Hitting new highs, gold is once again making headlines.
Hedge fund managers love gold, since it the easiest thing in the world to sell – gold is shiny, pretty, used to make expensive jewelry, and is great during currency devaluations and other disasters. Gold is easy to sell because it appeals to both greed and fear at the same time.
The problem with gold is that it’s impossible to determine its intrinsic value. Like tulip bulbs, gold has practical purposes but is primarily worth whatever someone is willing to pay for it. Gold doesn’t pay dividends. Gold doesn’t increase revenues. I would never recommend buying physical gold when it is trendy to do so.
Having said all that, I’m not at all against buying companies whose product is gold. One such company is Canadian-based Nevsun Resources.
Among other things, Nevsun Resources (stock symbol: NSU) owns a copper-gold-silver-zinc mine in Eritrea, East Africa. The Eritrean government owns 40% of the mine’s shares, 10% of which was mandated and 30% of which was purchased by the government in the market. In other words, the government has full reason to protect and encourage its investment.
Nevsun’s flagship Bisha mine just began production in January of this year, and is expected to have a thirteen-year mine life. Over those thirteen years it is expected to produce more than 800 million pounds of copper, 1 billion pounds of zinc, 1 million ounces of gold, and 11 million ounces of silver. Promising additional sources of these metals are also being explored in the region.
Despite a newly-completed, fully-functioning mine with enormous reserves, Nevsun shares are trading at only $6.05 CDN per share, giving it a low forward P/E of 7.4 and a great Current Ratio (debt safety measure) of 3.8. Surely there must be a downside, right? Of course there is!
Like many countries in Africa, Eritreans and their neighbors despise each other. The Canadian government’s official warning: "The political situation is highly instable, due to ongoing tension between Eritrea and neighbouring countries, and could become violent at any time.” This is in addition to the street crime, lack of reliable communications, and border area landmines common to this part of Africa. As a poignant example of the dangers, it is fitting to remember that during a geological mapping expedition in 2003, one of Nevsun’s geologists had his throat cut and his four-wheel drive vehicle set on fire.
Those who have studied economics will recall reading about “political risk” - the possibility of losing your investment due to negative political events. Eritrea is an example of political risk at its harshest.
For any investment in Nevsun Resources, the political and also ethical risks must be weighed against the ridiculously wonderful economic potential. Having considered all, I believe an investment in Nevsun Resources is indeed worth it. Supporting this idea is the fact that construction of the Bisha mine (which began in 2008) was completed on time, under budget, and without incident. The locals are apparently completely onside with the positive attributes (ex. non-military jobs, electricity and health care) that have resulted from Nevsun's presence.
As with all stocks I recommend on this site, I own Nevsun shares.
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"If you want to make peace with your enemy, you have to work with your enemy. Then he becomes your partner."
Nelson Mandela
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For more information, see:
Nevsun Resources Main Page
Nevsun Resources - Social Responsibility Page
US Gov't Eritrea Travel Warning
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Disclosure
Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.
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