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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 appealed to me. I was late but early investors made 58x returns.)
Thus we have proven that indeed the premise is true, the incentive required to generate a replacement gold mine equals not only the expenses of the discoverer but also those who tried and failed.
Now onto rockets 🚀
What is SpaceX worth? Well, what is the replacement cost for SpaceX? How much different would it cost to build your own SpaceX vs. buying SpaceX as it exists today. What incentive is needed to justify even trying to build your own SpaceX from scratch.
Thus far, entire governments (China) with essentially unlimited funding, cannot replicate SpaceX. Thus the replacement costs for SpaceX approaches infinity. No amount of money can replicate SpaceX today.
When Rocket Lab were developing Electron, there were more than 100 companies trying to build a competing small launch vehicle.
How many companies succeeded in building a small launch vehicle with cadence: ZERO
Rocket Lab is the 1 in >100 that succeeded.
The other way of saying this is that, to get another Rocket Lab, you would need to fund 100 companies to go out and try again.
What makes more sense, giving 100 start-ups $0.5B each to try and replicate Rocket Lab. Or just buying Rocket Lab for $50B today.
Electron is less than 1/3 of Rocket Labs valuation today so lets adjust and say: Would it make more sense to give 100 companies $150M each to try, or just buy Rocket Labs Electron business for $15B.
History shows you'd be better of lighting your money on fire than funding rocket start ups - but at least we'd get a sequel to Wild Wild Space.
Bottom Line = Permanently High Valuations
Don't be surprised to see successful launch & space companies sit at permanently high valuations based on traditional metrics.
It's easy to compare companies using metrics like Price to Earnings or Price to Sales and say 100 P/S is overvalued for SpaceX or 60 P/S is overvalued for Rocket Lab - but when you're competing in a market segment of 1 - companies will migrate towards their replacement cost.
What exactly that replacement costs is the market will determine - it's too complicated for one person to calculate but the market says it's around $1.75T for SpaceX.
Arguably at those high traditional metrics, Rocket Lab should be $80B today and $300B if you buy based on 2030 rev estimates ($3B rev x 100 P/S if the market is right about SpaceX).
For those curious, that puts RKLB at $519/share.
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Positions:
3,680 RKLB Shares
69x Jan 28 $75 Calls