Gold or base metal shares, which offer better value?

Reminding his audience that “in the mining industry too, investment is all about money,” Robert Weinberg, in charge of international mining sales, drew attention to how the general market today appears to be perceiving the difference between price and value.

“The extraordinary divergence between what it sees as representing value in the gold and base metal sectors is positively awesome,” he said.

“I should like to consider some examples. Let us start in North America. The market capitalization (number of shares multiplied by the share price) of every gold company in the U.S. and Canada amounts to roughly $20 billion(US). And all of these gold companies this year (1989) will produce net profits adding up to about $665 million.

“In other words, it will take the investor 30 years to get his money back. And this is in terms of company earnings. I am not talking about dividends, with which we can think of amortizing our investments, for these are slim indeed.

“Nor do the sector’s growth prospects justify a premium rating in the market. Using a gold price of $400 in 1991, the P/E multiple works out at 20 years of earnings. But very few of these companies will even be around for that long.

“Let us turn to the base metals. Alcoa, Inco and Phelps Dodge are the market leaders in aluminum, nickel and copper, respectively. They have a combined market capitalization of $12 billion. We may think of this as representing the equivalent of 60% of the market capitalization of all the gold shares in North America.

“Yet this year these three companies alone will earn $2.3 billion or 3.5 times the earnings of all the gold companies. In earnings, you will get your money back in just over five years.

“But not only do these companies have substantial earnings, they also pay dividends. This year they will have paid a total of $480 million in normal dividends and they have already paid a further $1.4 billion in bonus dividends.

“The normal dividend payout alone, excluding the bonuses, is equivalent to 72% of the earnings of all the gold mines put together.”

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