a probing analysis of macmin

Over the last 2 days I have sold my holding of 205k shares in MMN @ 17c. I still have 50k of the options which I might sell too. I accumulated the holding in dribs and drabs since 2003, but the price I got is still about a 20% loss.

I have tried to get a grip here on Macmin's ability to keep funding itself, as well as how well it is really going at Twin Hills.
For me, investing in precious metal juniors since 2003 has been an exercise in the scatter-gun technique. I was convinced by the arguments of various commentors that a primary bull market in commodities and precious metals had begun. However, I had no experience of geology, mining, or anything like it. None in reading a cashflow statement. None even in investing on the stock-market. I didn't know about share forums. So I read 'Shares' magazine, browsed a site which listed petroleum and minerals companies, and 'selected' a dozen or so juniors, thinking that one or two duds wouldn't matter too much in a secular bull market. As a result I've taken virtual 100% losses from Gympie Gold, Croesus, and BMA gold; as well as +50% losses in Bendigo Gold and TAM. Highlands Pacific (HIG) was another big winner.
It was like a child being told a story by a wily old raconteur. As the story is read, the child goes into a pleasant trance of imagination. Each stock I read about, or activity statement, management update or presentation was like that. When I came to the end I'd blink, come out of the trance, and that would be another episode over in
a cheery narrative towards a nice conclusion. That was research. Apart from peasant suspicion, how the hell could I know if they were telling the truth or not?
Obviously I cannot afford another crash, so with Macmin I tried something that is not natural to me, and for which I have no remote training or talent. Something radical being called for - commonly known as thought - I tried to analyse the recent company reports and de-spin the statements of management.
This is a pretty negative take on Macmin, so if you can find errors of fact or interpretation in the following effort, please do so.
Maybe the price of silver will explode in time. Maybe all the upgrades will work, and cash will flow, and it'll all actually happen.

Targeted production of Twin Hills
In the announcement of 2nd April 2007, first silver production was reported. Bob McNeil went on to forecast increase of production to to an annualised rate of 2.5m ozs of silver over the next 3 - 6 months. After that an annualised rate of 4m ozs would be looked at, lol.
Of course reality intervened in Bob's fantasies, as it always does, and by the Dec Qtrly what had they produced?
"Silver production increased to 1,418 kg (approximately 37,000 ozs contained silver) in the month of December."
Multiply December's production by 12 and what annualised rate have they reached?
37,000 X 12 = annualised rate of 444,000 ozs of silver.
So 9 months after 1st production, 3 mths later than Bob's maximum time line limit, they had achieved 444,000 ozs; not 2,500,000 ozs annualised.
That's ~ 80% short of their target.

Quality of their silver powder product
They tell us how many kilos of powder they sell, and how many ozs of silver are contained, but they do not go the obvious extra step, and say what the purity of the powder is.
I only took this extra step myself in the last few days. The powder they are selling is only ~ 81% silver content.
I calculated this again from the Dec Qtrly.
1418 kg of Twin Hills silver powder contained 37,000 ozs of silver
From conversion calculator : 1 kilogram = 32.15 troy ozs
So dividing the ozs of contained silver by the total ozs of produced silver powder we get :
37,000 / 1418 X 32.15 = 37,000 / 45,589 = 0.8112 = 81.12% silver content

Since they gave us the weight of silver in ozs, and confusingly the weight of powder in kilos, I'm left asking questions as to whether there is obfuscation about other possible problems.
What if the specific impurities present difficulties to the powder consumers, or to smelters and refiners? Or what if the particles are too large or variable in size?
I'm only speculating here, but would they tell us if there is some intractable problem?
Considering the small amount sold over 11 months and the price obtained, we can be pretty sure of one thing - industrial buyers are not queueing at the Twin Hills gate for this special product.
They have been talking about upgrading the powder to appeal to a wider range of consumers. Maybe that's because they cant shift the stuff as it is. What specifically do they need to upgrade in the powder? Is it the kind, or amount of impurity? Is it the size or regularity of particles? What has been the feedback from customers? Management doesn't tell us.

Price they are getting for the powder
They have made a couple of announcements about selling batches of powder but they dont say what price they are getting for this powder. Dont shareholders want to know that?
A sale of 280kg of powder containing 7,300 ozs of silver was reported in the Dec Qtrly activities statement on 16th Jan. If we look at the cashflow report for that Qtr, published 2 weeks later, we find under 'Cashflows relating to operating activities', item line 1.1 'Receipts for product sales and related debtors' . The sum against this item line is $90,000
I can only read this as being the amount that they received for the sale of the 7,300ozs of contained silver, mentioned in the earlier activities statement.
If right, this gives us the price that they are getting.
It is $90,000 divided by 7,300ozs = $12.33 per oz of silver. Note that this is the price per oz of silver, not per oz of powder.
This is the 'unique product' that CEO Garry Edwards refers to. Spot silver last closed at AUD$18.65

Their rate of Cash Burn.
- FY 2007
From the cashflow statements in the 2007 fy annual report I get the total net cash ouflow from both operating and investing activities as (4,913,581) + (6,355,369)
= A$11,268,950. Lets say $11m debit
- FY 2008
From their cash flow statement for the Qtr ending Dec31, 2007, the total net cash outflow for the last 6 months is ($7,509,000)
If you use the half year figure to get a rough idea of the whole year's cash burn for FY 2008: you get $7,509,000 X 2 = A$15,018,00. Let's say $15m debit
So they have to find $4m more this financial year than last.
And the $15m only gets them to end of this June. Then they have to start rattling the tin again, unless the silver production and rate of payment suddenly gets a lot, lot better.
But first, what funds have they got so far for this financial year?
From the 2007 annual report it looks like they kicked off FY 2008 with cash and cash equivalents of $6,774,508, let's say $6.8m
From the Feb 7 announcement they have borrowed a $4.7 convertible note, from Cornell Capital - that's the final tranche.
From the Feb 6 announcement they have got $1.4m from the interim allotment of shares from the entitlement offer
We can forget about money from silver sales so far. So that's 6.8 + 4.7 + 1.4 = 12.9m credit
So with the dribble of acceptances that will come from the extended entitlement offer, plus the back-up of equity holdings, we can assume I guess that they'll be right for FY 2008. That's another 4 mths. Will all the various upgrades be in process and functioning well then? I think somewhere Bob McNeil reckons the upgrades will gain full traction "well into 2008" - calendar year I assume. His timing tends to be a bit off though, doesn't it?
At a pinch they can sell the equity investments in FNT, MAR, and NGG. In the Feb 7 funding announcement the CEO reckoned at that time that they were worth ~ A$9m
But that's only 7 months of funding at current cash burn, if I have estimated correctly.
Can they get yet more funding from Cornell, and on what terms during an ongoing and worsening credit crunch? I wouldn't have a clue, but I'm not taking Macmin's word for it.
They can launch yet another SPP or entitlement offer. However this current one's not doing too well. Shares can be bought on-market more cheaply than through the privilege of the offer. I over-subscribed to this offer and lost money on it. The prolific MMNO options have become confetti unless dramatic good news intervenes before Oct this year.

Skin in the game from management
Bob McNeil and Denis O'Neill are heavily invested.
From the 2007 annual report, page 50, Bob McNeil was left holding 7,061,743 shares at end of FY 2007
Denis O'Neill was left holding 5,069,870 shares.
But GM Edwards and EG Newman, the Company Secretary now CEO, and the Project Manager respectively - these guys have put NOTHING in the game.
GM Edwards was holding ZERO shares, and had flogged off those he got as part of his remuneration as fast as they came in.
EG Newman, the Project Mgr, was holding only 50,000 shares, and he too sold the 300,000 he got as remuneration in the same year.
They have both been with the company for 12 years. Would anybody be better placed to know whether MMN is a good investment than these two? And does it inspire confidence that they let others take all the risk?