Hamilton's E-Wave Analysis

CUA, CuOro one more time.

 CUA nov 17 2012

Counting waves is an art, if you are at a complete loss just count the total and if it does not add up to 5 + X x 4 it is probable not complete. We are at 8, not 9 so there may be another low to come. We shall see.

Just read an analyst opinion that basically argued that since the stock is trading below the cash on hand per share this is a no-brainer, a buy of course as 28cents is below 30 cents (10 mln. cash, 30 mln shares, roughly). Let’ look at the accounting;

This is the balance sheet as per Aug. 31 of this year. Notice that cash on hand dropped from 18 mln. to 10 mln., a drop of $8,347,972. But this is an exploration company and under GAAP or IFRS rules they are allowed to “capitalize” just about all expenses till such time that the investment proves to be impaired. This is explained in the notes;

 

The Company is a junior mineral exploration company currently engaged in the acquisition and exploration of precious metals on mineral properties located in Colombia. On the basis of information to date, the Company has not yet determined whether these properties contain economically recoverable ore reserves.  The underlying value of the mineral resource interests is entirely dependent on the existence of economically recoverable reserves, the ability of the Company to obtain the  necessary financing to  complete  development  and  upon future profitable production.  Mineral resource interests represent costs incurred to date, less amounts amortized and/or written off, and do not necessarily represent present or future values.

Essentially you can keep digging till the funds run out without seriously affecting the shareholder’ equity. The funds are simple moved from cash to “exploration and evaluation” assets, which are valued as follows;

Exploration and Evaluation Assets

The Company follows the practice of capitalizing all costs relating to the acquisition of, exploration for and development of mineral properties and crediting all proceeds received against the cost of the related properties.  Such costs include, but are not  exclusive to, geological, geophysical studies, exploratory drilling  and sampling. At such time as commercial production commences, these costs will be charged to operations on a unit-of-production method based on proven and probable reserves. The aggregate costs related to abandoned mineral properties are charged to operations at the time of any abandonment, or when it has been determined that there is evidence of a permanent impairment.  An impairment charge relating to a mineral property is subsequently reversed when new exploration results or actual or potential proceeds on sale or farmout of the property result in a revised estimate of the recoverable amount, but only to the extent that this does not exceed the original carrying value of the property that would have resulted if no impairment had been recognized.

This balance sheet was as of Aug. 31. Nearly three months have passed. Given a burn rate of about one million a month cash should now be at about 7 mln. or 23 cents a share. Using fully diluted 42 million shares that would work out to 17 cents a share. But even then these numbers do not mean a thing if the company cannot complete the project or it is found to be unprofitable for future production. We will know soon when the next financials come out and certainly in 7 months when all cash is gone.

Then there is that often overlooked category of events after the fact;

12. Events after the Reporting Period

(a) On September 19, 2012 the Company amended the exercise price of 36,000 share options from $1.50 per share to $0.52 per share.
(b) In October 2012 the Company, having failed to reach an agreement with the underlying owner of the Barranco Project, to amend the option terms, determined to terminate the Barranco Option.

Sometimes it pays to dig into the details but few people actually do. It can be so tedious and also there are still armies of analysts and brokers that are amazed everyday that somehow the assets always equal the liabilities. By the way, there is nothing wrong with these accounting methods. Boeing, for one, uses essentially the same method for accounting for it’ aircraft. Nevertheless it pays to understand what is going on.