some charts can be deceptive......

What's wrong with the chart below?

Last week a broker put out a downgrade of the stock soon after the resource upgrade was released to the market. One of the main arguments was a 'metric' which I will refer to as the Enterprise Value to Resource Inventory Index

It is obtained by dividing the Enterprise Value by the number of pounds of copper that have been established in the ground.

If you think that the ratio is a little obscure, I agree with you, because it is!

The Enterprise Value is given by the Market Cap plus Debt minus Cash, but simplistically, the Market Cap would probably suffice.

A comparison of copper based companies according to this obscure metric is provided in the chart below



With Cudeco valued at $2.74 from (which the market cap) can be obtained and let's say we use the broker's in ground inventory of 643,000 tonne of copper, the ratio comes to:

[$2.74 * 138 mill shares + Zero Debt - $30 mill Cash] divided by 643 kt Cu converted to pounds

ie: The [EV/lb cu] ratio for CDU equates to 0.25

To argue that the [EV/lb cu] ratio should be discounted to a ratio of 0.1 because of lower grade considerations would require a share price by my calculations of $1.21 which explains why the broker put a share price target of $1.20 on the stock and a SELL recomendation.

But hang on a minute!

What does this ratio actually reflect? There is an unstated assumption that a high value for this metric is a good thing.....But is it?

Certainly it is not obvious what the numbers associated with the above metric actually reflect.

High values for the [EV/lb cu] ratio could occur under a range of conditions.

In particular the [EV/lb Cu] ratio will be higher for company A with identical resources to company B, if company A has a higher Enterprise Value. But so what? Does that make it superior? Or just more expensive?

On the other hand a company with a low value for the [EV/lb Cu] ratio might be a dud company because of a small Enterprise Value (ie low share price). In which case it probably is a dud company.

When you think about it, if pursuing a high value for the ratio is worthwhile, what you need to do is to have as small a resource as possible, because as the number of pounds of copper approach zero, the value of the ratio rises to infinity.

Now does that make such a company a strong BUY?

I think not!


But what about a company like Cudeco with a proven and indicated substantial resource and a faltering Enterprise Value. Rather than alluding to the company being a sell with a target of $1.20, shouldn't the advice be if the company ever gets down to $1.20 it would represent sensational value compared to its peers because of its large JORC compliant resource and grossly undervalued share price?

And doesn't it mean that SFR with only an indicated resource with a bloated Enterprise Value and fewer pounds of copper in the ground is actually getting expensive compared to Cudeco?

If anyone has been influenced by the misinformation of that particular broker report they could do much worse than get in contact with the company as requested.

It very much appears to me that the analysis used with the [EV/lb Cu] ratio is very much designed to create confusion to push an agenda.

If so, then it has certainly succeeded because the analysis is not only confusing, it is actually quite deceptive.

Cheers
Nev