Sunday, 29 March 2015

The Real Cost of Gold Mining - Adequacy Ratios

In February Mickey Fulp published analysis with Cipher Research detailing the financial failures of the gold industry and proposing a renewed focus on grade rather than growth which analysts chased companies to chase for the past decade.

Most interesting is the "Adequacy Ratio" which simply compares operating cashflows against all outflows including "capex"
Cipher Research has developed a new, simple, and powerful tool to analyze profitability, the Adequacy Ratio (AR). It is cash inflows (revenues) divided by cash outflows (OP-EX + IMP + debt repayment + dividends paid). Note it does not include equity raises or cash spent on acquisitions. If the ratio is greater than 1.0 a company is healthy; if less than 1.0, unhealthy. Of the seven companies we looked at over 11 years, none had an average ratio greater than 1.0 over the period. Only for one year, in 2011 when gold hit its all-time high, did the average adequacy ratio for the companies as a whole exceed 1.0. To compare for example, Apple has a 1.3 adequacy ratio over the past 5 years.This industry-wide failure means the major gold miners have not generated enough cash flow to meet their obligations despite the amazing 11-year run for gold. We found that companies have been going into debt to pay dividends. For example, Newmont took on an additional $5.8 billion in debt and paid out $5.2 billion in dividends over the period. We know of small-tier junior miners that have paid out dividends with equity raises… that’s unholy and in my opinion, should be illegal.

Open Pit Gold Mining Costs / Tonne

Lat-Am per Tonne ranges from Condor Gold PFS

Saturday, 14 March 2015

Euro QE and Debt Restructuring

OMFIF on risks of European QE
.......It feels as if the markets are programmed to crash when the ECB's QE programme nears its end, if not before.
Pettis on Debt restructuring
As soon as Draghi made the statement to do “whatever it takes”, markets recognized that the ECB was in effect guaranteeing the bonds of EU member states whose credibility was in question, and yields immediately dropped. It is important to understand why this was effectively a kind of debt restructuring. .......Draghi’s promised immediately reduced a larger part of the uncertainty associated with the resolution of the debt. The collapse in uncertainty reversed the reflexive process in which rising uncertainty caused declining economic expectations, which caused rising uncertainty.