Several decent mails by way of feedback on this post yesterday, 5% discount rate stupidity and all that. All mailers kept anonymous and some are just excerpts, to protect IDs of both innocent and guilty:
Some people just grouched along with me:
“Well said – there is no capital available to junior mining for 5% or 10%. My biggest issue is that the purchase price of the project is not included in the financial analysis in the 43-101. It’s just a sunk cost, prior to the feasibility study, and so can be neglected in the NPV and AISC calcs. Its no wonder that the cash flow is marginal compared to what you would expect with an AISC of $700.”
Some people still don’t get how 43-101s are being used for ulterior motives…
“Hey
Otto – I couldn’t agree more that if you take the company’s stated 5%
discount rate or whatever they choose as the correct one, you shouldn’t
be investing in the mining space at all.
With
that being said, I have always had a viewpoint that there was a purpose
to the 5% discount rate for golds or let’s say 8% for base metal
projects. Is it really the 43-101’s job to assess the level of
geopolitical risk? From
an operating / construction / processing etc. side, sure, but that’s
where I would stop. I would say that the 5% is simply a rule of thumb
that let’s anyone reading the 43-101 report generally speaking compare
the relative quality of one project versus another,
without considering geopolitical and other risks. Obviously there are
limitations as the price decks are not uniform, which I think is
something the industry should be pushing for to change, but it is a
starting point.
Everyone’s
perception or tolerance for risk is different and an investor is solely
responsible for applying a discount rate he/she believes addresses
risks external to the project. I guess in my mind the 43-101 on the npv
side is
aimed at providing you with a relative data point rather than a factual
one – once you have gotten past that point then other risks can be
factored in, which in my mind are more external than internal to a
project’s quality.”
Some people do and defend the system (a bit), but still miss the promo BS angle:
“There
is another way at looking at discount rates – granted that a junior in
an exploration phase pays say 12% interest, however when they find an
economic deposit that promises to make a very good return, interest
rates for the junior will go down and approach that paid by producing
companies. Accordingly it does not really make sense to use a very high
discount rate in an EPA, or Feas. as this could cause a company to
discard what otherwise could be a money maker once producing. Therefore
using a discount rate equal to a junior’s explorers’ cost of capital
while in the exploration stage would be a huge mistake.”
Other people really get it, like this one:
“The 5% rate serves only one very important purpose: it allows the entire junior market industry to function (raise and pay $$). If actual cost of capital rates were used (only) 10% of projects would be economic…”
And this one:
“My dearest
Mr. Otto,… I once questioned an analyst on whether a 5% discount properly
reflected risk for a sketchy project in a difficult mining jurisdiction
and his answer was, if everyone uses a 5% discount, it is easy to
compare project to project. I guess I just never spent enough time to
understand the incredible similarities of the risk profiles of a
project in BC to a project in the DRC. Silly me.”
But I’ll leave the final word to a geologist:
“FWIW I don’t quietly masturbate over
43-101 reports. I try to make it as loud as possible (and) put on ‘Ace
of Spades’ for tempo.”
Nuff said.