Would you like fries with that? Or would you rather have a mine?
Not questions that normally go together. But junior miners wondering why capital is so scarce these days could do worse than take a look sideways at the restaurant sector.
The most iconic of the high street brands is McDonald’s, so let’s take that as a representative sample. According to the current documentation, the cost of a McDonald’s restaurant for franchisees in the UK runs at between £125,000 and £325,000.
In addition, there’s a couple of smaller one-off fees, and then some rent, servicing and marketing costs which are taken off the top-line, much like a gross smelter royalty would be.
After that, it’s on into the profits.
And here’s where it gets interesting.
For an outlay likely to clock in at around US$500,000, your McDonald’s restaurant is likely to deliver profits of between US$150,000 to US$300,000 per year, or more.
And there’s no noticeable ramp-up period.
So, do the maths. Life of project? – probably indefinite, but say seven ears. Payback? – good, less than a year. Internal rate of return? – exceptional, upwards of 50 per cent. Political risk? – occasional anti-capitalist rioters may smash a window from time to time.
Now, compare that to the costs involved with starting up a small mine. Capital outlay? - likely to be (say) US$20 million at the very least. Payback? – could be less than two years, but only in exceptional cases. IRR? – 30 per cent would be nice enough in this day and age, what with falling commodity prices and rising inflation.
Political risk? - outright sequestration in certain specific jurisdictions (Venezuela, Bolivia), partial sequestration in others (Zimbabwe, Tanzania), wider political unrest (South Africa), and corruption (take your pick – Russia, South Africa, DRC).
When commodity prices are on a relentless upward tear, the case for parking money in junior miners just about makes sense as the value of the equity itself will rise. But when they’re not, it won’t.
And in those circumstances, investors will invariably plump for a burger with fries unless mining company chiefs present a compelling case.
