Course 409:
Hard-Asset Stocks
In this course
1 Introduction
2 Has Barrick Capitalized on Its Natural Endowments?
3 What about Growth?
4 What Has Company Performance Meant to Shareholders?
5 Has It Delivered the Diversification Benefits of a Hard-Asset Stock?
6 What Does It Cost?
7 Conclusion: Appraising the Asset

Why invest in hard assets? Unlike most of the economy, which creates wealth from the relatively thin air of raw materials and brainpower, a hard-asset producer traffics in goods of supposedly intrinsic value. Windows 95 won't be worth much on doomsday, the thinking goes, but gold bullion can still be bartered for food. Even if the apocalypse fails to materialize, the diversification value of hard assets can still increase a portfolio's returns and reduce its volatility. Hard-asset stocks don't march in lockstep with the rest of the market. As their diversification powers suggest, hard-asset stocks feature unusual investment characteristics. Current profits are less important than large and easily extracted reserves of oil, gold, or other natural resources. The analyst's touchstones are reserves and production costs, which indicate the size of a company's natural-resource reserves and how profitably those resources can be exploited. To screen for companies with large reserves, use market capitalization as a proxy for mineral wealth (the two figures are closely correlated). To find the lowest-cost producers, screen for high net margins. The less cash a gold producer pours down its mine shaft, the better its profit margins. Let's use Barrick Gold ABX as an example. Barrick boasts the largest market capitalization in the gold-mining industry, more than $7 billion. That valuation is perched atop 50 million ounces of gold reserves, one of the largest deposits among North American producers. Furthermore, Barrick's high net margin indicates that it is a low-cost producer. The mining giant can bring an ounce of gold to market for about $160, excluding noncash charges such as depreciation. That's less than 60% of gold's price as of December 1999. Of course, a wealth of resources (even Barrick's riches) can always be frittered away. To pick the best hard-asset stocks, we need to examine how those assets have been managed and what the result has been for shareholders. To do that, we can look at profitability, growth of reserves, and production costs.

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