Cash backing: who can ride out the storm?Friday, 5 December...

Cash backing: who can ride out the storm?
Friday, 5 December 2008
Kate Haycock

THE good news is that some juniors still have money – the question is, how long can they make it last while still exploring and developing projects?
Perth-based investment houses Hogan & Partners and Euroz Securities have both crunched the numbers in the speculative end of the resources sector and figured out just who had some money left and how long it may last them.

In its research note, Hogan warned investors that companies trading below cash backing were not automatically “good buys” because some small plays would just shut their doors, hoard cash, and be nothing more than lifeless husks – a strategy the brokerage criticised.

“In the current market environment many companies choose to shut up shop and curtail all discretionary expenditure – such as exploration – in order to conserve cash,” the brokerage said.

“We do not hold the view that investors take exposures in speculative exploration companies just to see those companies do nothing.

“In the current market it is even more important that the junior explorers continue to do exactly that – explore.”

Given the current costs of operating, the brokerage said it believed junior resource stocks would need a minimum $7 million in cash to continue exploration work for the next two years with $1 million for administrative expenses, and then at least another $2 million per annum for exploration, plus another $1 million as a contingency.

However, the brokerage noted that some companies with less cash than this could find alternative arrangements, such as farm-ins, joint ventures with bigger companies.

The brokerage’s list of explorers with more than $7.5 million cash and their percentage included Botswana Metals and Emu Nickel, with both having $8 million at the end of the September quarter, and a market capitalisation of $2 million each – well below their cash backing.

Cape Lambert was well placed with $333 million in the bank after the sale of its namesake tenement, while Alara Resources also has $8 million, Aurora Minerals has $9 million and Carnavale Resources was well-funded with $10 million in cash.

Those explorers with greater cash reserves included Northern Iron, which has $105 million, Brockman with $111 million, Strike resources with $68 million and Metallica Minerals with $25 million.

Otherwise, Hogan told investors to favour companies that are already generating cash from an asset with high grade or low costs, have established resources, minimal debt and a strong team.

The brokerage also said investors should look to see that a company’s hedging covers less than 30% of its reserve, and the commodity focus should not be “exotic”.

Euroz Securities also warned investors to be careful of basing too much of an investing decision on just cash backing, especially for companies looking to develop projects.

“In reality if the market remains this poor by year-end the said projects would unlikely be developed, even if it is inconsistent with what optimistic management might currently be suggesting,” the brokerage said.

The brokerage suggested investors look carefully at producing companies and positive cash flow versus a negative cash backing.

Focus fits the bill


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