Sunday, February 3, 2013
Some questions arise from Deloitte's stuff
After sleeping on Glenn Ives' VRIC talk, and remembering the Deloitte pamphlet, some questions came to mind - the things I'd want to ask Ives if I met him at PDAC, say.
Here's one question I was just thinking about.
In all seriousness, why are so many juniors financing projects, or why does the market expect them to finance, through dilution?
I mean, there are tons of tiny pennycrappers with projects whose NPV is many multiples of their market cap. It seems the market's assumption is that there's no way they'll ever become mines without massive share dilution - and nobody wants to own a pennycrapper before that next wave of paper hits the market. The market doesn't seem to want to assume the possibility of debt financing for anyone. Why is this so?
We're in a debt market bull; India just sold a perpetual bond, Mongolia and Sri Lanka have 10Y bonds yielding 5% (which makes the Spain yield situation look even sillier), and now there are even African municipal bonds being sold. Are junior miners so pathetic that they're considered at higher risk of default than Mongolia? Why can't they sell debt? It's a seller's market right now. Yield is in demand.
Now maybe it's just a problem of selling a cyclical resource; after all, you wouldn't finance a mine with a break-even at $1000 gold, if you were worried that gold could drop below $1000 two years into production. So maybe there needs to be a recognition in the finance industry of a higher long-term bottom to the gold price before they'll ever consider buying this sort of debt.
But it still seems kinda funny. What's more likely in the next ten years? That gold will permanently drop below $1000, or that Sri Lanka will have another civil war/Nairobi will default? I know you get clowns like Credit Suisse saying "it's the end of the gold bull", but you've got to wonder whether these guys have ever looked at the cost and resource side of things that Brent Cook or Pierre Lassonde harp on about to all and sundry.
Or, maybe, the financiers are actually smarter than the mining CEOs. After all, like Ives said, a lot of the capex explosion is caused by miners being completely unable to hire good front-line management. Some of his examples were hilarious: a major African pipeline had to be rebuilt from scratch because the installers tightened the screws too tight, stressing every segment of pipe - because nobody on the project knew how tight to tighten a screw. I repeat, for the love of God and all that is holy, nobody on the project knew how tight to tighten a screw. And some Newfie project was achieving only 20-25% productivity from its construction staff, because they didn't know how to efficiently stage construction to maximize worker productivity.
So if I'm a financier, perhaps I accept the secret knowledge that worker productivity is a function of management competence? If so, then when I evaluate whether to buy a miner's capex debt, I'll do so based mainly on whether or not I feel management is competent enough to manage construction costs. Sure, you'll get some cost creep from your hard inputs, but it seems Ives is suggesting that the bigger capex explosions are arising out of sheer incompetence.
(And ultimately, if your company has a bunch of clowns on the job, it's the fault of the CEO and upper management. I'm sorry, but hiring a hundred construction managers at $500,000/year apiece is still a lot cheaper than a $1B cost overrun. It's a pretty stupid boss who doesn't understand that efficiency and cost saving start with hiring the best possible staff.)
So is it a situation where the good junior CEOs command a higher stock price than the idiot ones, because the good CEOs are more able to attract debt financing while the clowns are just expected to print more and more shares?
I dunno. As I said, it seemed an interesting question, and something Deloitte's chair could talk about at length.
In fact, since Deloitte is already marketing themselves vigourously as saviours for the mining industry, maybe they should add "finance consulting" to their stable of products. Maybe they simply need to explain to these companies how to finance without zeroing out the share price.
Cos after all, if the mining industry could only grab some of that crazy debt demand that's out there right now, that alone would be enough to reinvigorate what's essentially a patient on life support. CEOs might not have cared about dilution when they still had a path to production - but now they've all slit their own fucking throats by printing so much paper that they've essentially crippled themselves by reinforcing the expectation of -100% ROE.