new video on cudeco home page, page-35

Abuman, my only point is that buying the mining fleet up to 7 or 8 years ahead of digging a hole is a waste of money. It is a negative return on investment. It is, to put it bluntly, putting your donkey in front of your rooster.

Lets look at it this way. Net Present Value (NPV) of an investment is the current price, multiplied by the yearly return, and inflation-adjusted for the length of the project. If your nett return is less than inflation, you have a negative NPV (ie; you are losing money).

So. To determine the best place to stick your money you look at Internal Rate of Return (IRR). The IRR of a project tells your the capital efficiency of the project; it cannot compare apples with oranges however. a $20M development may have an IRR of 40% but a $500M project may have an IRR of $35%. But the $20M project will have a smaller NPV than the bigger project, so you are tasked with a choice of discriminating the best place to put your money.

Do you want NPV - and be sure your wealth will grow in inflation-adjusted terms - or do you want a good IRR and make sure your money is working hard?

So. lets consider a truck or a digger purchased by CDU. Lets say, hypothetically, it cost $10M.

The same money, invested in bonds (which are taken to be risk-free) has a $0 NPV. Bonds return 4.8% p.a. at the moment. The CuDeCo truck sits idle for 5 years, costing money for maintenance, and it also has an opportunity cost; ie the money could be used to invest in bonds but isn't; it could be earning more than 4.8% p.a. but isn't.

So it is losing at least 4.8% p.a. and thus has a NPV of only $7.82M over 5 years, probably less. The same money chucked in a bank share with a 5.6% fully franked dividend yield would be in excess of $12M.

Then you depreciate the asset, and adjust it for inflation as well. You find that the machinery is now, in NPV terms, actually losing you in excess of 40% of the initial investment.

Therefore, holding a $10M piece of mining machinery idle for 5 years is stupid, it is destroying value. It has negative NPV and a zero IRR.

Arguably, the company should be hiring that machinery out to whoever can put it to work (and make a profit on it; it would then be a rational investment), or it should sell the machinery and reinvest the money into drilling, which notionally creates value for shareholders.

So yes, Abuman, I'm totally being cynical. I hope you appreciate that your company is in fact actually wasting your money on toys for the sandpit. This is thekind of capital investment decisions the company is making right now. It looks good with Burgo's waxed eyebrows waggling in front of it, but it is stupid. Factually, provably stupid.

How is this kind of decision-making capability going to serve you well in the event mining starts? Right now their track record on returning shareholder capital and deploying capital on the best projects is negative NPV and zero IRR.