Friday, September 25, 2015

To spend or not to spend

To spend or not to spend?

When is this good for the shareholder?
When is this bad for the shareholder?

or could it be both good and bad?

The classic case is whether a company should spend $$'s at a significant depth to increase resources to a project. The deeper the drill-holes, the more costly to firm up those resources.
Most companies may just leave it as 'open at depth' and leave it for once the mine is in production and the area is more accessible from lower development.

Having finite numbers can be a lot easier to promote to the marketplace than just the generic 'open at depth' . You cannot put a $ figure on 'open at depth'...or at least the company cannot...analysts or investors are free to extrapolate as they like.

Should regulations stop companies from promoting part's of their projects or force them to spend unwise $$'s to get solid and expensive numbers.

What you end up with are companies with unrealized asset's that the public and investors do not get to hear about unless they have a casual voice to voice conversion with opinions (and not fact's) being shared.

At Chidliak, the flagship open pit deposit (CH-6) could contribute close to $2.5 billion plus in revenue to the project. The company is spending core exploration $$'s in firming up this deposit.

On the flipside, there is a string of pearls kimberlite that is about a 1/4 hectare in size (CH-20) that the open pit of CH-6 will naturally break into one the one side.

The cost to firm up any resources in CH-20 will be expensive....yet the contribution to the project in a production environment could be close to or above $100 million.

$100 million sounds like a lot of money and it is. Spending $10 million to firm up $100 million down the road is also a lot of money to spend. The company is wise not to spend that money and firm up the additional mill feed when they actually open pit CH-6 and expose CH-20 for no additional $$'s.

This is material that probably will not get into a mine study and not be included in the resource, but is a very significant addition to the cashflow.

The company knows the kimberlite pearl is there, they know it will have some value, they do have a drillhole sample...yet it is more wise to spend exploration $$'s expanding the flagship CH-6 to the maximum resource as possible as they will get the most bang for the buck.

A $100 million cash flow item hidden within the project for a company that is worth only US$35 million is not right.

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