Putting Mines Over What Matters

There has been a lot of success in the mining business lately. Are managers letting it go to their head?

I think that's a fantastic comment. For the first five years of the cycle [since 2000], miners were prudent. There was very little mergers and acquisitions silliness. I believe this year you're beginning to see the first evidence of corporate silliness.

Take Falconbridge [which was recently acquired by Swiss miner Xstrata]: It's the same as it was three years ago. And people are now prepared to pay five times what it was worth then. [Falconbridge stock traded at $10 in August 2003 and traded at $55 when it was delisted earlier this month.]

Eventually you'll get into "corporate-jet land" when every director thinks that they should fly in the corporate jet. We're not there yet. But a certain silliness is creeping in. That's when capital is wasted.

Do you seek out companies that could be likely takeover targets?

The key is to buy companies that have good assets that are undervalued because one day other people will see what we see. We don't buy on EBITDA or P/E. Instead, we ask, "What would we pay for that company?"

What should investors in mining stocks look for and what should they avoid?

Look at geology and have an understanding of the geology. It's not easy to learn geology. Most people didn't understand the Internet. [And we all know what happened there!]

With a small, new speculative company, it is all to do with the geology and is not to do with the financial earnings.

What's your view of the gold price?

We have said that the gold price should be at $500 an ounce. If you have a good project in a nice part of the world, you should be making 20% to 25% gross margin. At $700, which we saw recently, even if you have a bad project in a nasty part of the world, you are still making 20% to 25%. It means a lot of gold will be found and sold.

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