Real investors need real products

Comparing second-quarter financial results of Canada’s major mining and high-tech companies, as reported by the financial press in the week of July 23, reveals some interesting trends. Even comparing revenues without considering profits is revealing; besides, it’s unfashionable to worry about profits when evaluating high-tech companies!

Inco, trading at $21 with 200 million shares outstanding, reported quarterly revenue of $800 million. Falconbridge, at $17 with 200 million shares, also grossed $800 million, and Noranda, at $15 with 250 million shares, grossed $1.9 billion. JDS Uniphase, the high-tech analysts’ darling and (we are told) the world leader in a limitless fibre-optics industry, was trading at $190 with 800 million shares outstanding — a market capitalization exceeding that of the entire North American mining industry. However, its revenue was just $500 million, well below that of Inco, Falconbridge or Noranda.

The quarterly revenue per share of the three miners averaged $6, ten times higher than JDS’s paltry 60. The question is, should the miners be trading ten times higher at $200 per share or should JDS be one-tenth as high at $20? Anyone purchasing shares for his registered retirement savings plan would be wise to consider this question. But such questions are deemed irrelevant by modern high-tech analysts. Seemingly without exception, they fawn over the well-dressed emperor and issue higher and higher “must buy” recommendations. Equally irrelevant is the fact that JDS lost more than $400 million, negating most of its revenue, whereas all of the miners were highly profitable. JDS has a hot product, the analysts gush. It’s much more than a dot-com with a cool idea. As in previous quarters, JDS’s endless losses are simply dismissed as “acquisition costs.” The fact that these acquisitions will throw another 600 million shares on to the market and include an offer to purchase SDL at 220 times annual revenues — equivalent to Noranda’s launching a takeover of Inco at $3,500 per share with the shares trading at $21 — is of no consequence.

Or is it? Bre-X, too, had a hot product (property) and a cool idea. Anyone familiar with the Bre-X debacle will see dozens of unclothed emperors in the high-tech parade and recognize that the current crop of high-tech analysts would see unlimited gold at Busang. Post-Bre-X miners are highly regulated; they are required to identify their product with meaningful labels ranging from “inferred” to “proven.” How many “inferred” products are being flogged unchecked by the high-tech companies and their analysts? Keep the faith, miners and explorers. Real investors need real products. Naked, overfed emperors can be very, very ugly!

Stuart Averill

President

Overburden Drilling Management

Nepean, Ont.