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Buyer Beware: How to Identify Companies That Waste Shareholder Dollars



-- Posted Wednesday, 25 September 2013 | | Disqus

By Jeff Desjardins

In the current squeeze on the junior sector, much has been said about the challenges in raising money and the impact of lower precious metals prices on the cash costs and feasibility of future projects. However, in these tough markets, another metric that investors should pay close attention to is the General and Administration (G&A) expense ratio.

With capital more scarce than ever, the G&A expense ratio shows how prudent a given management team is in advancing their projects. Management may say money is going in the ground, but a look at this simple figure will show investors the distribution of money going towards exploration in comparison to the upkeep of management salaries, rent, travel, investor relations, and other administration costs.

G&A Expense Ratio Equation

Note: Our G&A expense ratio is a proprietary measure that is non-GAAP and non-IFRS compliant.

In our Tickerscores system, the G&A expense ratio is an important component of how we calculate scores for management teams. We also use empirical measures such as management and institutional ownership, YTD insider buying, and M&A experience.

In this article, we share some of the trends and results we found after calculating over 300 G&A expense ratios in various jurisdictions.

G&A Expense Ratio distribution among exploration and development companies

Above is the distribution of G&A expense ratios throughout the companies that we have evaluated so far. The lowest numbers we found were around 10%, and we found 22 companies with G&A expense ratios above 90%. This wide range is indicative of the quality of companies that can be found in the sector.

Also, we found G&A to have low, negative correlations with cash, market capitalization, and months of cash left (at our blended burn rate we calculate for each company). The r˛ values were -0.17, -0.22, and -0.13 respectively. These are not significant correlations. The significance of this – to an investor – is that if you are looking at just cash, market capitalization, and burn rate, the likelihood of extrapolating any of this to a G&A expense ratio is improbable. Therefore, an investor should check this metric (G&A) independent of other information before making an investment.

Regional and Stage Differences

The average G&A ratio varies between jurisdictions quite significantly. Further, we found exploration companies and development companies to each have very different results as well. This again speaks to the complexity of this figure – which means one size does not fit all.

exploration-stocks-ga-burn-cash

G&A of Development Stocks along with Burn and Cash

Because the sample sizes for each of these datasets is much smaller, also note that outliers can have a big impact. For example, without Torex, Mexico’s development circle would drop all the way to $10 million cash on average (Torex has around $380m in the bank). Nevertheless, you can see a trend in G&A especially with companies with projects in Quebec and Atlantic Canada and BC.

Jeff Desjardins

President

 

Visual Capitalist

www.visualcapitalist.com


-- Posted Wednesday, 25 September 2013 | Digg This Article | Source: GoldSeek.com

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