Banro Corp. fka BAA

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Cash Starved Mining Stocks Go Bang

https://www.bullionvault.com/gold-news/cash-mining-092720144

TGR: If companies have no more options, how long can they keep the lights on?

Richard Karn: Not long. The end of the quarter is September 30, and companies will have to disclose their financial situations. We expect a fresh wave of failures within the next six to eight weeks as more resource companies become insolvent.

We don't know what the catalyst will be, but for some time we've been expecting a final selling frenzy that will mark at least an intermediate-term bottom in the specialty metal sector.

Some assets are so mispriced that the market appears to be pricing in failure well before the fact. In fact, so sure is the market that a number of these companies will fail that they are trading for less than the cash they have on hand, literally placing no value whatsoever on their resource projects.

Final washouts often occur when markets are oversold, and the specialty metal sector remains oversold. The spark for the selloff could be another failed rights issue or poor uptake on an option scheme, either of which would reflect a fundamental lack of confidence in management.

It could be some unknown – perhaps an otherwise meaningless threshold event – that "spooks the herd," and shareholders just start selling everything indiscriminately to ensure they recover some of the money they've invested.

It could be that it finally dawns on investors that a number of these junior resource companies hold a lot of each other's stock, which they are carrying on their balance sheets at par as a liquid asset when in actuality those shares are so illiquid they could not be sold except at a steep discount – and could well crash the share price in any case.

As I said, we do not know what will spark the selloff – just that it is coming.

And when the selling has been exhausted, it will constitute at least an intermediate bottom in the specialty metal sector.

In the final shakeout, we are anticipating a number of mismanaged companies will deservedly go under – as, unfortunately, will some quite good companies – and some very good projects will be picked up very inexpensively.

And being able to pick up outstanding assets for very little money always marks the bottom of the cycle, because it increases the odds of success as the cycle turns up again.

TGR: What characteristics should investors look for to avoid these doomed ventures?

Richard Karn: At the moment I would avoid small-cap specialty metal companies that are carrying any debt, especially if they are not cash-flow positive. If or when their ability to service that debt is called into question, it will likely be too late to get out.

In addition to reading financial statements to get a grasp of their financial situations and those circumstances just mentioned, I would look at what managements are actively doing to help their long-suffering shareholders.

For example, have they reduced staff, cut expenditures and taken a cut in salary themselves or are they still maintaining a "resource boom" lifestyle at their shareholders' expense?

Most important, I would look for either positive cash flow from operations or sufficient cash on hand to sustain operations through to some pivotal event the market has been waiting for, such as commencing production, receiving project funding, permits or approvals, or receiving the results of a bankable feasibility study, etc. – something that will demonstrate management is delivering on its promises.