In Monday’s Lessons From Breakfast with Warren Buffett article I stated that Buffett prefers productive assets over physical gold, which he says lacks utility.
Gold bugs might scorn such statements, but reading between the lines – and factoring in Buffett’s actions – it’s clear to me that mining companies bridge this ‘non-productive’ gap for Berkshire’s (NYSE: BRK-A) CEO.
This week Berkshire’s IMC International Metalworking Companies unit announced an $80 million investment in Woulfe Mining (WOF.V) (WFEMF.PK) to help bring its Sandong tungsten mine up to production. The South Korean project should be up and running in 2013 when it will be the world’s biggest tungsten producer.
Tungsten prices have soared in recent years since there is no economical replacement for the metal. It is used as an abrasive and cutter in the metalworking industry, and is so valuable because of its exceptionally high melting point. This utility is why Buffett is buying.
The recent investment in metals is nothing new for Berkshire – it purchased an 80% stake in IMC International Metalworking Companies in 2006 for $5 billion. The Israeli-based company has over 140 subsidiaries in 65 countries, and is one of the world’s biggest metalworking conglomerates.
While Berkshire’s interests in Woulfe Mining are clearly to secure a future supply of tungsten, the company also owns a South Korean gold project – one of the biggest historical producers in that country. It will be interesting to see if Buffett advocates spinning this project off into a separate gold producing company as things progress.
Buffett might not like precious metals like gold because they don’t do much on their own. But his company clearly sees the value in the miners that produce other valuable metals.
It’s all a matter of perspective. For mere mortals who want to protect their assets from dollar devaluation gold has quite a bit of utility. From this vantage point, I see gold mining investments fulfilling the same purpose as Berkshire’s recent stake in Woulfe.