Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Gold is a very controversial object. Many investors view the precious metal as a storage of wealth and a hedge against uncertainty. However, critics claim gold is a bubble and has no intrinsic value, especially since you can not eat it. The tech giant Apple Inc. also receives a fair amount of controversy, and unlike its name would suggest, you can not eat it either.
Last year, Apple made headlines when its cash and marketable securities position of $73.8 billion surpassed the operating cash balance at the U.S. Treasury. The news magnified calls for Apple to deploy some of its idling cash hoard. At the time, analyst Katy Huberty from Morgan Stanley explained that Apple’s current and future cash flows “greatly exceed” its cash needs. After Apple’s most recent earnings report, the calls for deploying cash are increasing in volume.
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Late Tuesday, Apple reported its financial results for its fiscal 2012 first quarter, which ended December 31, 2011. In addition to a blow-out earnings number, Apple’s cash position has grown to new earth-shattering records. Apple generated a cash flow of $17.5 billion in the quarter, and finished 2011 with a whopping $97.6 billion in cash and equivalents. According to Zero Hedge, “Looked at otherwise, if Apple were a country, and its cash was equivalent to GDP, it would rank as the world’s 58th largest economy, above such countries as Slovakia, Iraq, Luxembourg and Syria.” In terms of market capitalization, Apple has now surpassed Exxon Mobil as the world’s most valuable company. In fact, Apple’s current cash position of nearly $100 billion is greater than the market cap of 474 of the S&P 500 companies.
The question then becomes, what should Apple do with its massive cash hoard? Conventional recommendations range from paying a dividend or buying back stock, to acquiring suppliers. While these are certainly worthy recommendations, it is hardly the unconventional thinking that has propelled Apple to the top of the podium. In addition to these recommendations, Apple should also consider purchasing gold. A relatively small gold position in Apple’s portfolio could help the company further offset currency and monetary policy risks to its $97.6 billion stockpile. In November, Apple started accepting Chinese yuan for App Store downloads, but could benefit even more by diversifying into gold. A report by Oxford Economics last year recommends holding at least 5 percent of assets in gold. The report concludes that gold is a good hedge against inflation, as well as deflation.
Companies investing in precious metals such as gold is not completely unthinkable. In 2009, life insurer Northwestern Mutual announced it purchased $400 million in gold. It was the first time in the company’s 152-year history. Chief Executive Officer Edward Zore explained, “Gold just seems to make sense; it’s a store of value. The downside risk is limited, but the upside is large.” Since his comments in June 2009, gold prices have increased from $950 per ounce to nearly $1,700.
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Aside from gold’s monetary value to investors, gold also has a minor industrial value. According to the most recent data from the World Gold Council, technology gold demand in the third quarter of 2011 was 120.2 tonnes. The WGC explains, “According to the Semiconductor Industry Association, worldwide sales of semi-conductors (the major consumer of gold in tech) were $25.8 billion for the month of September, an increase of 2.7 percent from sales of $25 billion the prior month. Over the year to end-August, sales grew 2.2 percent year-on-year, partly as a result of rising demand in netbook and tablet segments. Industry analysts iSuppli estimates that worldwide tablet shipments will exceed 60 million units in 2011, with Apple accounting for 73.6 percent of those.” Keep in mind, this estimate was before Apple’s record breaking sale of 15.43 million iPads in the December quarter.
While some may think it would be out-of-the-question for Apple to purchase gold, the precious metal would provide a hedge for the company and its shareholders. At the very least, Apple could use the gold in its technology products. If Apple deploys just 5 percent of its $97.6 billion cash hoard to purchase gold, it would only have to part with $5 billion. This amount of cash flow was earned in just one month in the previous quarter. Although Apple has not announced new plans for its cash supply, it may be nearing a decision. The company’s Chief Financial Officer Peter Oppenheimer said, “We’re actively discussing uses of our cash balance, and have no specifics to share. In the meantime, we continue to be disciplined with cash, and are not letting it burn a hole in our pockets.”
