The following is the text of an e-mail I sent today to Subscribers of StockResearchPortal.com. StockResearchPortal.com is a research website that provides coverage on the approximate 1,600 Mining and Oil & Gas stocks listed on the Toronto and Toronto Venture Stock Exchanges.
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In a previous e-mail I suggested the importance of the amount of net cash (cash + short-term investments - interest bearing debt) an exploration company has on hand in the context of its monthly total operating expenses and current year drilling program/business plan - and discussed what I see as the importance to you as an investor in such a company to continuously monitor its net cash balance and monthly 'cash burn rate' or 'run rate' (the company's prospective monthly net cash outlay).
In the past few weeks we have been speaking both with people who help raise capital for Canadian Mining Exploration companies and the executives of some of those companies. Certainly for many of these companies raising cash through private placements has been easier after March (when the stock markets bottomed) than it was from mid-2008 to March - albeit most executives I have talked to express the view that those private placements often have been done at share prices discounted from 'real value'. Simply put:
· at any point in time an inability to raise new capital may result in dire consequences (e.g. mothballing, sale at a 'forced to sell' and hence discounted share price, or in the extreme case 'liquidation') for a company and its shareholders even if the company has promising exploration prospects; and,
· where a company is able to raise incremental capital, the more expensive that capital is, as a rule the greater will be the dilution suffered by existing shareholders.
You may or may not believe that going forward the world stock markets (read in particular the U.S. stock markets) will deteriorate following their +/-50% index rise since March 9, 2009. In either case, I suggest in this environment if you hold or are considering investments in junior mining exploration companies that you, in combination with your investment advisors, now look closely at the amount of:
· net cash each such company currently has on hand;
· debt each such company currently has on hand; and,
· how the net cash balance of each such company relates to its prospective 'cash burn rate'.
You can quickly determine the amount of net cash a company had at its last quarter end, and the amounts it has spent in each of its most recent 8 fiscal quarters, by reviewing its quarterly balance sheets and cash flow statements found under the 'Latest 8 Quarter Data' in the left Navigation on the Company's Data Page on StockResearchPortal.com. Using that data as a a basis for discussion, I suggest you then call the company's President or Investor Relations Executive in an attempt to determine the Company's current net cash position and prospective 'cash burn rate' over at least the next 12 months.
Where a company does not have net cash on hand to sustain at least 12 months of operations at its current and near-term planned monthly 'cash burn rate' I suggest you address with your investment advisors what that means to the company in the contexts of both:
· the likelihood the company's ability to raise cash in the current and prospective market; and,
· what that likely means to the company's risk/reward profile going forward.
In this regard, I suggest you carefully consider what happened to virtually all listed companies last fall and winter - the prices of their shares pretty much all dropped precipitously with the general drop in world stock markets, irrespective of the quality of their operations or opportunities. If a significant drop occurs again in world stock markets, mining exploration and other companies that might be able to raise capital in the present market environment may once again find it extremely difficult if not impossible to do that. I consider the current economic (and hence stock market) climate to one of significant uncertainty. In my view strong cash positions are a very important 'touch point' when considering investing in exploration companies in any stock market environment, and become even more so in times of greater market volatility and uncertainty.
Ultimately, of course, the real question you and your investment advisors need to answer is whether that risk/reward relationship is right for you in each company you presently are invested in, and what course of action you now (and each day hereafter in both good and bad markets) should take with respect to your investment in each such company.