Does De Grey Mining Limited (ASX
EG) Need To Issue More Shares?
Lee Kay October 3, 2017
De Grey Mining Limited (
ASXEG) announced a loss of -$1.88M in its most recent earnings update. Although some investors expected this, their belief in the path to profitability for DEG may be wavering. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Additional cash raising may dilute the value of your shares, and since DEG is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined DEG’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
See our latest analysis for DEG
What is cash burn?
DEG’s expenses are currently higher than the money it makes from its day-to-day operations, which means it is funding its overhead with equity capital a.k.a. its cash. With a negative operating cash flow of -$1.83M, DEG is chipping away at its $0.96M cash reserves in order to run its business. How fast DEG runs down its cash supply over time is known as the cash burn rate. The most significant threat facing DEG’s investor is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the highly risky metals and mining industry often face this problem, and DEG is no exception. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
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ASX
EG Income Statement Oct 3rd 17
When will DEG need to raise more cash?
Opex, or operational expenses, are the necessary costs DEG must pay to keep the business running every day. These include employee salaries and other overhead. In DEG’s case, its opex fell by 35.36% last year, which may signal the company moving towards a more sustainable level of expenses. However, even with declining costs, the current level of cash is not enough to sustain DEG’s operations and the company may need to come to market to raise more capital within the year. Although this is a relatively simplistic calculation, and DEG may continue to reduce its costs further or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the DEG’s operation is, and when things may have to change.
What this means for you:
Are you a shareholder? In the context of your portfolio, you should always seek to diversify, especially if you have a relatively high exposure to DEG. The outcome of this analysis should shed some light on DEG’s cash situation and the risks you may or may not have been aware of as a shareholder of the company. Now that we’ve accounted for opex, you should also look at expected revenue growth in order to gauge when the company may become breakeven.
Are you a potential investor? The risks involved in investing in loss-making DEG means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. Now you know that even if DEG were to continue to shrink its opex at this rate, it will not be able to sustain its operations given the current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should DEG come to market to fund its growth.
An experienced management team on the helm increases our confidence in the business – have a peek at DEG’s CEO experience and the tenure of the board
here. If risky loss-making stocks do not appeal to you, see
my list of highly profitable companies to add to your portfolio..
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