The Real Cost Of Growth For Gold Miners

Company A’s

Shares Outstanding: 200,000,000

Current share Price: $3.25

Market Capitalization: 650,000,000

Company B’s

Shares Outstanding: 150,000,000

Current share Price: $1.00

Market Capitalization: 150,000,000

In dollar amount both companies paid the same price. However in terms of shareholder dilution the prices paid are very different; Company A has to give up 10% of its equity ownership while Company B has to give up 43% ownership.

In order to capture the costs each company paid to achieve growth we use Full Shareholder Dilution.This is measure of actual plus potential (in the case of streaming) equity dilution companies undergo to develop and/or acquire the ounces of gold in the ground (R&R). A good way to think about this measure is instead of only asking the question “what cost did the company pay for growth, to ask “what did the company forgo and/or will forgo in the future in order to achieve this growth?” To derive the Full Shareholder Dilution cost we convert all existing debt financings including all present and future streaming obligations into equity at current share price. Once we complete the conversion we can compare what the eight companies have given up in exchange for the growth they accomplished.

Full Shareholder Dilution

To convert all regular debt from the balance sheet into equity we simply convert net debt into number of shares using the current share price.

Streaming agreements are not as straightforward. In a typical metals stream financing, a streaming company makes an upfront payment to a resource company in return for the right to purchase a fixed percentage of future production of one or more metals produced by a project, and makes on-going payments for each unit of metal delivered equal to the lesser of a fixed price and the prevailing market price at the time of delivery. Streaming transactions are generally long term in nature and are often for the life-of-mine.

Taking into account only the upfront payment for the development & production does not reflect the full cost to shareholders. Shareholders will forgo future revenues even after the upfront payment is repaid.

To illustrate, Teranga Gold entered into a streaming agreement with Franco Nevada to acquire and build the OJVG project.In exchange for an upfront payment of US$ 135 million, Franco Nevada will receive 22,500 oz of gold annually for the first 6 years (135,000 oz in total) and after that will be receiving 6% of the annual production for up to 34 years.Currently the OJVG project contains 3.63 Mi oz in Reserves and Resources combined. If the full amount is mined and no further resources discovered, an additional 80,000 oz will be delivered to Franco Nevada.At todays prices (US$ 1,100/oz) this would yield Franco Nevada US$ 186 million (based on current Reserves) or US$ 475 million back (based on current Reserves + Resources) in the latter case costing shareholders US$ 340 million in addition to repaying the upfront payment of US$ 135 million.

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Disclaimer Cipher Research Ltd. is not a licensed broker, broker dealer, market maker, investment banker, investment advisor, analyst, or underwriter and is not affiliated with any. There is no ...

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