start here

start here

The Daily IKN email digest, get all daily posts sent to you next day (& no ads)

10/12/17

I see Rye Patch Gold (RPM.v) moved up strongly yesterday...

...on the pre-announced new of a weak Q3 of production. This can only be explained by the undoubted fact that there are thousands of people who trade mining stocks who don't have the first clue about company financials. Or as The IKN Weekly put it in IKN435 dated September 17th.....

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx



"...as at end 2q17 RPM was working cap negative, its debt now a clear and present issue. In its 2q17 MD&A, RPM tries to play down this working cap deficit by saying this:

However, the deficit includes $7,126,070 contingent consideration relating to the purchase of the Florida Canyon Mine and includes provisions to satisfy this amount by way of equity or equity instruments. The Company considers that it has sufficient cash resources to complete the ramp-up phase and enter into production.

Now that’s true, but personally I don’t care so much about that $7.126m line item. The thing that should worry RPM longs is the Macquarie debt and to illustrate that, here’s the 2q17 balance sheet ripped from the financials with some red ink scribbled on it:





The problem is the bottom bit. RPM has drawn fully on the $25m revolver facility, its interest rate is an eye-watering 16% to 36% (depending on the tranche) and in just six months, it’s expanded by over $13m. What’s more, $19.2m is due in the next 12 months.

Also, please note that “says who?” comment about the value of its property/plant/equipment line item, which is basically its Florida Canyon mine. We only have the company’s opinion on its fair value at this point (and that’s expanded generously since the end of 2016, too). If we take the numbers as gospel, RPM has a book value (all assets minus all liabilities) of 18.5c per share, which means it’s still trading snugly over book. That might be fine for an operating and profit-making company of a hot exploreco with an exciting asset that’s now being developed, but when it’s a company that continues to fail to deliver on production and has a whole bunch of debt on its books….well, that looks expensive even if every penny of that $107.8m valuation is justified. Add in the expansion of the share count, now 427.16m and with that $7.126m contingent liability looking likely to turn into equity and dilute things even further and you have a balance sheet wouldn’t be particularly pretty even if 3q17 turned out to be good. I was considering the stock as a purchase by assuming RPM would finally deliver on its promises in 3q17 and give us positive free cash flow from its mine. It’s obvious now that it won’t and the debt clock’s ticking is now very loud. “Not particularly pretty” has now become plug ugly and I don’t see how RPM pays down that debt in time, now we know that commercial production won’t happen until 2018.

The bottom line to this is line: It’s the balance sheet, stupid. They matter, you cannot hide them behind promises of a happy shiny future, RPM is now in serious financial straits and when that happens it’s the equity that suffers. The only people who could recommend this stock are people that don’t open company financials (or if they do, don’t know what they’re looking at). Avoid this stock.