Next Qtr positive cash flow, page-6

My market cap estimate is more of a "guesstimate". There's usually too many unknowable variables to "precisely" measure the value of a mining resource and try and arbitrage gold miners in the market.

My guesstimates on the value of gold miners centres on past costs/operations coupled with likely future costs/operations and grades overlaid on top of the number of ounces in the ground and their various levels of confidence, be them proven and probable reserve ounce and measure and indicated resource ounces or inferred ounces.

Using this I "guesstimate" the potential free cash flow of the total resource then I compare it the enterprise value of the company along with the company's finances to be able to extract the resource.

Of course the FCF of any mine will HEAVILY depend on the commodity price itself but at current gold prices can you see that a lot of higher quality, multi-mine, lower cost gold miners in the ASX300 that also own and manage their own mills and mining equipment with no debt and are trading on EV of $80 to $250 per reserve ounce.

EXG is none of these things at present (and unlikely to be in the near future) So that really puts an upper limit on what EXG shareholders can realistically expect their resource to be valued by the market at (excluding significant discoveries or resource upgrades).

My concerns with EXG is mostly about the risk of further shareholder dilution.

It is a small single mine operation, very little collateral, has creditors to pay, producing high cost gold, doesn't have full control over cashflow because it doesn't own its mill, has little cash in the bank and has already conducted multiple capital raisings at increasingly lower prices in the past 18 months...

On top of that the past management has left the accuracy of its resource estimates in question for the new management to now address.

And hoping that nothing will go wrong... well all I can say to that is - it's mining!

Loads of things can go wrong and often do, including but not limited to:

Gold price drops. Costs go up (eg oil price rise). Mine operations stop for a protracted problem (eg pit wall failure, equipment failure, contractors issues, bad weather, etc). Grades disappoint. Mills can't process the ore immediately. Mills don't release payments on time. Management can just plain lie about the resource...

A low cash balance, skinny margins and debts to pay mean that any hiccup (whether due to poor management or simply bad luck) will have EXG going back to the market for financial help yet again and likely at a discount to the last CR of 2.1c.

At which point, even if they only need $5m just to keep creditors at bay and get operations back on track $5m at 1.5c per shares is another 330m shares being issued...

More shares means spreading the profits thinner. Thinner profits per share means lower share prices.

And that's while the gold price is $1600. If the gold price was at $1500 again EXG might struggle to get money at 1c a share. At $1400 gold I see EXG ending up in administration within 12 to 18 months at which point existing shareholders would get slaughtered.

EXG has always had the same problem - it's under capitalised with a high risk business model.

And every time something has gone wrong (even if it's not a permanent problem) they have had to go to the market for funding at a large discount and at great expense to existing shareholders.

Good management is smart enough to organise additional financing when times are good - not when times are bad.

On the flip side, if the gold price goes to $1800 and everything goes to plan, and most of the original resource is there and it is economic to mine or they can expand the resource then EXG will probably be a decent investment from these levels...

But at current gold prices I think EXG is just as likely to go to below 1c as it is to go above 5c.

I don't like those sorts of investments. Especially not when past performance suggests the chance of out-performance is essentially zero.