re: Ann: EVG commences construction on Las La...
Gday Alchemist,
On one level it is hard to disagree with what you are saying ---- it could be the topic of a spirited debate with both the negative and affirmative having a good case to put.
Steve Saville (TSI Report) in one of his latest newsletters suggests the the development and early production stage of a mining companies life are when a company is most at risk --- “ whether reality matches the conclusions of its Feasibility Study” --- whether the actual grades, widths, locations and metallurgy of the deposit line up with the assumptions made.
These sentiments expressed by Saville are backed by the experiences of many start up companies – without going to any effort BDG,TAM and PSV come to mind ---- I am sure other posters could add many companies to this list ---- NGF would be in deep trouble if Lehman Brothers hadn't gone belly up.
It is in these cases where forward sales are indeed “deadly weapons of mass destruction” --- BDG would be long gone if they had forward sold.
When a company sells short there is a chance they can lock in profits and can even make a profit without even producing --- in the event of a falling gold price.
The problem from a risk point of view is that the downside of a forward sale is far greater than the upside – or to put it another way --- theoretically the upside of the gold price is unlimited and the downside is of course limited.
I understand that Macquarie Bank demand the forward sale ---- why they do so is beyond my comprehension ---- Mac Bank where also the bankers to CRS --- whose forward sales combined with production and development issues led to the companies eventual demise.
We are stuck with the derivative scenario --- so the question is how to best handle it --- I don't know why buying put options hasn't been an option ---- but I have been there.
So we are left with a timing and luck.
We are lucky EVG didn't get into production as planned in late 2008 (only from a gold price point of view of course) --- if it had have we could be stuck with a forward sales of 50% of production at US$ prices far lower than today.
EVG are a very cheap stock ---- partly for the reasons discussed above ---- if development and early production go relatively smoothly --- they will be worth far in excess of 9.5 cents ---- irrespective of the position of the hedge book.
If we have a development/production issue ---- and the gold price moves against our eventual derivative position --- look out below.
It is a difficult situation --- If they do have operating costs of circa $325 US --- we can make money at any price.
My gut feel is to try and sell spot ---- if the gold price has a serious spike ---- then lock in some profits --- but 50% of projected production before production starts --- is a fairly brave call.
Time will tell of course – it would be too easy if we knew for sure --- we could argue the point till the cows come home - for all our sakes ---- lets hope on a good outcome.
We have some pretty good posters on the EVG thread now.
Regards,
cy7
EVG Price at posting:
9.5¢ Sentiment: None Disclosure: Held
