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Every why hath a wherefore

Regarding Dynasty Metals & Mining (DMM.to) debt and misconceptions (a rant) (from IKN360)

A small section of IKN360, out last night


Regarding Dynasty
Metals & Mining (DMM.to) debt and misconceptions (a rant)

Reader ‘FS’ sent the following in
after reading my succinct appraisal of the fast-deteriorating situation at
DMM.to last week (13), one that even came before the company’s second NR Friday
afternoon (14) that told us of its employee walk-out (reason is simple: don’t
pay people and people don’t work for you). Here’s FS:

“Hi Otto.  I read
your note about Dynasty being insolvent and no longer a viable economic entity.
 But I would like to know why you don’t think there is at least some value
in its 3 projects with 6 million oz of gold and the Zaruma plant, equipment and
mine development plus all the technical work that’s been done over the past 10
to 15 years.

“I would have thought
competitors would be willing to pay say $10 per ounce in the ground for the
whole company.  That would be 60 million dollars and would leave some
money for shareholders.   What is wrong with this rationale?”

And here’s what I wrote back to FS:

Shares are better understood by their formal name
‘equities’ and they get crushed to death by financial debt, it doesn’t matter
what price is put on the supposed and apparent fixed assets. Look at what
happened to Jaguar Mining (JAG.v) shares during the re-structuring there. Or
look at Colossus. Or Atna. Or Allied Nevada (aka Hycroft). A company like
Vertex One will not play cute and pay their money to third parties when they
can get the assets for no money. Equities are behind in the queue, debt
creditors are first.

Also, DMM has no money, 2700oz Au shipped or not. No money
is very very not good.

Many many years ago, somebody much
smarter than I gave me a wonderful definition of company shares, i.e. equities:
“The small sliver of hope that sits
between assets and liabilities on a balance sheet
”. To expand a little on
that, I understand where reader FS is coming from on certain levels, he sees
the potential for a third party to move into DMM, pick up “cheap assets” by
“only” paying $10/oz, paying off the debtors, injecting capital, getting the
company running on a positive cash flow basis, reaping the rewards of acting on
a “bargain basement opportunity”.

Which may be so but first we need
to ask questions. Who knows more about the DMM assets, a third party or the
people developing this company for over a decade? We need to consider the
never-ending delays, screw-ups and broken promises delivered by Robert Washer
and his team. We need to wonder about the high cash cost, the succession of
operating losses and the way the company can never seem to deliver on its
development programs. And why workers have had enough and walked out. And
Ecuador (let’s not even go there today). To cut to the chase we need to
consider the word “value”, the one used by FS in his mail, a little more
carefully. When it comes to balance sheets and fixed assets, within reason a
company can claim the asset value it likes and if it decides not to cut the
value of the thing it owns from time to time (i.e. impairment or write-down)
it’ll stay that way. Examples:

  • If Argonaut Gold (AR.to) thinks its Magino project is
    worth the same (in fact more) than the $341m it paid in October 2012 for
    the property, when gold was at over U$1,700/oz, and doesn’t write down a
    bean of its value because it claims that if gold stays at U$1,142/oz over
    the long-term it will be able to re-coup all the price paid…well, they
    can do just that if they want (and my stars, they have).

  • Topically (15), if Kaizen Discovery (KZD.v) magically
    makes its $4m purchase into a $12.5m asset without adding a single drill
    hole to Pinaya then we can sit back and applaud (or laugh).

Two examples, we could play around
with dozens but the point should be clear: Just because a company says it has
an asset, it doesn’t mean that it is an asset. An asset that does nothing for
your company apart from level charges and lose money isn’t one, it’s a
liability (or at best a non-performing asset). Or as stated in IKN351:

A billion ounces of
uneconomic gold is worth zero dollars and zero cents because if it costs more
to get out the ground than you can sell it for, it’s worthless. But hey let’s
up the ante because according to USA’s oceanic people NOAA, there are around 20
million tonnes of gold in the world’s seawater (3). In old money, that’s 643
billion ounces (yeah, with a B). Not only that, but about twenty seconds on
Google will show you that people have spent time working out successful methods
for extracting that gold (4).* But despite there being oodles and oodles of
ounces of gold, out there, identified and available, they’re all worth nothing.

Combine the misconceptions of
“in-situ gold value” and the magical accountancy so prevalent in the junior
mining world and I find myself naturally circling back to DMM to wrap this rant
up.

After making decent money in a DMM
trade way back when, then losing about the quarter of the profits in a bad
second trade afterwards, it just so happens to be a company I’ve studied
carefully, watched over the years and…yup I’ve never been back. But rather
than me again, here’s what A. Mining Professional told me just a couple of
weeks ago because he nailed it so well. He’d met with Washer at PDAC, was on
the receiving end of a romancing, knew I knew a bit about DMM and asked me for
an opinion which I gave in no uncertain terms. He looked more carefully and…

“… I downloaded the three 43.101 reports on Friday (and)
had a glance through the attached on their operating Zaruma mine this
evening. Shocked, gobsmacked, appalled… take your pick… there are so many
deficiencies in this report I wouldn’t know where to begin. That this is the
basis for the mine plan and business is shocking….

BTW, the Dynasty Goldfield vein target, there great hope is
comprised of 110 veins in a polygonal resource.  Yikes!  

There are sometimes interesting
fights that go on when a company implodes on debt but has an asset hanging
around. A few examples that come are San Gold, Rubicon, Gran Colombia, and even
Pacific (PRE.to) in the O&G sector. People swoop in on the distressed, pick
over the asset book and try to find value. More often than not they don’t and
that’s largely because of something of the utmost simplicity; If the assets it
has were (or are still) good ones, the company wouldn’t have got into financial
trouble in the first place!

Bottom line: DMM is going bankrupt
because its assets are not assets, nobody will jump in to save them from their
creditors, those creditors will hit the non-compliance button and people
holding equities that day will get a sharp lesson in why balance sheets are the
single most important financial documents for companies. Perhaps they’ll end up
selling the mill to INV Metals, or perhaps somewhere down the line after a
restructuring a newco rises but if it does, you can bet any money you like that
the current equity holders will have been diluted to a Pacific Ocean scale.

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