Hi Mike G,
The real outcome of this could depend on the short term price of Gold. If the POG pops up dramatically then RYO could survive, but if not then it looks grim if you are long.
What sort of move do you have in mind when you talk of "If the POG pops up dramatically"?
At this point one might argue that Royal Oak common is a low priced "call option" on the price of gold, with a "strike price" far above the current ~$300 POG. However due to their low cost of production and high fixed costs, this might not be the best way to assess the value of the stock (see below).
If you wish to speculate on the possibility that the price of gold might experience a very large spike in the next ~six months, is RYO a sound way to place such a bet? I say "in the next ~six month" because if such a spike doesn't happen in that timeframe, then the opportunity for RYO common to participate will have passed.
Thomas Talbot, Michael Bidder, Al Cern and myself discussed the current valuation of RYO with POG = $300 and the "what-if" scenarios of rises in the POG around posts 1520-1541. In my post:
exchange2000.com
I put forward the suggestion that if the POG were to go to $375, then under my most optimistic view (remember, as a short I must take an optimistic view of Royal Oak's business prospects when assessing my downside) they would perhaps be able to just tread water. An interesting thing is that their low cost of production at Kemess means that a spike in the POG won't make as big a difference to them as it would to a high cost mine.
I closed that post out by writing (in reference to the value of RYO common)
My point was, the value of a mine sold today or in the near future (e.g., under bankruptcy) will be determined by today's market conditions. If a you have $100 million or $500 million that you would like to use to lay a bet on gold rising in price, there are simpler more efficient ways of doing that than buying a low cost gold mine.
Although not explicitly written, one of these more efficient ways would be to buy a high cost-of-production gold mine.
Royal Oak's chief problem is that it cost too much to develop Kemess, and that under its current financial structure it is unable to pay for the cost of its capital. A rising price of gold will not be their saviour. Simply put, they paid too much for the mine, and at some point this misallocation of capital, this loss, must be recognized and paid for. Everyone with a stake in Royal Oak will probably be hurt, but the pain will not be spread evenly. By law the financial interests of creditors, suppliers, employees and bankruptcy financings come before the interests of the common shareholders. None of us on this discussion group have been able to figure out how the shareholders are going to wind up with anything.
If Kemess is a viable low cost producer (I assume that it is), then it will survive and probably prosper even if the price of gold is mired at $275 forever. Royal Oak common stock however will likely be worthless in about a year.
- Daniel |
