Strange Maths In The Market

If we throw aside all considerations of intermarket arbitrage in the stock against a rising price trend in TLT, we are seeing the market price in 1P/E on forward earnings @26.5¢.

Take the net outstanding shares, 284,717,355, multiply by .265 and you get some ~$75m.

Divide this ~$75m. by the last stated average realized price of ~$1750/oz. you get some ~43koz. This is near the stated production goal. Processing rates have since increased over Q2 fiscal 2012, and probably again in Q3 fiscal 2012.

So if processing rates have actually increased, and the mill is under full utilization, then we could be processing 700tpd. @10g/t. Processing rates should have been around ~500tpd. for Q2 fiscal 2012, and increased once again for Q3. (which is by now half over - results not forthcoming from Q2.)

Take the resulting yearly production of 82koz. which you divide from ~$75m., you get ~$915. This is very close to the stated 'everything, including the kitchen sink' required to keep the company growing and developing.

So take the Net Present Value of this rather fixed amount. This will be seen as an ultimately reliable number to work with, since a gold price of $900/oz. will never been seen again.

Over 10 years, the company would be producing a Net Present Value of $740m. in operations and development alone.( and this number is probably compounded over the years - remember we're not working with the average realized price) If you discount this number by 50%, you would still get over $500m. (Of course, with 1000tpd, @10g/t, the production rate is more like 120k oz. producing well over $1b. in Net Present Value over 10 years.)

This amount is by far and enough away to cover all of the company development plans and overcome the huge developmental deficit without issuing a single share. The market, however prefers to price in either a 1P/E on a forward earnings basis, or solely the Net Present Value of operations and development.

As it stands the volume of trades in TLT is still very strong, operation twist meaningfully guaranteeing that as much money flows as possible into the long dated end of the yield curve, rather than into shorter dated treasuries. This is why it makes such a compelling arbitrage trade to sell as much of GBN.V as possible, then bet it on the rising price trend in U.S. long dated bonds.

On a day such as yesterday with almost ~8m. units traded and a price of ~$117 U.S. per unit, this means that GBN.V shareholders are completely at a disadvantage on days with a surge into treasuries.

This is as good a demonstration I can make for the case for paying dividends. As long as the markets remain an arena for this kind of risk-averse arbitrage trade, then the avenue for returns must logically be for dividends.

As it stands, the gold price is holding a robust average price and the company can well afford to compound dividends quarter over quarter as they do operations and development costs. (my suggestion is 3¢ per share per quarter - any and all information pertaining to any impairment costs or investments is not provided, thus of course, investors will have great difficulty making an assessment)

Given that gold is adjusting for inflation and will eventually see an average of ~$2000/oz. for next year, this will no way impair whatever 'pie in the sky' production scenario the company has in mind. Dividends should be made part of the equation here, as it was during the depression, the economics certainly demand it.

In my opinion, the production rate out of Roy Lloyd is far too aggressive. The company is very likely to implement production eventually out of 5 mines simultaneously, each providing ore for the mill. During the depression, mines that paid divdends and operated for decades had miniscule processing rates of 200tpd. This should be the extraction rate from their various mines, rather than 350tpd.

Either Roy Lloyd is just so much small beer, or there really isn't much there in the first place. You have to wonder what an Elephant hunter like R. Netolitzky is doing with such a presumed make-work project. Either that, or their ability to convey the value of the mining project is seriously hampered. But you can be sure that all legal requirements have been met.

supersize: http://www.flickr.com/photos/11747277@N07/6353919225/sizes/l/in/photostream/

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-F6