STOP PRESS – A lesson in IRRs and NPVs

By John Cornford

This is a follow-up piece to my article in the September issue of Master Investor Magazine.

The fact that Condor Gold (CNR) is putting up for sale its La India gold project in Nicaragua is a blow to sentiment in all miners – not just gold. On the surface, all-in cash costs looked reassuring at below $700/oz, but even a low cost doesn’t work if its life (7-9 years) is too short to recoup the capex. That short life feeds through to the key IRR (internal rate of return) measure (cover for a project loan) which at 16.4% (at a $1,100/oz POG – or 24.6% at $1,250) was too low, and while the payback of less than 4 years also looks good, it wasn’t good enough to attract a lender. All this left the company with the sole option of equity funding (on a $44 million market cap compared with a c.$120 million capex) which Condor has concluded would dilute shareholders too much.

What transpires will be an excellent guide to the state of sentiment among miners themselves, but the story illustrates the care needed when bandying around NPVs and IRRs, as well as other measures like cash costs. NPVs, as we have said, are as long as a piece of string, but even though the 5% discount Condor used (they say it is the norm for TSX juniors in Central America) boosted it to $66 million at $1,100/oz (it would be $124 million at $1,250/oz) it is still low compared with the capex. (For lack of space we only quote approx figures from a range of Condor’s scenarios). For mathematicians, the independent variables that dictate a project’s attractiveness to its owner’s shareholders (not the same as within the project itself) number more than six – not amenable to superficial analysis – which is why investors (and apparently miners too) get tripped up so often.

And, by the way, whatever ‘price-in-the-ground’ per gold ounce La India might fetch, this won’t be a guide for others. Again, the variables that dictate the price an acquirer would pay are just too many!