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Cash is King? Combined Reports

Cash is King? Combined Reports

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Published by David Zurbuchen
Mining companies trading near, at or below the value of their cash + investments.
Mining companies trading near, at or below the value of their cash + investments.

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Categories:Types, Research
Published by: David Zurbuchen on Apr 09, 2013
Copyright:Attribution Non-commercial

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02/26/2014

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The Metal Augmentor
© 2008
1
The Metal Augmentor
The Metal Augmentor’s
M
INING
E
QUITIES
R
EPORT
: I
SSUE
I
C
ASH
 
IS
K
ING
?
September 14, 2008
 
Introduction
A major objective of many investors active in the natural resources sector is to diversify away from thefiat-based world of finance and credit-dominated sectors such as banking, insurance, and retail. Theseinvestors want exposure to hard assets, not soft ones. Today, they desperately hope that commodityprices will soon recover given the large losses just about every natural resource portfolio has incurredover the past few months, the last two in particular.The fall in commodity prices has created an environment that has made it very challenging for naturalresource companies—mining equities in particular—to obtain financing for exploration and projectdevelopment. It seems cash, not metal in the ground, is king. How ironic that the one asset naturalresource investors are trying to diversify away from—the U.S. dollar and its troubled competitors—is thevery asset that mining equities need the most right now. It turns out that drilling contractors, engineers,geologists and miners all still prefer to be paid in paper money.Due to the simultaneous reduction in market liquidity and commodity prices, metal exploration andmining companies that need to raise funds to finance their activities are facing the prospect of substantial share dilution or the possibility of losing their property interests if they cannot meetcontractual spending commitments. We believe there has to be a very compelling reason to own cash-strapped companies in this market.Conversely, companies that are not in need of financing have an important margin of safety in thecurrent environment. Should metal and commodity prices stay weak for a long period of time—something that is not impossible during a bull market as the historical example of the mid-1970sdemonstrates— such a margin of safety could turn into a major advantage.
 
The Metal Augmentor
© 2008
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The Metal Augmentor
Indeed, if the markets were efficient and logical, we should expect that mining equities with lots of cashand other liquid assets would trade at significant premiums to their cash-strapped peers. But thatdoesn’t appear to be the case at the moment.In early August of this year, things didn’t look quite as bad, but nevertheless we had already started tonotice that the market capitalizations of several mining equities were approaching their cash positions.This situation piqued our curiosity so we placed these companies on our radar. To our surprise, theirprices continued to fall so that now in many case they are trading at a steep discount to their breakupvalue (the estimated amount of cash that could be distributed to shareholders if all assets and liabilitiesare liquidated and the company is broken up). Compellingly, many of these companies have attractiveproperty holdings—some joint ventured with majors—that are currently being assigned a zero value bythe market.Thus was born the idea for our inaugural Mining Equities Report, the title of which—“
Cash is King?” 
reflects the strange contradiction that the one asset in greatest need, cash, seems to actually be more of a burden than an asset to some mining equities. While this situation is perplexing, we feel that it is onlya matter of time before the most astute natural resource investors begin to realize that the market’spresent foolishness obscures a rare opportunity. With blood running in the streets, now seems like thebest time to beat the smart crowd to that realization.The dollar signs wouldn’t stop dancing in our minds, so we were left with no choice but to examineseveral hundred mining equities, both explorers and producers, to plot their cash and liquidity positionsagainst their capital requirements. We discarded companies that still have substantial value attributedto their projects because those values could evaporate should fear continue to run rampant in thehearts of investors. Though some of you may protest that we have erred in casting aside someextremely undervalued companies, we suspect that the value of fiat money could fare better than thevalue of metal in the ground for a while yet. That bold assessment still left us with more than 30companies that deserve closer examination. We detail these companies in our inaugural report.We would like to point out that our report is not a comprehensive list of mining equities with breakupvalue exceeding market cap because such a calculation is very difficult to make given the large dailyfluctuations in the prices of mining equities recently. Rather, our report should be viewed as a cross-section of interesting opportunities to explore further. We believe it contains something for everynatural resource investor.Some of the mining equities in our report possess a cushy cash position that is not contractuallycommitted to be spent in the near term. Others have virtually no cash requirements because a separatecompany (for example, through a joint venture) is paying for all exploration expenditures andsometimes even covering administrative expenses. Many of these companies have projects of 
 
The Metal Augmentor
© 2008
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The Metal Augmentor
significant merit and other assets unaccounted for in our calculations because they have been given zerovalue by the market. After all, who are we to argue with the market?Ultimately, our report does not answer the underlying question: Cash is King? Only time will do that.But we believe there is a reasonable basis to conclude that some of companies in our report arepositioned to benefit, relative to other mining equities, regardless of where the market heads next: up,down, or sideways.
 About The Metal Augmentor 
The Metal Augmentor is a new service being launched in the next few weeks atwww.metalaugmentor.com.The main purpose of The Metal Augmentor is to aid both new andexperienced investors in navigating the fascinating, dangerous, and rewarding world of investing inphysical metals and mining equities. Our focus will be on gold and silver, but we will also provide in-depth coverage of the other major metals.Portions of the service will be devoted to investors who buy gold and/or silver in its various forms (ETF,bullion, allocated account, etc.) for price appreciation. Other portions will appeal to people who buybullion to hold in their own possession for the purpose of preserving their wealth or buying poweragainst fiscal irresponsibility by fiat-wielding governments.A key feature of The Metal Augmentor will be the detailed coverage of mining equities from juniorexplorers to major mining companies. Our unique approach will avoid making outright buy and sellrecommendations (except in special reports that focus on individual situations) but instead providerelevant and timely information and insights so that each investor can confidently make his or her owninvestment decision.Perhaps the most valuable feature of The Metal Augmentor will be exclusive coverage of the basis ingold and silver as taught by Professor Antal E. Fekete.

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