Ok, i'm in for a few, average .093 so far, playing the odds that they don't get shut down and that the current price will provide healthy leverage to any positive move for the PoG .... it's a tad scarey after a drop like this, so i'm absolutely not using the rent money, but all in all i think they have a good chance and, lord willin' and the crick don't rise, we'll get a multi-bagger just filling the gap to .23 .... here's an article from mininginsights via stockhouse -
'MII "GEOMAQUE" OReSEARCH UPDATE
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... in the MII MEMBERS FUND
407,000 shares;
2.2% of portfolio;
ranked 15 of 64 equities.
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Geomaque Explorations Ltd. - Wow! What Happened?
Geomaque released second quarter 2001 results
yesterday. At first glance, they were not that good,
and the stock dropped 5c to close at 23c.
Recently, the Globe and Mail newspaper wrote about it, and
the stock tanked 50% to 11.5c. The Globe and Mail, one
of Canada's two national newspapers, uses the slogan
"Well Written. Well Read". Well, after participating in
the conference call, crunching the numbers, speaking to
both CEO John Paterson and CFO Jon Morda, and comparing
that info to the market reaction of the media article,
we certainly agree with the "Well Read".
In this Update, we'll objectify the issues at stake,
which in our view are markedly different than that
espoused by the news media. Shareholders, balance both
views, and if you need more info, contact us directly.
The Globe and Mail writes:
"Wednesday, August 22, 2001 - Print Edition, Page B4
Geomaque Explorations Ltd. of Toronto has failed to
make payments to several creditors as a result of
production problems at its new Vueltas del Rio gold
mine in Honduras. Accounts payable at June 30, have
increased to $7.1-million (U.S.) from $4.4-million six
months earlier. It also has not paid $850,000 to a
sinking fund provided for a major creditor. The
company's current liabilities of $10.2-million exceed
its current assets by $4.8-million. President John
Paterson said the company is expanding its leach pads
to increase production. As a cost-saving measure, the
company has laid off Jon Morda, its vice-president and
chief financial officer and Sean Stokes, its manager of
investor relations."
Talking Points:
· Yes, Geomaque has failed to make payments to
several creditors. No, the creditors have not forced
the company into default. Geomaque is working with the
creditors to balance payments over time, and we do not
expect them to throw in the towel and force the closure
of the Vueltas del Rio mine. Let's also make the
distinction between 'supplier' creditors and 'financial
creditors'. It is the latter we have to worry about -
see point 3.
· Yes, there are production problems at the
Vueltas del Rio mine. Two things to note - the company
only reached commercial production at the start of July
2001, and even then, commercial production represents a
change in the way operating expenses are treated. Our
back-of-the-envelope calculation suggests that if the
operating costs were capitalized during the quarter (as
they were in the pre-production phase), then the loss
would have been mitigated to a penny a share. Is
conservative accounting to blame for the price
catastrophe?
· The company has not reached sustainable
commercial production, and indeed hasn't reached the
breakeven point on a production basis. Nor did anyone
expect them (or any other mine development company) to
do so in less than six months.
· "It also has not paid…" Well, not quite true.
Geomaque has paid US$870,000 into the sinking fund for
the major creditor, which will cover the September
US$825,000 payment with some left over. The issue is
whether the company will make the next due payment
coming at the end of the year.
Important point - the payment concerned, which was not
adequately explained in the conference call, is
'interest and fees'. So, the presumption that GEO faces
another US$bigdollar payment isn't realistic.
Geomaque is in talks with the major creditor concerned
to defer it. Deferring a payment isn't the same as 'not
paying it'. Let's assume the creditor calls the loan -
when can they do this? If the company puts money into
the loan account every month as the contract
stipulates, they can't. Our feeling is that calling the
loan won't happen, or can't happen before the first
quarter of next year.
Then again, what would a banking entity want
with a Honduran gold mine? In the rainy season?
Geomaque is also trying to get the creditor to take the
fees in shares, although this was a better idea at 28c
than 11c.
We don't even see this as the principal issue. That is
liquidity, discussed below.
PRODUCTION PROBLEMS
Let's talk a little about the actual production
'problems'; assuming that month-on-month production
growth of 56% represents a 'problem'. Geomaque has
prepared two leach pads, of which one is fully lined
and taking ore. The new, larger agglomerator (which
turns clays into cement, such that the cyanide
solutions don't get trapped in stuff that doesn't
contain gold) works so well that more rock is ready to
go onto the pads. This means that to process it, the
company has to remove the drip tubes, put another
'lift' of rock on, and replace the drip tubes. In so
doing, the lower lift is squashed a little more, which
restricts the flow of cyanide. In some areas of the
pad, a third lift lies on top of one slightly squashed
lift, and one really squashed lift. The production
estimate for August 2001 is 3600 oz gold, which should
move the company much closer to production breakeven.
Call this the sustainable 'squashed ore' production
rate.
In other areas of the pad, only one non-squashed lift
is busily leaching gold. Whether or not the squashing
of agglomerated ore is responsible for decreased
production (or a slowing of the production growth rate)
can't be known until the end of September at least.
Still, nobody argues that finishing the other leach pad
is a priority, and work is underway.
Finally, let's deal with financial strength. The Globe
article states that current liabilities outweigh
current assets by $4.8MM. By rights a simplistic view,
but media guys have deadlines to respect.
We ran the last two quarters through a detailed
financial model, and here's what comes up:
ONE QUARTER GROWTH
· Sales down 25.3%;
· Operating profit down 87%,
· Profit before interest payable down 7.4%.
· Current assets up 9.7%;
· Current liabilities up 24.3%;
· Capital employed (remarkably) didn't change.
MARGIN
· Gross margin down 40%,
· Admin costs as function of sales up 18.5%;
· Exploration costs on same basis up 11.3%.
FINANCIAL STRUCTURE
· Book gearing in Q2 was 19% up from 16% in Q1
· Market gearing in Q2 was 33% (because the share
price was 10c) against 11% in Q1. This is still
not out of line with leveraged producers.
LIQUIDITY
· Current ratio for the quarter was 0.4, down
from 0.5 last quarter.
· Acid test (pull inventories from current assets
and recalculate) was 0.17, down from 0.30.
Yes, the liquidity is terrible. But then it wasn't great
last quarter either, and the stock hit 44c (to the delight
of at least one MII Member).
PERFORMANCE
Irrelevant given negative numbers all the way down the
profit & loss statement.
We see the acid test as the most relevant to the way
things stand. To be fair, increasing current assets
won't just come from getting more gold out of the heaps
(turning inventories into cash), but also pulling in
some heavy IVA payments from the Mexican Ministry of
Finance for the San Francisco mine.
INVESTMENT CONCLUSION
Judging from the financial analysis, (and relating it
to price movements) we see the key value drivers as
noted by bearish analysts, time-pressed media artists,
and the market in general, the key issue is the
perception that the company didn't provide for the
September sinking fund payment (it did) and the
expectation that the company won't make the December
fees and interest payment. What happens if they do? Or
if agreement is reached to defer it? Then you'll look
back at these happy times and wish you'd loaded up at
10c.
OK. Performance and liquidity is terrible, but taken in
context against that of previous quarters, isn't that
different.
For our part, we will play a waiting game. The key
challenge for the company over the next two months is
to manage the liquidity - forget the sinking fund
stuff. We'll revisit this issue in the first week of
September, when the August gold production will be
known and we can estimate month on month changes.
MARKET INSIGHTS
Share volatility - 6.9%; lower than you would have
expected given market returns.
10% rule - 15 of the last 248 trading days broke the
10% rule. This is one highly liquid stock!
Total traded over last year - 32,939,756
Average trade size - 3,924
Average trade value - C$1,256.00.
'Retail days' - 232
'Institutional days' - 1
Overall, institutions aren't driving the price of
Geomaque. In order to forecast share value, we'll have
to read the retail mind. And that is always difficult.
Stay tuned to MII for aggressive GEO-T coverage.
Jim Steel, B.Sc. (Geol.) MBA
Mining Insights Inc.
stockhouse.ca.
Url to mininginsights - mininginsights.com |
