first majestic silver

Durban Dynamite

CPA, Principal & Co-Founder of Zeal LLC
May 5, 2000

Our local hometown hero, Durban Roodepoort Deep, released it's Q1 2000 operating results on 3 May 2000. In order to test the oft-mentioned hypothesis that DROOY's leverage relative to the gold price is extraordinary, I ran some price projections for DROOY using the Q1 2000 financial results with hypothetical gold prices. The results are quite stunning, as I think you will agree.

Begin disclaimer. Before we begin, I need to disclose I have a material position in DROOY and am not a professional investment advisor. The following is purely an exercise in financial projections, and should not be construed as investment advice. Before you buy any investment, consult your loved ones, trusted advisors, an investment professional, your magic 8-ball, or a palm reader. End disclaimer.

As a foundation for our projections, the posted Q1 2000 numbers directly from Durban's website ( were used. From a methodology standpoint, the ONLY number changed for these projections was the market price of gold. The goal is to simulate a hypothetical scenario restating operating results using various gold prices to determine their resulting effect on the share price of DROOY.

At various gold prices, I computed the price per common share (or US ADR) of DROOY using two price earnings ratios. The first P/E ratio used is 13.5, which is a widely accepted historical average P/E ratio for general US equity markets. The second P/E ratio used is an arbitrary mania P/E ratio of 100, which could describe a valuation scenario where gold investments become fashionable as other world markets crumble. Wouldn't a gold mania be grand?

A South African corporate tax rate of 30% is assumed. Since the Q1 2000 results are only for one quarter (very astute observation, I know!), they were annualized to yield the following share price projections.

Once again, changing NOTHING but the gold price, here are the results:

Not too shabby, I thinks! Even a moderate 25% rise in the price of gold initiates an explosion of value and profits in our beloved Durban Roodepoort Deep! Durban is indeed gold dynamite incarnate.

As an investor, the thing really relevant to me is not accounting earnings, which are a fiction, but cashflows. (I am a Certified Public Accountant and ex-Big Six corporate auditor. I CAN say accounting earnings are fictional. They can and do diverge massively from investor cash flow, distorting the true valuation of a business!)

With a fractional share of ownership in a business, the investor presumably has a fractional allotment of the total cashflows of the business. Non-cash charges, like depreciation, represent a current shadow of a historical cash outflow, and really are not relevant to projected future cash flows. Ignoring non-cash expenses, I ran the projection again to see the future cash flow each share of DROOY represents at the same gold prices we used above.

As you can see, using cash flow as a proxy for earnings shows the phenomenal leverage DROOY has relative to the price of gold. It is like the ultimate gold call option! It never expires, is incredibly inexpensive, and represents a fractional ownership in a great business rather than a fiat derivative.

Now what is the probability of these gold price scenarios, are they just "pie in the sky" NASDAQ type dreams, or is there a real possibility these gold levels may soon be breached? Consider the following…

We are entering an equity market environment of great uncertainty. Inflation is real, has iron teeth, and is back with a vengeance. Serious dislocations in the credit and currency markets are occurring at unprecedented rates, and the CRB commodity index is rocketing to new highs. For all of human history, gold has been the ultimate refuge in turbulent times.

If gold went from $275 to $350, it is merely a 27% increase in the dollar price. With the relentless growth of M3, an astounding 50% since 1995, is this scenario improbable?

The legendary Frank Veneroso, through an extensive study of global gold supply and demand, has stated that he believes $600 is the true market clearing price of gold without any political or financial manipulation. Is a $600 gold scenario improbable?

Our own patriarch, Dr. Vronsky, has stated that he believes there is a high probability gold will trade at $1500 per ounce in the next 24 months. This analysis is from years of intense study and from the man who built this wonderful virtual mead hall for our merry band of gold marauders. Who am I to argue with the esteemed Dr. Vronsky?

In the last major inflationary periods in the United States, the late 1970s and early 1980s, we came into a period where reckless money supply expansion came back to bite the American economy. Gold was openly and officially manipulated between a range of $100 to $150 an ounce, and memories of the last large failed gold manipulation effort (the London Gold Pool) and the US national default in 1971 were still fresh. Nevertheless, gold broke its political shackles and rose to over $800 an ounce, or an 8x increase in a few years. Today, we are in a similar environment where inflation is beginning to show its fangs and rampant running of the printing presses is sending money roaring into the economy like a runaway freight train. Where would another 8x increase in gold put the magical yellow metal? At $2,500 per ounce! Is this an improbable scenario?

If our prayers our answered and $2,500 gold is reached, an investment of DROOY at $1.25 could yield returns of 17,000% to 133,000%. That might even be impressive enough to cause your NASDAQ neighbors to wake up and take notice!

Below is a graph showing the relative percentage returns of DROOY (purchased at $1.25) versus gold (purchased at $275). Incredibly, this graph shows the most conservative of our projections, the full Q1 2000 numbers at a 13.5 price earnings ratio! If we use the 100 mania P/E ratio, Durban outstrips gold by an unfathomable 133,000%!

Bottom line, if you believe a rise in gold above $325 is possible, you have RISK capital you can afford to lose, and you are looking for ludicrous profit potential with limited downside, Durban Roodepoort Deep may be an investment you wish to consider. Don't of course, take my word for it, consult your professional investment advisor or lucky rabbit foot first!

Go gold go GATA go DROOY!

Adam Hamilton, CPA, MCSE
aka Zelotes (ancient greek for Zealots, as in "I love gold zealots!")
[email protected]

The above projections are summarized in an Excel 97 spreadsheet. If you are interested in checking the calculations or running hypothetical scenarios with DROOY, please e-mail Mr. Hamilton for a copy of the spreadsheet.

Adam Hamilton, CPA, is a principal of Zeal LLC, which he co-founded in early 2000 as a pro-free market, pro-capitalism, and pro-laissez faire contrarian investing and speculating Information Age financial-services company. Hamilton is a lifelong contrarian student of the markets who lives for studying and trading them.

Throughout history the ruling class has always sought to own gold and silver because they represent purity and longevity.
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