r/wallstreetbetsApr 23, 01:31 AM
Rockets Are Worth Their Weight in Gold (Aka RKLB to $519).
I didn't think I could love Rocket Lab CEO Peter Beck more as a Engineer, a CEO, and all round good guy... until that is, I found out he owns a gold mine.
I intend today to convince you that valuing rocket launch companies is analogous to valuing gold mining discoveries.
Before switching focus to investing in space companies, I spent 12 years investing in gold, silver, copper, and uranium exploration companies. I've noticed a strikingly similarity in valuing these commodity discoveries to rocket companies.
I'll start you off with this wonderful quote from the 1948 movie "Treasure of the Sierra Madre". The scene is two men discussing the value of gold.
Howard:
Say, answer me this one, will you? Why is gold worth some twenty bucks an ounce?
Flophouse Bum:
I don't know. Because it's scarce.
Howard:
A thousand men, say, go looking for gold. After six months, one of them's lucky. One out of a thousand. His find represents not only his own labor, but that of nine hundred ninety-nine others to boot. That's six thousand months, five hundred years, scrambling over a mountain, going hungry and thirsty. An ounce of gold is worth what it is, mister, because of the human labor that went into the finding and getting of it.
*End quote*
I thoroughly enjoy this quote and the premises rings true to me. Here is a simple thought exercise to clarify the point.
If 1,000 people compete for a chance that one of them would make $10, very few would take up the challenge. But if 1,000 people compete for a chance that one of them would make $10,000. Then the incentive is there, and rightly, to the victor goes the spoils.
Back to Gold, we can say that if 1,000 people search for gold, the reward needs to pay for all 1,000 peoples efforts including their time and expenses, even if only one person is ultimately successful.
This remains as true today as in 1948. It's hard to pin down an exact number but I've seen an estimate that only 1 in 4,000 grass roots prospects ever turn into a producing gold mine.
There are ~1,600 junior mining companies listed in Canada & Australia today and maybe 2-5 new gold mines go into production globally each year.
When it does work, the rewards generated by those 2-5 new producing gold mines needs to cover the expenses of all 1,600 companies that went looking for new mines. Here is the proof:
In 2015, Great Bear Resources purchased the Dixie project for CAD$210,000. After successfully discovering gold, they sold the project for total consideration including a royalty spinout of approximately CAD$2B, a 9,523x difference.
Great Bear spent a total of approximately CAD$80M working on the project before selling it, showing that the return (incentive) covered far more than their own efforts - the reward had to amortize not just their costs but the costs of the dozens of other companies that tried but failed to make discoveries in the same area.
(I was fortunate enough to invest in Great Bear Resources - you can see why the sector appe