CROSS-CUTS The royal shaft

Investors around the world have been renewing their love affair with gold during the past year, and Canadian gold stocks have all been performing exceptionally well as a result. In fact the market value of some gold equities is so buoyant they seem to bear little relationship to the price of the commodity. Richard Cohen, an analyst with Brown, Baldwin, Nisker, poked a little fun at the high price (relative to the amount of reserves) of quality gold stocks. With tongue firmly in cheek, Cohen proposes to create a new company — Royal Shaft Gold Mines. Royal Shaft would have seven million ounces of proven gold reserves, 350,000 oz of production per year, with production costs of less than $10(US) per oz. What’s more, the property would be in Canada, close to a highway, railway, airport and deep water transportation.

He estimates that the market would be willing to pay at least $10,000(US) per oz of production based on recent trading of some other gold equities (the number of shares in the company times the market price of the shares divided by the number of ounces produced). Its market capitalization would be about $3.5 billion, not out of line considering the quality of its reserves and projected production costs.

Cohen’s execution plan, however, doesn’t involve prospectors, mine developers or any of that hard work. Here’s what he proposes:

“Initially we look for a big pit. We will then buy seven million ounces of gold at a cost of $420 per oz for a total expenditure of $2.9 billion and put the gold into the pit. We will also contemplate burying a few bricks down deep so that drilling will indicate that there is potential at depth. From this point onwards we will dividend out the gold to the shareholders at a rate of 350,000 oz per annum. We may even sell forward a bit of the gold in order to defray our operating costs.

“Assuming a market capitalization of $3.5 billion and considering the company has a book value of $2.9 billion, we shouldn’t have any trouble booking a profit of $300 million by selling off 50% of our original investment.”

It may sound absurd, but in the mining business there have been a lot of strange ideas tried. By comparison, this one sounds almost reasonable.