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7/18/17

Regarding discount rates and junior promo bullshit


IKN Nerve Centre received a mail today from A. Reader, who prefers to remain anonymous but can fairly be called an experienced financial professional. He was in grouch mode and his lament was on the "State of The 43-101", a subject we've covered previously at this humble corner of cyberspace but there's nothing wrong with a revisit either. Here's an extract or two:
Lundin Gold, from IKN 370's commentary, had a discount rate of 5% for NPV. Somewhat ludicruous given extremely high political risks over the centuries in Ecuador as you mentioned.  Recently I saw an iron ore mine FS that had a discount rate of 8% for NPV for northern Canada.  Seriously.  Higher than Ecuador!   Now obviously there's no "standard" for assessing discount rates and other FS variables across the global risk spectrum and never will be.  But this is getting ridiculous, as these FS's and NI 43-101's  just seem to lead to more questions for investors rather than answers. 
Feasibility studies and NI 43-101 summaries feel more like marketing power point pitches than bare bones factual guts.  
Lastly, I don't have the time or energy, but it would be interesting to hire an intern or analyst to take say the top 100 mining companies of all time and compare the feasibiity study estimates to actual mining output and profits in a spreadsheet. Don't even bother with the sub 100, you know what those results would be.

Good points made and let's consider that whole 5% NPV discount rate issue a little further because yes, that one is a fetid turd on a stick. If you care enough (and if you do it will immediately place you in the top 1% of retail investors because most people who trade junior miners are freakin' morons) check out the latest few financing deals for juniors raising or servicing capital for their projects. To give you a start, here are two that come to your humble scribe's mind quickly (because I've analyzed and traded both in the last 12 months):
  • Continental Gold (CNL.to) cost of capital for capex raise; approx 14%
  • Red Eagle (R.to) current interest rate on loan; LIBOR +11%
Those just two off the top of my head, thing is that they're pretty typical and I'm quite sure you have half a dozen more to offer me of the same ilk. The point is, what the merry jinkums and blinking flip do those numbers have in common with a discount rate assumption of 5%? Or even 8% for that matter, a figure that used to be a type of benchmark standard for financial anal ysis in previous years? Answer; Nothing, not a sausage and bugger all. But that's not going to stop the purveyors of high quality bullshit (you know them as junior miners, their consultants, their paid whore promoters and their under-strict-instruction paid lackeys in sellside houses) from using them to throw sequins in your eyes. And if you, dear and kind reader, think there isn't much difference between a 5%, 8% or 10% discount rate when running a financial anal ysis you live in the same world of dumbass mathematics as Allan Barry.

When floating such comments about 43-101s on the blog, it's round about now that the geologists (normally) or engineers (sometimes) pipe up and say "AHA! But my dearest Mister Otto, a 43-101 isn't meant for the public world, it's by nature a technical document designed for an audience who understands the funny graphics, quietly masturbates over mill plan flowcharts late in the evening or knew the difference between a greywacke and a schist before you were out of short trousers; dearest Mister Otto". Which just goes to prove how stupid geologists and engineers are. Their insistence on this point, when it's crystal clear that Company XYZ has put a 5% discount line into its PEA and then trumpeted it in the accompanying NR and then got all the hangers-on and parasite lackeys to repeat the spin verbatim on their radio show, youtube channel, coldcall phone spiel, anal ysis report, chatroom wankery, blog, weekly subscriber report or wherever else is too much of an insult to be taken seriously (note to geologists and engineers; please check out definition of 'common sense' in your preferred dictionary).

So what's the answer to this mess, reader A. Reader and others? Pretty simple really, know more than your peers. Yeah yeah, I know I know but once you do you're allowed to put in place a BS filter that quickly separates the mining wheat from the chaff. In this specific case you can boil it all down to something like:

"Immediately ignore any company, promoter or market voice who tries to get me into a stock using an analysis based on a 5% discount rate."

You see them trying to do it, immediately blackball the assholes. It's how a free market works, after all.