The cash backing of a speculative mining stock is critical. In fact the lack of sustained cash earnings is the defining attribute of a speculative mining stock or explorer. The reason they are raising money is:
1. They need to finance ongoing exploration
2. They need to finance a capital development; which will ultimately give them a cash flow stream
3. They want to recapitalise the company so that it is able to deleverage or fully develop its opportunities, i.e. A company might not be satisfied with simply wanting for earnings to finance exploration. They may want to raise cash in the short term with the expectation that this raising will result in an expanded mine-life, aid their capacity to raise future debt. We need to recognise that most companies maximise leverage in the project financing stage to maximise returns. High returns is what ensures financing. But banks will expect companies to reduce risk as soon as possible to satisfactory levels. Such provisions are not likely to be made public.
Now, a company with large cash reserves can be viewed in different ways. Consider that:
1. It avoids any risk of future cash raising
2. It presents a problem of locked-in dilution
3. It presents a problem of non-performing capital. i.e. They have your money, and they are not using it.
Now, this need not be a bad thing if you buy a stock which is cashed up, but the value of the company is a fraction of its cash or liquid assets per share. In this case, the company has $25 million of cash in the bank, and yet it has a market valuation of just $15 mil. This is despite the fact that it also has a very promising, advanced mineral project in Africa. Why the low value? Well, markets are often 'fad driven. Speculative mining stocks are a fad. They go from positions of 'over-sold' to fair or over-valuation. This will depend on the nature or the extent of the recovery and the sustainability of the confidence underpinning it.
Of course the value of the mineral and cash is contingent upon the way these assets can be used. Consider that:
1. The mineral project has a strongly discounted value in the ground. In a recession, or in a period of low commodity prices, this project will be intangible, and thus it can be expected to remain a low value on the balance sheet
2. Cash is great, but if your holdings of 'tangible' cash are being spent or rapidly depleted on 'intangible' exploration for a project which is unlikely to find application in a recession, then this is not appealing.
So what are we to make of a company with $25mil cash worth less than $15mil (say $5million) if we think the project has a valuation of $10mil. We cannot expect this stock to have upside to $25-35mil unless there is a change in market sentiment. We can be assured that we are close to the bottom at such a price. After all, it would benefit shareholders if the company paid a special dividend of say 10c/share knowing that the company will raise money at stronger prices later, when it actually needs the money.
You might wonder why the company has the excess capital in the first place. It is often the case of:
1. A company which sells out of a minority project interest in order to pursue opportunities it has greater control of, and more upside.
2. A cash raising at much higher share prices; followed by a confidence collapse which resulted in the reassessment of their activities, or at least their short term value.
For more understanding of speculative mineral exploration and mining stocks see our mining page or my personal profile.
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1. They need to finance ongoing exploration
2. They need to finance a capital development; which will ultimately give them a cash flow stream
3. They want to recapitalise the company so that it is able to deleverage or fully develop its opportunities, i.e. A company might not be satisfied with simply wanting for earnings to finance exploration. They may want to raise cash in the short term with the expectation that this raising will result in an expanded mine-life, aid their capacity to raise future debt. We need to recognise that most companies maximise leverage in the project financing stage to maximise returns. High returns is what ensures financing. But banks will expect companies to reduce risk as soon as possible to satisfactory levels. Such provisions are not likely to be made public.
Now, a company with large cash reserves can be viewed in different ways. Consider that:
1. It avoids any risk of future cash raising
2. It presents a problem of locked-in dilution
3. It presents a problem of non-performing capital. i.e. They have your money, and they are not using it.
Now, this need not be a bad thing if you buy a stock which is cashed up, but the value of the company is a fraction of its cash or liquid assets per share. In this case, the company has $25 million of cash in the bank, and yet it has a market valuation of just $15 mil. This is despite the fact that it also has a very promising, advanced mineral project in Africa. Why the low value? Well, markets are often 'fad driven. Speculative mining stocks are a fad. They go from positions of 'over-sold' to fair or over-valuation. This will depend on the nature or the extent of the recovery and the sustainability of the confidence underpinning it.
Of course the value of the mineral and cash is contingent upon the way these assets can be used. Consider that:
1. The mineral project has a strongly discounted value in the ground. In a recession, or in a period of low commodity prices, this project will be intangible, and thus it can be expected to remain a low value on the balance sheet
2. Cash is great, but if your holdings of 'tangible' cash are being spent or rapidly depleted on 'intangible' exploration for a project which is unlikely to find application in a recession, then this is not appealing.
So what are we to make of a company with $25mil cash worth less than $15mil (say $5million) if we think the project has a valuation of $10mil. We cannot expect this stock to have upside to $25-35mil unless there is a change in market sentiment. We can be assured that we are close to the bottom at such a price. After all, it would benefit shareholders if the company paid a special dividend of say 10c/share knowing that the company will raise money at stronger prices later, when it actually needs the money.
You might wonder why the company has the excess capital in the first place. It is often the case of:
1. A company which sells out of a minority project interest in order to pursue opportunities it has greater control of, and more upside.
2. A cash raising at much higher share prices; followed by a confidence collapse which resulted in the reassessment of their activities, or at least their short term value.
For more understanding of speculative mineral exploration and mining stocks see our mining page or my personal profile.
Asian property markets outperforming Japan Foreclosed Guide Philippines Property Guide
Profit from mining with Global Mining Investing eBook
