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Gold/Mining/Energy : Precious and Base Metal Investing -- Ignore unavailable to you. Want to Upgrade?

To: jackjc who wrote (1880)	2/18/2002 8:25:58 AM
From: russwinter	Read Replies (2) \| Respond to of 39344

<greatest leverage to such a spike?> That's what we should be discussing all the time, although I haven't seen much of it on SI. In general I would say the ones with the lowest market caps, that are somewhat in the money and have discovered ounces. I would define "in the money" as an IRR of 15% at 300 POG, but that IRR would INCLUDE all in cost, or what the buyer would pay for the deposit on top of the total production cost () However, there is such huge leverage in all these names that I see little advantage to buying high cost deposits. I would still focus on that top quartile under 160 cash cost group because that's where the private market values (buyouts) will be realized from and once we go private rather than relying on the fickle public market we are in a whole new realm. I think we will get an eye opening illustration of that soon. A simplified example of leverage (and this discussion is just about leverage, not other factors that might enter in) using MFL: MC is US$ 35m at @2.70. There are 3.5 million oz using a 1.0 g cutoff and the total cost is about 170. You could use 170 as your strike price for MFL, and I would say at 300 the major might pay $30 an oz for an all in cost of 200. That would give the producer a nice return on 300 mining plus a deposit that should have low reserve replacement costs. So $30 an oz X 3.5 million would be US$105 m or about $8 a share (a triple). If there are any option theorists here they could calculate the leverage value of a $25 move. It's getting nicely in the money between 300-325, so I'd say MFL gets $18 of that, giving the other $7 to the major as a little downside cushion? Maybe the major could argue it down another couple bucks more because of recent depressed price history. $15 of the 25 move would give MFL another $50 million bucks, or 4 bucks added to the $8 we saw at 300. That would be a PRIVATE transaction, but I would suspect the leverage from the PUBLIC (investors not operators) could be less, unless the speculative juices really get running in this market. () layman definitions cash cost: cost of an ounce without accounting for capex total cost: cost of an ounce accounting for capex capex: cost of putting a mine into actual production all in cost: complete cost of putting the mine into production for a new buyer: takes total costs, and adds in the purchase of the deposit owned by the junior. As junior investors, the purchase price of the deposit is what we should be cued on. If the capex is low enough, then we could theorize it as if the junior becomes the producer, but that's a riskier proposition that I would account for (example: BAY).