E Teranga Gold Corp: Making Money, Adding Ounces, Staying Cheap

TM Editors' Note: This article discusses one or more penny stocks and/or microcaps. Such stocks are easily manipulated; do your own careful due diligence.

Traditionally, value investors stay away from mining companies. Similar to what Warren Buffet must have realized after acquiring the original Berkshire Hathaway, a textile factory company, was that capital goods enterprises are, well, very capital intensive. Investors sink in tremendous amounts of money for a relatively small ROIC (return on invested capital) as well as costly assets that depreciate quickly. Another issue with the mining companies was that they are homogeneous - the end product they produce is the exact same a their competitors. A gold ounce extracted in South America is the same as a gold ounce extracted in Canada. Thus, no competitive advantage of a product "moat", a classic value criteria (when a company has a protected competitive advantage that competition cannot replicate - a proprietary patent for example). Not to mention historically mining is an ugly and poor business. They have finite resources - every ounce taken from the ground today is an asset that is gone forever.

So who would invest in these assets cannibalizing extremely expensive, moat-less, and dirty businesses? 

The madman contrarian, of course. 

If one has kept reading after understanding all the downsides the sector has, and is still somewhat interested, there are some very good aspects.
For starters, no other business besides commodity businesses can potentially have the price of the product they're selling rise every other day. For instance, Nike (NKE) doesn't have the luxury of increasing the price of their shoes at the end of each week without losing to competition. But if the market price for gold goes up 3% each week, every mining company benefits from those thicker margins. Imagine the cash flows when gold rose from $250 in 2003 to over $1900 eight years later ($206.25 per annum average or 82% per year). How would Starbucks (SBUX), Nike, or Apple (AAPL) do if the very things they sold rose 82% each year? 

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DISCLOSURE: This author did not receive payment or any incentives for writing this article. It was done out of own free will. Author owns shares of Teranga Gold Corp ...

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