Option ValueThe option value of a project is the value built into the total value based on the potential for it’s earnings to rise on a higher gold price. It is the option value which is promoted as the reason to hold gold company stocks rather than physical gold or a Gold ETF if you are bullish on the gold price. The reasoning being that if the gold price is at US$1000 per ounce today and rises to $1100, the investor in physical gold or ETF has earned 10%. In the same scenario, a gold miner producing gold at a cost per ounce of US$900, generating a profit of $100 per ounce will experience a 100% increase in profits at a US$1100 per ounce gold price. The irony is that recent high gold prices, which we would expect to strengthen mining company values, have actually coincided with periods of gold company stock price crashes of around 70% below recent highs (at March 2013). The reason for this, in the option value context at least, is that investors believe the upside to gold prices are low and therefore the option value of mining companies is low or negative. It has been argued quite validly that the introduction of Gold ETF’s which happened only ______ years ago, has drawn a huge amount of investment capital away from gold companies. ETF’s provide a convenient exposure to gold without the risks of having to select a gold mining company. The actual reasons for gold company stock trends is more complicated than all of this and not discussed here. CEO of Goldfields Nick Holland recently gave a refreshingly honest talk on the reasons gold mining stocks have been performing so poorly despite rising gold prices. |