The following report about Durban Deep relied heavily upon the use of excerpts from a brilliant analysis which appeared in the November 1998 edition of the world-acclaimed GOLD Newsletter. It is our opinion the report warrants the attention of every serious gold investor.
A little-known gold miner in South Africa boosts the potential of being one of the most profitable gold mining companies in the world. Correspondingly, it may well become one of the world's most lucrative investments, once the gold bull begins. Its name is Durban Roodepoort Deep.
The reason why it enjoys such great potential is based on its leverage to the gold price (or as they called it on the other side of the world, "gearing"). Following are a few of the more eye-popping highlights of this heretofore little-known 'Gold Mine' investment (pun intended).
- A profitable gold mining company producing about 600,000 ounces annually - which plans to increase production to one million ounces by 2001
- Its stock price falls far short of reflecting its current and future profitability
- It has Proven and Probable gold reserves of 20 million ounces, making it among the largest in the world
- Market capitalization of only $5.78 per ounce of gold in the ground, compared to other companies with market caps as high as $147 per ounce of gold
- Depending on the gold price, it has up to 50 million ounces in additional gold reserves
- Offers stunning leverage potential of posting stock price appreciation of up to 58 times greater than those of gold bullion price gains
Indubitably, Durban Deep is the most highly leveraged gold mine in the world. Durban Deep trades on the Johannesburg Stock Exchange under symbol DRD, and on the New York NASDAQ under DROOY).Effects of Gold Leverage
There are two cardinal benefits harvested by a highly leveraged mining company. Firstly, its earnings explode upward as bullion prices increase. And more importantly, the stock's market price accelerates upwards. Let's take a careful look at the first benefit. If a company is just about breaking even (i.e. costs equal to income) and is producing 500,000 ounces of gold, any $10 increase in the price of bullion immediately adds $5 million in net earnings. Needless to say that is a dramatic move in profits from breakeven. Therefore, it follows that in a major gold price increase of $100 per ounce, the company goes from being just a marginal producer to one enjoying a positive cash flow of $50 million.
The upshot of leverage is that a mere 20% to 30% increase in the gold price will generate exponentially rising earnings. This results in the second highly beneficial effect of gold leverage: a soaring stock price. Here is a historical example of the multiplying effect of Durban Deep's leverage. The chart shown here paints a poignantly vivid picture of the explosive rise of Durban Deep's stock from 1977 through 1980. During the period gold futures rose from $110 to about $850. Through the financial 'magic' of leverage Durban Deep's stock price went ballistic from about $2 to $50 per share. While gold rose about 670%, Duran Deep soared nearly 2,400% - more than three and half times more. THAT'S LEVERAGE. Many fortunes were made in that run-up.
The dramatic share price rise in the 70s was not a fluke. It happened a second time to Durban Deep during the 1992-1994 gold bull market. While gold bullion increased 24% from about $330 to $410, again Durban Deep soared 650% from approximately $2 to about $15 - increasing in value more than 27 times the gold advance. THAT'S LEVERAGE par excellence! Many more fortunes were made in that run-up.
Cheapest Gold Reserves Globally
|With Durban Deep, you are buying gold reserves at only $5.78 an ounce in the ground - as little as one-twentyfifth the price of other world gold producers.|
| Durban Deep|
To our knowledge there is no other major gold producer which boasts a lower acquisition cost of its in ground reserves. From an investor's view point this represents AMAZING VALUE. Even using the most conservative Proven and Probable reserve figure of 15 million ounces, one may appreciate that by investing in Durban Deep you are essentially buying an ounce of gold in the ground for a paltry $5.78. Compare this to other major gold miners, such as Barrick Gold (at $101/oz) or Normandy ($148/oz). See table.
Following is perhaps a much simpler way to compare how cheap Durban Deep's in ground gold reserves are versus that of industry giants. Gold reserves at other major mining companies sell for more than a dollar per relative unit - whereas an equal unit may be purchased at Durban Deep for a measly 6 cents… a little more than a nickel versus a buck!
Why pay a buck for something that you can get for a nickel…?!
(Whereas the GOLD Newsletter report made no mention that Durban Deep might be a takeover candidate, this writer would certainly be remiss not to call attention to the high probability and feasibility of it occurring.)
Interestingly, it is almost axiomatic to observe that a gold producer with 15-20 million ounces of gold reserves, must necessarily be a mouth-watering target for major world miners, who are aggressively seeking dirt-cheap vast reserves. Moreover, any major world producer who is acquisition minded would obtain an existing infra-structure which would cost billions and years to replace. Durban Deep is indeed a tasty morsel for the giants.
Top Gold Mining Analyst Report
One of South Africa's top gold mining analysts, Dennis Tucker, prepared an extensive model of Durban Deep's production levels and earnings, assuming various gold prices. Additionally, the analyst provides estimates of the Price Earnings Ratio (PER) that he expects at the various gold price levels. Upon this premise he extrapolated share prices for Durban Deep - which may be seen in the table below.
|The Most Highly Leveraged|
Gold Share In The World
|Gold price $/oz
% Gain in Gold
% Gain In Durban
Durban's Leverage To Gold
Price ($) at Rec. PER
Some may question the analyst's estimated PERs. However, if you think PERs of 10 to 30 are seemingly high, compare them to high-tech stocks sporting PERs of 60 to 100 - or Internet stocks with implied PERs of infinity. In a rising gold market, PERs of 10 to 30 are indeed very conservative - especially for a highly leveraged company.
The following is an example interpretation of the table projections. Assume that in the next gold bull market, bullion goes to $500 per ounce. Per the analyst's computer model, Durban Deep shares might well soar to $62. Consequently, an investment of $20,000 (10,000 shares at the current price of about $2) would orbit to $620,000 - and a $50,000 investment today could conceivably appreciate to $1.55 million. That's leverage! It is feasible - as it happened once before (when Durban Deep soared 2,350%). And due to the recent acquisition of the Crown Consolidated properties, its fundamentals are even better today than they were in the 70s.In Conclusion
The November 1998 edition of GOLD Newsletter summarized the very comprehensive report with a rather stunning statement. "Durban Deep is the most leveraged gold play in the world, and it's a gold growth company as well - but it's only for gold bulls. If you believe gold can go to $500 in three to five years, then a $100,000 investment in Durban Deep could be worth $2 million." HOWEVER, when the GOLD Newsletter report made that statement in November 1998, Durban shares were somewhat higher. If one invested $100,000 today, and bullion zoomed to $500 in the next three to five years, the investment could well soar to $3.2 million.
1 June 1999
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