Just the other half of the review I did for my freind I am posting here as it was too big for one straw.
The main thing you want to look at is that essentially you are paying for the Net Present Value of the mine if you take that value and use it for the book value it should give you an indication of fair value. To cut out the math's the NPV is calculated by taking the predicated future earnings then discounting them back to the present value using a discount rate which is made up of the risk free rate to represent the opportunity cost of the investment (government bonds, which is where you would put your money if you wanted no risk) and a risk premium which is the premium that you as an funds provider (as a shareholder you are a funds provider, kinda like a bank) require to be paid to you for taking on the extra risk of the investment.
The issue is the NPV calculated by the company in their releases uses a discount rate of 5% (they published their discount rate), if you take away the risk free rate of 1% that only gives a risk premium of 4% which is WAY too low in my opinion (giving a much higher value/price). To look at it another way, I am sure Sprott is charging far higher than 4% interest on the loan!
The closest that I can come up with is using their NPV vs the Market cap
The Company's NPV according to themselves is AU$488M
The current market capitilisation is $128Mil
Meaning the market currently values the company significantally lower than the companies NPV aswell, backing up my assumption that the NPV discount rate is far too low. The question is where will the true value be? (or what is the true discount rate?) In a perfect world, where everyone was correct and trustworthy, the shares would be a good buy. But in reality if the true value of the project is around 200mil then you won't make much gain for the risk you take on. The other thing with some of these mining companies is they often won't return all of the gains to shareholders, they will burn them up trying to find more gold, or the management will pay themselves huge wages, so you will need to set an exit point, for example tell yourself you will sell once the mine is producing, or some other milestone. If you are an optimist however then they could be wrong the other way, the grade could be far higher, they make more money than they thought, then find more gold and get bigger. That's where the gamble is I guess.
I did a bit of an overview of this company for a friend, so I thought I would post it here aswell for anyone who is interested. Personally I am neutral on this company, I have some reservations form an ESG point of view however.
I don't normally do much with mines as they are a world of their own and extremely risky and full of dodgey characters. I have traded mining services companies before (companies who provide the services to the mines) as they tend to be more diversified. The issue with speculative mining is it takes a lot of capital to setup and there are a lot of things that are estimated or assumed, and it doesn't take much for a number to be out somewhere and it blows the whole thing, but on the opposite side, if they become profitable then they can really make a profit. You have to watch for people in the industry who just setup mines, or keep raising capital and prospecting for the material but never finding anything, and paying themselves a lot of money to administer it.
Most of this info I just got off their latest couple of press reports,
They just released one on 6/1/20 saying the mineral investment agreement has been signed, there is also an investors presentation going with it. They can be found here: https://www.asx.com.au/asx/share-price-research/company/EMR
What does the company do?
Currently setting up the first gold mine in Cambodia.
As they are the first miner in Cambodia they may have opportunities to expand into the rest of the country. More than likely if they found something massive another company would just buy them out (still a good thing). The Board has all been around listed mining companies a fair bit, this is a good and a bad thing, it is great in that it means they have experience, it is bad just in that you need to check if they are just pumping and dumping/leaching off investors of speculative mining companies.
Who are the competitors/threats
No competitors but looking at PESTEL there are some areas of concern
· Political: They operate in a politically different environment to operate in than Australia, should the government change, war break out, or the government just change their mind, the whole thing could be done for.
· Economic: The gold price can fluctuate (see above), Cambodia would have cheap labour, but also has an underdeveloped economy with not much infrastructure which could increase costs of setup for example the road that is currently being built.
· Societal: Will there be societal backlash towards mining in Cambodia? Will it be perceived over here as taking advantage of a developing nation? I have not researched their ethics, you need to feel comfortable ethically with what you are providing your capital too.
· Technological: May be difficult to get access to tech in Cambodia as discussed above, however also the rapid increase of tech in mining could be a benefit as they can mine better and more efficiently than the locals can, also remote communications and networking is a lot better than even a few years ago.
· Environmental: Are they going to destroy the environment or mine responsibly? Some mining companies operating overseas (even Australian ones) have done pretty messed up things (Poisoned rivers etc). Depends what you are comfortable with.
They didn't really mention much anything concrete about the environment, whether they will rehabilitate the area or just leave it damaged. It was just a basic one slide Environment and social slide, didn't list any environmental programs besides getting kids to plant trees in school, so in my view it could be dodgy.
· Legal: I see no legal threats and no real reason why there would be.
Does it have a competitive advantage / what Is the competitive advantage?
First mover advantage in that they are the first in the country, there are some significant bureaucratic barriers to entry to work in Cambodia, this is the main competitive advantage I can see, this could be valuable.
Access to better tech and experience than any local company can provide, but nothing special compared to any other ASX listed miner.
Who has skin in the game?
US$60 Mil has been loaned to the company for the project by "Sprott private lending" this is a huge plus, Eric Sprott is is a very successful investor and businessman (It's worth a google). It is not him but an arm of the Stockbroking firm he started doing the funding. They would not be lending a high risk venture like this 60mil without doing a lot of research themselves so this is a big plus.
Having said that, it all depends on what price/deal sprott got, they know the name is worth a lot and so do EMR as they mentioned Sprott a few times in the pressentation, so as part of the deal Sprott was probably has options to buy stock cheap etc (I havent looked into the deal just a guess), so it may have been a bargain for sprot….but not for you who then buys the stock on the market at a far higher price.