Hey folksThought I would share a different type of analysis that...

Hey folks

Thought I would share a different type of analysis that I like to do on some of the companies I invest in. Imo its very useful for understanding what's happening ROI-wise for small cap miners & oilers who tend to raise capital regularly. Of course the 1st reaction of most people to a CR is "dilution!", but imo, CRs are a regular part of the funding & growth cycle for small cap miners & oilers. The key is to understand what part of the cycle we are in, and whether or not the company has made effective use of the capital invested through CRs.

The data has been obtained from the company's 3B & S708A statements, quarterly reports.

The chart below is a daily chart of MAD's mcap (the blue line) - calculated as the closing SP x the number of shares issued as at each day.

Plotted on the same chart are two other lines:

1. The red line, indicating what I call the base mcap taken at an arbitrary date for the purpose of the analysis (in this case, 2/1/2011, to cover the last 18 months basically). The red line is simply the benchmark measure - what was the company worth 18 months ago.

2. The green line is the base mcap (at 2/1/2011) plus the capital invested into the company through each capital injection event, whether that be a CR, SPP, or issue of C notes which later get converted to shares. The green line is a measure of the amount of capital funds injected into the company since the base mcap date.

Notes:

1. The analysis ignores any discount rate to measure the time value of money, to keep things relatively simple. But the chart still provides a very useful picture.

2. Being a measure of mcap, it doesnt include options outstanding and in the case of MAD, the escrow shares which I view as simply free options, so not talking fully diluted mcap here.

So what can we see from this analysis of MAD?

1. MAD had 187M shares on issue at 2/1/2011 and now has 315M on issue (excluding escrow shares), an increase of 128M shares or 68% increase in shares on issue

2. The mcap has increased from $41M to $397M, an increase of $356M or 870% in the mcap.

Very simply a comparison of the above two sets of numbers indicates that the company's management have been successful in increasing shareholder value rather than diluting it through the new shares issued over the last 18 months.

The capital injected since 2/1/2011 totals about $78M, while the MCAP has increased by $397M, a return of $319M on the $78M new money invested.

Looking at the chart, the steps in the green capital injection line show 4 noticeable steps where injection of significant funds occurred. The 1st step (in Feb 2011) did not appear to have much effect, however results started filtering through due to the reserves increase that got the SP going early this year, just before the 2nd capital injection in March.

Looking carefully at the blue mcap line, it is possible to discern small retraces in the mcap as the new shares are issued/absorbed, but these are really blips, as the mcap continues to trend up quite strongly.

What I am always keen to look for is what happens to the mcap after a major capital injection. A lot of traders will shy away from a stock if they've just done a CR, because of the "dilution" and the overhang of shares for a period of time as some of the CR shares enter the market for a quick profit return - MAD's mcap line indicates new stock has been absorbed quite readily, without any significant period of overhang.

What I also look for is how the mcap responds after any absorption period following a capital injection - as the company's value should start to increase as a result of the funds invested and employed into projects intended to deliver new shareholder value.

Look at MAD's mcap chart, imo shareholders have seen the benefits of value growth quite clearly from the 1st & 2nd capital injection steps indicated in the green line. I dont believe there has been sufficient time yet for such value to be delivered from the funds obtained in the 3rd & 4th steps, which represent the 2 tranches from the recent $50M CR.

With past performance being a good indicator or future performance (imo) in terms of whether a company has a strong management team or not, MAD's mcap chart indicates that management have delivered good shareholder value from funds already employed, which is an indication of whether they will continue to do so.

A note of caution though - one other way of looking at this chart is that the blue mcap line, which represents the market's valuation of the company, when it is so far ahead of what shareholders have invested into the company, could indicate that the market overvalues the company. To determine whether this is the case of course you have to look at results, which will help to provide a conventional valuation of the company. Certainly in terms of reserves, I would say the premium valuation by the market is supported. At this stage, production numbers still lag behind the reserves based valuation, so a continuation in the trend shown in the above graph will be critically dependent on the growth in those production numbers.

I hope the above is useful to someone.

Cheers, Sharks.