Ann: Annual Report 2014, page-26

Millibuster

re the gold and silver price discovery:
I put less and less import on Western Economic data and official statements having any measurable or logical impact on spot pricing. It is a matter of record that Western public participation in precious metals is infinitesimally low. Price discovery is from the LBMA and COMEX, which are future exchanges with little actual metal ever changing hands.

The majority of physical purchasing in recent times has been through the Shanghai exchange with some 2,200 tonnes of wholesale demand being met in 2013 (c. 81% of global production). Of that, c. 1,500 tonnes was imported with another 400 tonnes coming from Chinese mines, the balance being re-refined 'scrap' metal. This year it looks as though wholesale demand in China will be around 1,800 tonnes (ie c. 67% of global production).

But, as there is clearly no evidence of price discovery shifting from the purely paper markets to the physical markets there is no measurable basis upon which to factor-in an upward price trend into PM stocks earnings models. This was particularly apparent to me at the outset of the US QE3. Logic would have implied a clear positive case for accumulation of the metals or stocks, but the opposite occurred, and was spectacularly emphasized by the dramatic falls of April 12th & 15th 2013.

Hence, given this backdrop in metal pricing, I wholly shifted focus from stock selection via earnings modelling to a much closer focus on actual financial strength and operational sustainability of producers and largely ignored developers and explorers given the changed economic realities which they were then facing (and are still facing!).

I now largely focus on the financials and MD&A's of some 70+ gold and silver producers worldwide. The aim being largely to avoid the majority who are struggling to make any headway as they are beset by production costs and financial liabilities inherited from pre-2013 PM price levels and instead try and identify those who (in my opinion) can still show a positive investment case at current PM price levels.

Given this large amount of data accumulated from financial reports I import salient data and computations into a comparison matrix from which I can further analyze various ratios and score accordingly. These ratios and the rating of MML specifically are as follows:

1. Ev/OPCF MML is .. 3rd
2. 1/PE .. 4th
3. OP Margin .. 2nd
4. FCF/Sales .. 50th (but we know that currently all MML's profits are ploughed back into inward investment)
5. All-in Costs/oz .. 2nd
6. Cash/Equity .. 23rd (same comment as for 4.)
7. Altman Z-Score .. 12th
8. EBIT/Ev .. 3rd

After applying a suitable weighting to each of the above for all stocks I get an overall score for MML of 2nd with Silvercorp (tsx:SVM) coming first. Oceanagold is 5th.

Of course, financial ratios are fine but they are only one part of the story. One still needs to research the probability of results being sustainable going forward and that there are no imminent risks on the horizon which could change the investment case - but that becomes quite subjective and is best personally undertaken according to an individuals risk/reward profile.

So this is where I am coming from with regard to MML. If circumstances change then so might my opinion and I would act accordingly. But, from current evidence, I am happy to hold and increase at these levels.

All the best
CPDLC