On Seeking Alpha this week ("Cash is King?"), David Zurbuchen noted,
Due to the simultaneous reduction in market liquidity and commodity prices, metal exploration and mining companies that need to raise funds to finance their activities are facing the prospect of substantial share dilution or the possibility of losing their property interests if they cannot meet contractual spending commitments. We believe there has to be a very compelling reason to own cash-strapped companies in this market.
Conversely, companies that are not in need of financing have an important margin of safety in the current environment.
One example of a company that deserves closer examination is U.S. Energy Corp. (USEG). The company has a market capitalization of about $54 million while holding $70 million in cash, short-term investments, and marketable securities. With debt of $14 million, this means the company itself is being valued by the market at negative $20 million despite the fact that it holds an interest in several prospective projects and other potential royalty streams. Specifically, the market is giving less than zero value for
1. the company’s Lucky Jack molybdenum project where Thompson Creek Metals Company Inc. (TC) will have the ability to earn up to a 75% interest by spending up to $400 million,
2. various oil and gas interests,
3. a 4% Net Profits Royalty on the Green Mountain uranium property in Wyoming owned and operated by Rio Tinto (RTP),
4. up to $40 million in payments from Uranium One starting in 2010, and
5. a real-estate project which could conservatively net $15 million to the company during 2008.
Short of being a very profitable producer (which the market doesn’t seem to like either), what else can a mining equity offer?
Zurbuchen is probably understating the cash USEG has on hand now (e.g., he doesn't take into account the funds from the recent sale of most of its stake in Sutter Gold Mining), but what he writes is otherwise consistent with what I've written in previous posts on the company.
Update: Commenter Albert notes that Zurbuchen's arithmetic was a little off above; using Zurbuchen's data, the enterprise value should have been negative $2 million and not negative $20 million.