Right now, perhaps more than ever, is a critical time for the Junior Exploration Sector. One should always look ta a exploration companies efficiency....money into the ground doing real exploration if you like. A very useful guide to how efficiently a company is using investors money in the Exploration Industry. Definitely worth a read, and a calculation for your favorite Junior.
Some of the critical stuff below without dgms (but you should look at these at their web site above)
.......By Jeff Desjardins at Visual Capitalist Originally published: 24 September, 2013
In the current squeeze on the junior sector, we need to be sure that management teams of companies where we invest are putting our money towards the purpose of creating value.
For this reason, a metric that investors should pay close attention to is the General and Administration (G&A) expense ratio.
With capital more scarce than ever, the G&A expense ratio shows how committed a given management team is in advancing their projects. Management may say money is going in the ground, but a look at this simple figure will show investors the distribution of money going towards exploration in comparison to the upkeep of management salaries, rent, travel, investor relations, and other administration costs.
Note: Our G&A expense ratio is a proprietary measure that is non-GAAP and non-IFRS compliant.
The G&A expense ratio is an important component of how we calculate scores for management teams. We also use empirical measures such as management and institutional ownership, YTD insider buying, and M&A experience.
In this article, we share some of the trends and results we found after calculating over 300 G&A expense ratios in various jurisdictions. We’ll also give some examples of management teams that seem better at putting shareholder money into their own pockets rather than the ground.
In the distribution of G&A expense ratios throughout the companies that we have evaluated so far, the lowest numbers we found were around 10%, and we found 22 companies with G&A expense ratios above 90%. This wide range is indicative of the disparity in quality of companies that can be found in the sector.
Also, we found G&A to have low, negative correlations with cash, market capitalization, and months of cash left (at our blended burn rate we calculate for each company). So how cash-rich or poor a company is, and how quickly they are depleting their cash seems to be a poor indicator of how efficient they will be with your money.
The significance of this – to an investor – is that if you are looking at just cash, market capitalization, and burn rate, the likelihood of extrapolating any of this to a G&A expense ratio is improbable. Therefore, an investor should check this metric (G&A) independent of other information before making an investment.
Regional and Stage Differences
The average G&A ratio varies between jurisdictions quite significantly. Exploration companies and development companies each have very different results as well.
They analyse a company which seems to have potential project-wise, but the G&A shows management’s true colors. A news release related to advancing their property hasn’t been issued since October 2012. This company is also in hibernation mode with 89% of expenses going to non-property or exploration-related expenses. Finally, the directors/management team owns only 0.8% of common shares which represents virtually zero vested interest and belief in the project.
You’ll see that they are spending 3X more on their office than they are on exploration-related expenses.
Look for management teams that respect the cash that has been raised by investors. Also, be aware of companies that go into “hibernation mode,” where companies spend as little money as possible on exploration in order to continue to pay salaries.
In the long run, always remember that disciplined management teams with cash in the treasury and low G&A expenses are going to have a better chance at making a discovery or proving up a resource.
Sprott’s Thoughts editors’ note: Should you avoid high G&A ratios?
I (Henry Bonner) asked Mishka Vom Dorp, an Investment Executive at Sprott Global Resource Investments Ltd. if he agreed that a high G&A ratio is a sign of poor management.
“A company that is sitting on 2 million dollars in cash, with, say, 50 million shares outstanding and nothing to show for, will most likely end in failure. In that situation, cutting expenses to a bare minimum is simply delaying the inevitable,” Mishka explains.
“But it depends on what they are doing. Cutting expenses makes sense for explorers who are perhaps drilling smoke – hitting something of value – but have not been rewarded. If they believe that they have a chance at creating something of value, but that the current market won’t take their share price higher, they may decide to hold off.”
So in some circumstances, companies may decide to postpone their plans, betting that a future market environment will be more rewarding towards their discovery. These companies may make better investments than those that have given up on their operations to keep paying their salaries for as long as possible before they run out of cash.
...So interesting to watch how this calculates for AMX and all Juniors.
Good luck
AMX Price at posting:
12.0¢ Sentiment: Buy Disclosure: Held
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