The investment case in South African resource equities, as in all other equities, should be premised on sustainability.  In other words, if factors responsible for economic value creation in mining are not renewable, then mining companies cannot sustain the valuations investors place on them, regardless of the level of those valuations.  To elaborate, companies whose shares look cheap can in the medium to long term remain structurally challenged (value trap) or decline into bankruptcy while the value of expensively priced companies could fall.  The former represents an opportunity cost of capital while the last two result in outright impairment of capital.  At First Avenue, we don’t concern ourselves with outcomes a year or two out because, as we all know, in the short term, share prices movements are random.

Factors of production as well as managerial decisions that lead to their acquisition and application are both sustainable and renewable if they can be improved on intellectually, technologically, or otherwise.  By default, non-renewable and non-sustainable factors of production exhaust either physically or economically.  There are a number of ways companies can create, renew, and sustain economic value.  At First Avenue, we assign greater value to management ideas and behavior that can be explained by applying concepts from the most fundamental organizing principles of knowledge, namely natural and social sciences.