporters describe it as “digital gold.” While Warren Buffett likened it to “rodenticide squared,” I described it as a worthless monopoly. In my view, NFTs are just as bad.
NFTs are digital files that exist on the blockchain and confirm ownership of digital art. Buyers usually have limited rights to view the digital artwork they represent, but do not own the copyright. Digital artwork can be reproduced by a third party.
Therefore, NFT owners have the right to brag and tokens that can be resold later. Anyone can create and sell NFTs. You “mint” a piece of digital art and pay a “gas” fee managed in cryptocurrency. Like cryptocurrencies, NFTs are not regulated.
At an auction in Christie’s in March 2021, Beeple sold an NFT for digital artwork “Everydays: The First 5000 Days” for $ 69 million. This amazing news has begun to take an interest in NFTs as a potential asset and has verified its value for some.
Not for me.
The purchaser was reported to be Vignesh Sundaresan, the founder of the Metapurse NFT project. Some skeptics speculated that his goal was to raise the price of his own NFT collection.
What if I sell my painting to myself for a high price? A high “rating” is reported and later I may try to sell it to a third party at a discounted price. Third parties may mistakenly think they have a bargain.
This is similar to a food retailer listing £ 3 of wine for £ 10 and offering it at half the price of £ 5 a few weeks later. Wine buyers are fooled, but at least they get £ 3 of wine.
GameStop soared last week when it was reported that a deficit video game retailer was planning to develop a market for NFTs and set up a division to establish a cryptocurrency partnership.
GameStop is trying to sell picks and shovels in the gold rush, but memetic stocks, NFTs and cryptocurrencies sound like rodenticides to me.
Secret Pension Fund Manager is a former institutional investor with over 30 years of experience. Click here for more information on Secret Pension Fund Manager.
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