The Cheapest Hole-in-the-Ground

Firstly, I have no strong conviction on gold. I think that it is largely an ego-based commodity driven by investment fashions. In the short- to medium-term I suspect that the collapsing gold price has less to do with gold and more to do with the strengthening US Dollar (which gold and other commodities are priced in).

The stronger US Dollar is likely to be here for a while, so the Dollar-price of gold is likely to remain depressed.

But, secondly, in South Africa, we actually price gold in Rands… The South African economy (as with most Emerging Markets) is likely to experience weaker currencies for the near-term.

Hence, the Rand-price of gold could well remain flat (or even rise).

That background, though, in my mind is “random walk” and I largely could not care less. I simply present it here as the macro view before I go into some details about why I like (and have bought) Pan Africa Resources Plc (PAN).

What is a mine?

It is a hole in the ground aimed at (profitably) removing whatever substance of value exists at the bottom of said hole.

So what makes for a good mine?

Not commodity price movements, not currency fluctuations, not even the resources at the bottom of the pit… All these variables are outside of management control. There is only one single part of a mine that is under management control and it makes or breaks the quality of the mine: costs.

The cheaper management can dig the hole and the cheaper management can extract the resources from the bottom of it, the better quality the mine is.

End of story.

See the illustration below to see that Pan Africa Resources digs its gold up the cheapest (click on image to enlarge it):

Gold Stock Cost of Production

Gold Stock Cost of Production








In other words, Pan Africa Resources is best “quality” gold miner on the JSE.

What are you actually doing when you invest into a mine?

Well, not just are you trying to buy the mine that digs its resources up the cheapest, but you also want to pay as little as possible for those resources. In fact, when you invest into a mine, you are buying the profits of the future production of that mine that currently are still lying in the ground.

So I have built a comparison of the gold counters on the JSE where I look at how much you are paying for the underlying stated gold reserves (i.e. the market cap of the gold stock divided by its stated gold reserves).

Click on image to enlarge it.

Gold Stock's Market Cap divided by Gold Reserves

Gold Stock’s Market Cap divided by Gold Reserves







What this graph tells us is literally how much are you paying per ounce of gold in the ground for each gold stock.

While Harmony is the cheapest at this moment, it is for good reason: Harmony’s costs of production are amongst the most expensive (see the first graph above). There is little point in having gold at the bottom of a mine if you cannot dig it up profitably.

Once again, then, we can see that Pan Africa Resources is the best choice stock stock, based on this metric.

So, not just can Pan Africa Resource dig the gold out of the ground cheapest, but one is currently paying amongst the least for that gold at the current share price.


Just to put the above two graphs into a matrix, see below. Anything sitting below the line is implied value, anything above the line is implied expensive, as far as investing goes (click on image to enlarge it):

Gold Stock Matrix

Gold Stock Matrix








I hope it is starting to become obvious why I have bought Pan Africa Resources? It digs its gold out with the biggest profit margin and I am paying the least for that gold in its share price.

It does not hurt that I am in fact getting Pan Africa’s platinum project for free amongst all of this… I view this as a free option on the PGM sector and platinum price.

In conclusion, while I have a fairly neutral view of the gold (and commodity markets, in general), I am not buying Pan Africa Resources for that reason. Rather, I am buying it because the Group digs the cheapest holes-in-the-ground and I am paying the least for what lies at the bottom of those holes.

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