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Thursday, January 5, 2017

HUI/GOLD ratio, the most useless ratio ever created

If you have traded Gold shares, chances are someone has sold you some version of this chart at some point.So you think Gold share are cheap? Gold has gone up 400% since the year 2000 but mining shares seem to be trading at absurd levels.



I can count about 50 different people who have mentioned it on blogs or to me in person.

This ratio has caused more financial pain than JimCramer’s “Bear Stearns is fine!”

comment. What if I told you that most Gold Miners are more expensive in relation to Gold than they were in the year 2000?
You would think I was smoking some really good weed. You would be wrong. 

The problem with a ratio like this is that it is based solely on price.
It completely disregards the total share count and total debt of the companies included in the HUI.
What I am going to do is calculate how much each company is worth today and how much it was worth in the year 2000.
The way this is done simply multiplying shares outstanding by the price and adding the Net Debt of the company. Then I will divide this by the price of Gold today and in the year 2000 respectively. This will give us the Enterprise Value (EV) per $ price of Gold. If Gold shares are overvalued this number would be higher, i.e. you are paying more per $ price of Gold. If Gold shares are undervalued this number would be lower, i.e. you are paying less per $ price of Gold.



Shares in 2000 (Millions)
Debt in 2000 (millions)
Shares in 2016 (millions)
Debt in 2016 (millions)
Barrick Gold
356.00
 500.00
 1,200.00
 17,000.00 
Share Price in 2000
14
Enterprise Value in 2000
5484
Price of Gold
250
Enterprise Value in millions per $ of Gold price in 2000
21.94
Share Price in 2016
17.5
Enterprise Value in 2016
38000
Price of Gold
1180
Enterprise Value in millions per $ of Gold price in 2016
32.20

So based on today’s prices and debt, Barrick is 50% more expensive per $ price of Gold than in the year 2000.

Shares in 2000 (Millions)
Debt in 2000 (millions)
Shares in 2016 (millions)
Debt in 2016 (millions)
Newmont Mining
140.00
 3,000.00
 500.00
15,000.00
Share Price in 2000
15
Enterprise Value in 2000
5100
Price of Gold
250
Enterprise Value in millions per $ of Gold price in 2000
20.40
Share Price in 2016
36
Enterprise Value in 2016
33000
Price of Gold
1180
Enterprise Value in millions per $ of Gold price in 2016
27.97


Newmont is about 40% more expensive today than in the year 2000.


Running the same numbers for Goldcorp as for Barrick and Newmont, 

2001 EV of 1.5 Billion.

2016 EV of 16.7 Billion. 

So adjusted for Gold price Goldcorp is TWICE as expensive today as in 2001.
A few more charts from SRSrocco, who independently reached the same conclusion as me showing how the relentless dilution of share count and racking up of debt has destroyed the Gold companies.











So by every common sense measure HUI companies are more expensive today that in the year 2000. Add to that, we have falling grades of Gold, 16 years of Gold that they already depleted their mines of, and we have HUI companies very, very expensive in relation to where it was in the year 2000. The reason is that they and almost every other Gold company diluted their share count and racked up debt like there was no tomorrow. Using HUI-GOLD ratio does not adjust for debt or shares outstanding. So next time Gary Savage or Adam Hamilton shows you that, remember they have a subscription to sell. 

But don’t all resource companies increase their outstanding shares. Err, no. 

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