Net Present Value vs. Discount Rate And Gold Companies

source: http://hspm.sph.sc.edu/COURSES/ECON/invest/invest.html

We have something called the Net Present Value of companies, where the discount rate forms the x-axis(horizontal axis) and the NPV of the company is on the Y-axis. (vertical axis) Golden Band management has calculated this NPV of the project and presented it many times.

The higher the discount rate, the lower the NPV of the company, but you would be well into the 10% range or more off to the right on the chart, before companies start to operate in the red. This one shows up to a theoretical 100% discount rate. This would be for any company within the economy. I believe the scale to be incorrect, so you could assume just as easily to go from zero to ten.

The lower the discount rate, the higher the value of the company until you get to near zero discount rate. Note that something very strange occurs the closer you get to zero on the curve. Your NPV of your project declines to zero. This goes for any company in the economy, as this is how it works. There is ONE notable exception to this rule.

When you get to negative discount rate, something strange occurs. The NPV of your business experiences losses from all portions of the business, because either costs surge, or supply is not available, or everything that’s priced in currency experiences difficulties on pricing. What’s more, refinancing against the discount rate becomes a real problem, so all of the costs have to be borne out of cash flow. If your cash flow is dependant on credit, then refinancing suddenly gets cut off.

So there’s a limit to what you can value your company at, given a near-zero discount rate. This is basically where we are at this point in time.

The great exception to all of this are the gold miners. Gold miners have as their asset value the gold contained in the ground. And their NPV is dependent on a commodity which is used as money that performs very strongly as a store of value in low interest rate environments. (or interest rate environments which are at either extreme of the discount rate axis.)

So their project value, or NET PRESENT VALUE skyrockets once the discount rate goes near zero or into the negative because gold, as a store of value, does not lose its value, it actually increases exponentially the more into the negative the discount rate goes. (Similarly, their NPV would skyrocket with higher interest rates as well the higher the discount rate. )

Under this NET PRESENT VALUE curve, the value of a gold company is not being presented correctly, that the Net Present Value of gold miners should theoretically be the INVERSE of the NPV vs. the Discount Rate curve.

Gold companies would not be able to operate in the black while interest rates are declining from right to left, until you get to near zero rates, where we are now. And its true, gold prices had fallen so far during this interval over the last 30 years, that even the biggest companies with massive hedge books were struggling. The NPV of a gold miner would zoom up in the same way that a company net present value should collapse.

An IRR with 100%+? Nonsense. The company NPV was not calculated correctly.

Conclusion: Golden Band Resources has made a serious error in calculating the Net Present Value of the company, since gold miners' Net Present Value curve is actually the INVERSE of the NPV vs. Discount rate.

$IRX

Now, all of the naked shorters in the stock, and there is a sizeable posse of gamblers on the short side, are trading GBN.V shares against declines or rises in the discount rate. One prominent sell-side broker weighs very heavily on the stock when discount rates rise in the U.S., but also buys relentlessly when the discount rate declines. There is, however, a crowd of sell-side brokers weighing on the stock when the money market rate in Canada rises.

While I can see a small rise in the $IRX for the next week or so(or not), the Central Bank Of Canada is about to make a policy rate decision, which governs money-market rates. Since there is probably going to be a bull market in the three-month treasury bill in Canada, rates will eventually recede, though for the moment, I assume that rates will remain unchanged until the next policy rate adjustment.

supersize: http://www.flickr.com/photos/11747277@N07/4801206425/sizes/l/

stockcharts.com

Marker Trading

So the largest sell-side account who sells inumerable shares on rises in the discount rate, seems to have a very large, leveraged position against GBN.V shares. He really goes out of his way to see a share price in decline. Moreover, GBN.V news releases co-incide with rises in the discount rate or corrections in the gold price almost as if they are getting their marching orders from the sell-side broker, if only to favour the downside of the share price. But I have pointed out that company insiders may be the holders of a large equity swaps position, and thus play along most obligingly.

Now, if somebody is holding equity swaps and looking for a decline in the shares, then some counterparty would be holding the leverage held against the position. You can't hold it in escrow and not allow the price of the Credit Derivative to trade if you've issued swaps against GBN.V company failure. That would be a breach of securities' law. Netolitzky holding naked equity swaps against the failure of his own company? Doesn't seem like him.

To give you an idea of how large a position this marker trader has bet on the decline of GBN.V shares, the marker trading record shows that he will dump hundreds of thousands or millions of shares at any given time, trading hundreds of thousands of dollars a day, day after day if necessary to control the price. (look up 'Previous Day's Marker Trading' on the insider report)

This is a very big position for so small a stock. Where is the counterparty? Who trades the counterparty?

supersize: http://www.flickr.com/photos/11747277@N07/4801889522/

supersize: http://www.flickr.com/photos/11747277@N07/4801870818/sizes/l/

Not Exactly Something You Want To See On The Open

supersize: http://www.flickr.com/photos/11747277@N07/4801893232/sizes/l/

'Pollitt' was selling shares at the open.

Things Are About To Get Darker

Alpha to launch "dark liquidity" facility

http://ca.reuters.com/article/businessNews/idCATRE66F2YJ20100716

An article of interest on Bactech:

http://www.miningweekly.com/article/bactech-plans-to-raise-c2m-including-1m-from-yamana-2010-07-15

An article Of Interest On Patek Phillipe

http://www.bloomberg.com/news/2010-07-07/patek-philippe-chairman-says-gold-price-is-big-threat-to-luxury-industry.html

Gold Lease Rates

Gold lease rates have been incrementally rising against a backdrop of declining short term rates, which is always price positive for gold. What that indicates is a large amount of gold leases are being sold into the market as physical gold.

source: http://www.kitco.com/charts/popup/au0030lr.html

-F6