Mining Equities Report: Cash is King?

By: Tom Szabo & David Zurbuchen | Mon, Sep 15, 2008
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A major objective of many investors active in the natural resources sector is to diversify away from the fiat-based world of finance and credit-dominated sectors such as banking, insurance, retail, and most manufacturing. These investors want exposure to hard assets and not soft ones. Today they desperately hope that commodity prices will soon recover given the large losses just about every natural resource portfolio has incurred over the past few months, the last two in particular.

The fall in commodity prices has created an environment that has made it very challenging for resource companies, mining equities in particular, to obtain financing for exploration and project development. It seems cash, not metal in the ground, is king. How ironic that the one asset natural resource investors are trying to diversify away from - the U.S. dollar and its troubled competitors - is the very asset that mining equities need the most right now. It turns out that drilling contractors, engineers, geologists, and miners all still prefer to be paid in paper money.

Due to the simultaneous reduction in market liquidity and commodities prices, metal exploration and mining companies that need to raise funds to finance their activities are facing the prospect of substantial share dilution or the possibility of losing their property interests if they cannot meet contractual spending commitments. We believe there has to be a very compelling reason to own cash-strapped companies in this market.

Conversely, companies that are not in need of financing have an important margin of safety in the current environment. Should metal and commodity prices stay weak for a long period of time-something that is not impossible during a bull market as the historical example of the mid-1970s demonstrates- such a margin of safety could turn into a major advantage.

Indeed, if the markets were efficient and logical, we should expect that mining equities with lots of cash and other liquid assets would trade at significant premiums to their cash-strapped peers. But that doesn't appear to be the case at the moment.

In early August of this year things did not look quite as bad, but we had already started to notice that the market capitalizations of several mining equities were approaching their cash positions. This situation piqued our curiosity, so we placed these companies on our radar. To our surprise, their prices continued to fall so that now in many cases they now trade at a steep discount to their breakup value (the estimated amount of cash that could be distributed to shareholders if all assets and liabilities are liquidated and the company is broken up). Compellingly, many of these companies have attractive property holdings -some joint ventured with majors- that are currently being assigned a zero value by the market.

Thus was born the idea for our inaugural Mining Equities Report, the title of which -- "Cash is King?" -- reflects the strange contradiction that the one asset in greatest need, cash, seems to actually be more of a burden than an asset to some mining equities. While this situation is perplexing, we feel that it is only a matter of time before the most astute natural resource investors begin to realize that the market's present foolishness obscures a rare opportunity. With blood running in the streets, now seems like the best time to beat the smart crowd to that realization.

The dollar signs wouldn't stop dancing in our minds, so we were left with no choice but to examine several hundred mining equities, both explorers and producers, to plot their cash and liquidity positions against their capital requirements. We discarded companies that still have substantial value attributed to their projects because those values could evaporate should fear continue to run rampant in the hearts of investors. Though some of you may protest that we have erred in casting aside some extremely undervalued companies, we suspect that the value of fiat money could fare better than the value of metal in the ground for a while yet. That bold assessment still left us with more than 30 companies that deserve closer examination. We detail these companies in our inaugural report.

We would like to point out that our report is not a comprehensive list of mining equities with breakup value exceeding market cap. because such a calculation is extremely difficult to make given the large fluctuations in the prices of mining equities recently. Rather, our report should be viewed as a cross-section of interesting opportunities to explore further. We believe it contains something for every natural resource investor.

Some of the mining equities in our report possess a cushy cash position that is not contractually committed to be spent in the near term. Others have virtually no cash requirements because a separate company (for example, through a joint venture) is paying for all exploration expenditures and sometimes even covering administrative expenses. Many of these companies have projects of significant merit and other assets unaccounted for in our calculations because they have been given zero value by the market. After all, who are we to argue with the market?

Ultimately, our report does not answer the underlying question: Cash is King? Only time will do that. But we believe there is a reasonable basis to conclude that some of companies in our report are positioned to benefit, relative to other mining equities, regardless of where the market heads next: up, down, or sideways.

To learn more about The Metal Augmentor's debut "Mining Equities Report: Cash is King?" -- available for purchase for just $87 -- please visit us at:

About The Metal Augmentor

The Metal Augmentor is a new service being launched in the next few weeks at The main purpose of The Metal Augmentor is to aid both new and experienced investors in navigating the fascinating, dangerous, and rewarding world of investing in physical metals and mining equities. Our focus will be on gold and silver, but we will also provide in-depth coverage of the other major metals.

Portions of the service will be devoted to investors who buy gold and/or silver in its various forms (ETF, bullion, allocated account, etc.) for price appreciation. Other portions will appeal to people who buy bullion to hold in their own possession for the purpose of preserving their wealth or buying power against fiscal irresponsibility by fiat-wielding governments.

A key feature of The Metal Augmentor will be the detailed coverage of mining equities from junior explorers to major mining companies. Our unique approach will avoid making outright buy and sell recommendations (except in special reports that focus on individual situations) but instead provide relevant and timely information and insights so that each investor can confidently make his or her own investment decision. Perhaps the most valuable feature of The Metal Augmentor will be exclusive coverage of the basis in gold and silver as taught by Professor Antal E. Fekete.



Tom Szabo

Author: Tom Szabo

Tom Szabo

The Metal Augmentor and Augment Partners, Inc. are headed up by Tom Szabo and David Zurbuchen.

Tom Szabo has co-founded several precious metal related businesses and investment funds, invests for his own account and runs the website at, a destination enjoyed, reviled, visited and ignored by literally thousands of silver and gold investors, not to mention a big shot industry know-it-all from time to time.

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David Zurbuchen

Author: David Zurbuchen

David Zurbuchen

The Metal Augmentor and Augment Partners, Inc. are headed up by Tom Szabo and David Zurbuchen.

David Zurbuchen is the editor of two natural resource focused websites, provides research for several investment portfolios, and writes a monthly premium newsletter focused on mining equities and the metals markets.

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