gold: blue sky upside...

  1. 1,816 Posts.
    With gold in the high USD.200's (ie/ $260, 70, 80..) many gold juniors were trading at 2x free cash flows.

    With gold at above USD.600/800/2000... these same gold stocks will be trading at above 20x free cash flows (ie. a 10x appreciation as a result of PE expansion).

    These companies will also be earnings a much larger margin per ounce mined. WIth an average cost per ounced mined currently at USD.200, the average margin currently is USD.150 per ounce (ie. USD.350-200).

    At a gold price of USD.1000/oz, the margin will blow out to USD.800/oz... more than a 5 fold increase in the margin per ounce.

    Thus, it's not out of the question to expect a 50 fold increase (ie. 10 x 5) in the share prices of junior gold miners that:

    1. Were trading at 2x free cash flows, and
    2. Are mostly unhedged.

    Adjustment for AUD appreciation.

    This offcourse does not account for any appreciation in the AUD v USD... so if we were to take the AUD/USD 0.5 in 2001... and an rate of AUD/USD 1.00 at some time in the future, the AUD spot gold prices would be:

    2001 (USD.270 x 2) = AUD.540
    A few years out (USD.800 x 1) = AUD.800

    Let's take the cash cost of production as a constant (ie. no decrease over future years) at AUD.300

    The margins under this situation are:
    2001 (AUD.540 - AUD.400) = AUD.240
    A few years out (AUD.800 - AUD.400) = AUD.400 an approx two fold increase in margins assuming an exchange rate of 1:1 at some time in the future.

    This still allows for a 20 fold appreciation in junior miners with the above characteristics in future years (10 x 2 = 20)

    Comments welcome.
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