A small section of IKN360, out last night
Regarding Dynasty Metals & Mining (DMM.to) debt and misconceptions (a rant)Reader ‘FS’ sent the following in after reading my succinct appraisal of the fast-deteriorating situation at DMM.to last week (13), one that even came before the company’s second NR Friday afternoon (14) that told us of its employee walk-out (reason is simple: don’t pay people and people don’t work for you). Here’s FS:“Hi Otto. I read your note about Dynasty being insolvent and no longer a viable economic entity. But I would like to know why you don't think there is at least some value in its 3 projects with 6 million oz of gold and the Zaruma plant, equipment and mine development plus all the technical work that's been done over the past 10 to 15 years.“I would have thought competitors would be willing to pay say $10 per ounce in the ground for the whole company. That would be 60 million dollars and would leave some money for shareholders. What is wrong with this rationale?”And here’s what I wrote back to FS:Shares are better understood by their formal name 'equities' and they get crushed to death by financial debt, it doesn't matter what price is put on the supposed and apparent fixed assets. Look at what happened to Jaguar Mining (JAG.v) shares during the re-structuring there. Or look at Colossus. Or Atna. Or Allied Nevada (aka Hycroft). A company like Vertex One will not play cute and pay their money to third parties when they can get the assets for no money. Equities are behind in the queue, debt creditors are first.Also, DMM has no money, 2700oz Au shipped or not. No money is very very not good.Many many years ago, somebody much smarter than I gave me a wonderful definition of company shares, i.e. equities: “The small sliver of hope that sits between assets and liabilities on a balance sheet”. To expand a little on that, I understand where reader FS is coming from on certain levels, he sees the potential for a third party to move into DMM, pick up “cheap assets” by “only” paying $10/oz, paying off the debtors, injecting capital, getting the company running on a positive cash flow basis, reaping the rewards of acting on a “bargain basement opportunity”.Which may be so but first we need to ask questions. Who knows more about the DMM assets, a third party or the people developing this company for over a decade? We need to consider the never-ending delays, screw-ups and broken promises delivered by Robert Washer and his team. We need to wonder about the high cash cost, the succession of operating losses and the way the company can never seem to deliver on its development programs. And why workers have had enough and walked out. And Ecuador (let’s not even go there today). To cut to the chase we need to consider the word “value”, the one used by FS in his mail, a little more carefully. When it comes to balance sheets and fixed assets, within reason a company can claim the asset value it likes and if it decides not to cut the value of the thing it owns from time to time (i.e. impairment or write-down) it’ll stay that way. Examples:
- If Argonaut Gold (AR.to) thinks its Magino project is worth the same (in fact more) than the $341m it paid in October 2012 for the property, when gold was at over U$1,700/oz, and doesn’t write down a bean of its value because it claims that if gold stays at U$1,142/oz over the long-term it will be able to re-coup all the price paid...well, they can do just that if they want (and my stars, they have).
- Topically (15), if Kaizen Discovery (KZD.v) magically makes its $4m purchase into a $12.5m asset without adding a single drill hole to Pinaya then we can sit back and applaud (or laugh).Two examples, we could play around with dozens but the point should be clear: Just because a company says it has an asset, it doesn’t mean that it is an asset. An asset that does nothing for your company apart from level charges and lose money isn’t one, it’s a liability (or at best a non-performing asset). Or as stated in IKN351:A billion ounces of uneconomic gold is worth zero dollars and zero cents because if it costs more to get out the ground than you can sell it for, it’s worthless. But hey let’s up the ante because according to USA’s oceanic people NOAA, there are around 20 million tonnes of gold in the world’s seawater (3). In old money, that’s 643 billion ounces (yeah, with a B). Not only that, but about twenty seconds on Google will show you that people have spent time working out successful methods for extracting that gold (4).* But despite there being oodles and oodles of ounces of gold, out there, identified and available, they’re all worth nothing.Combine the misconceptions of “in-situ gold value” and the magical accountancy so prevalent in the junior mining world and I find myself naturally circling back to DMM to wrap this rant up.After making decent money in a DMM trade way back when, then losing about the quarter of the profits in a bad second trade afterwards, it just so happens to be a company I’ve studied carefully, watched over the years and...yup I’ve never been back. But rather than me again, here’s what A. Mining Professional told me just a couple of weeks ago because he nailed it so well. He’d met with Washer at PDAC, was on the receiving end of a romancing, knew I knew a bit about DMM and asked me for an opinion which I gave in no uncertain terms. He looked more carefully and...“... I downloaded the three 43.101 reports on Friday (and) had a glance through the attached on their operating Zaruma mine this evening. Shocked, gobsmacked, appalled… take your pick… there are so many deficiencies in this report I wouldn’t know where to begin. That this is the basis for the mine plan and business is shocking….BTW, the Dynasty Goldfield vein target, there great hope is comprised of 110 veins in a polygonal resource. Yikes!There are sometimes interesting fights that go on when a company implodes on debt but has an asset hanging around. A few examples that come are San Gold, Rubicon, Gran Colombia, and even Pacific (PRE.to) in the O&G sector. People swoop in on the distressed, pick over the asset book and try to find value. More often than not they don’t and that’s largely because of something of the utmost simplicity; If the assets it has were (or are still) good ones, the company wouldn’t have got into financial trouble in the first place!Bottom line: DMM is going bankrupt because its assets are not assets, nobody will jump in to save them from their creditors, those creditors will hit the non-compliance button and people holding equities that day will get a sharp lesson in why balance sheets are the single most important financial documents for companies. Perhaps they’ll end up selling the mill to INV Metals, or perhaps somewhere down the line after a restructuring a newco rises but if it does, you can bet any money you like that the current equity holders will have been diluted to a Pacific Ocean scale.