-- Posted Tuesday, 31 March 2009 | | Source: GoldSeek.com
We are now in the midst of a significant market rally up 20% on the big boards in 3 weeks. Only God knows how it will continue, but it sure feels good to have the relentless, unyielding pressure of pessimism, that was palpable in the markets, let off some steam.
For investors in the junior mining sector, that pessimism meant and in many cases still does that many companies traded below cash value. Back in October 2008 that was understandable, as there was a rush for liquidity.
But the market downturns in 2009 have not been like that. Credit and liquidity has actually improved a lot as have metal prices. Both precious and base metal prices are up from October - but not enough to get new debt issues done for any new mines.
So why do stocks still trade below their current cash value?
One possible reason is that the stock market is like a fortune teller it guesses what reality will be like in 6-9 months and prices that guesstimate into stock prices right now.
Many of the companies that have large cash positions at least $10 million have discovered a deposit and raised enough money for feasibility or even partial funds for construction.
So perhaps the market is pricing in how much cash these companies will have in 6-9 months from now. And in almost every case, that means a lower cash amount.
Geovic Mining (GMC-TSX: $0.56) is one example, and we use it because has a nice even 100 million shares outstanding (makes the math simple!). It now has US$64 million, or CAD$80 million in the treasury. With 100 million shares out, it theoretically should trade at 80 cents the cash break up value of the company.
Geovic is ready to build one of the largest primary cobalt mines in the world in Cameroon. But investors dont care. In fact despite the fact that it is economic even at these low prices is irrelevant. Every asset is a liability in this market.
So why would it trade below cash, like many other junior resource companies? Well, management has given guidance that they intend to spend US$15 million or CAD$18.75 million in 2009. So at December 31, they should have and lets just round this up to $20 million, giving them some contingency. That makes $60 million cash at year end, and the stock price is now hanging in around, or just under, 60 cents.
Another example is Red Dragon Resources Corp (DRA-TSXV: $0.13). They have $12.8 million or about 18 cents a share cash. But they have commitments for $9 million in property payments and $8 million in exploration over the next several years. So the market is discounting their cash position because of their spending commitments.
Again, this is no comment on the company or the property, but rather an illustration of why companies trade below cash. Every (non producing) asset is a liability in this market.
Inca Pacific (IPR-TSXV; $0.33) has cash of $19 million, and a market cap of $19 million. But for the last few months it had a market cap of $9 million. It is building the Magistral copper-molybdenum mine in Peru it has final feasibility, and is ready to be built once economic conditions improve.
IPR traded well below cash level because one large institution - the Sprott Moly Fund owned 40% of the company has was being wound up, so it was being forced to sell the stock they finally were bought out of their position a few weeks ago and the stock immediately came back up to reflect its cash position.
So there are many reasons a company can trade below cash investors just need to scratch the surface to find out why. Because value always gets recognized just not in the time frame most investors expect.
-- Posted Tuesday, 31 March 2009 | Digg This Article
| Source: GoldSeek.com
