Hi Jimmy P,
Here’s an exercise you and the other forum participants might want to engage in to gain some perspective and hopefully some peace of mind. You might want to go to theminingplay.com and find the introductory page. Scroll down to “2022 2nd half general discussions” dated Dec. 2022. You’ll see a picture of “the wizard”. Click on it. You’ll get the wizard’s (Kevin’s) page. Click on “activity”. This will get you to Kevin’s most recent posts. Kevin refers to himself as a “shareholder advocate” for all of us, and he has been just that. Nowadays he’s a big wig with Microsoft in their AI department and is a less frequent poster. He is the ex-ceo of Medinah and he and Maurizio are close friends. Kevin is plugged in, and Maurizio looks upon him as a valuable resource, as too should we.
If you hit the blue link, you’ll see the posts that kevin is responding to when he made his various posts. In kevin’s most recent post he says “front channel-it’s not permanent”. This was in response to a “back channel” comment made by baldy that the funders were getting a permanent piece of the action, even after 5 years, that was going to be very dilutional to the Auryn share structure.
Kevin is saying that this rumor is false, there is no permanency to the funder’s role after they either max out or the 5-year term lapses. They have 5 years to earn a maximum of $20 million for doing the funding. The rumor that this funding deal was going to heavily dilute Auryn’s share structure was also incorrect.
I communicated with Maurizio immediately after the funding PR came out and Maurizio stated, in no uncertain terms, that there are absolutely ZERO common shares involved in this deal, no permanency to this relationship, and ZERO dilution. You people need to figure out for yourselves why every time news comes out, somebody finds the need to put a negative spin on it without bothering to find out if what he is stating is true or not. Kevin has many times engaged the party starting these negative rumors typically asking why this party needs to constantly “cast a shadow” on everything Auryn does.
Kevin’s post before the once cited stated, “Dividends - that means earnings / free cash flow. ”. Here he is informing us that if the funders are going to get cash dividends, that means that Auryn is making money from operations. That would be a good thing. No profits, no cash dividends.
The deal structure suggests that the funders are betting heavily that there will be profits. The question arises as to what they know that we don’t know? They were given access to the “DETAILED CASH FLOW ANALYSES” that Auryn’s BOD recently completed and that was referenced in a recent quarterly update. We shareholders do not yet have access to these cash flow projections. Recall that Auryn recently suspended their mining (“directly out of the vein itself”) and stockpiling efforts in order to focus their financial and time resources on preparing this document and presenting it to the funders.
In kevin’s post that preceded that one, which is the most important post of all, he said, “By the way - if they’re able to get a 5x return (capped) in 5 years, think about what that means for us.”
What this suggests is that the funders are getting a percentage of the amount of cash being dividended out to us shareholders and conjointly to the funders. It also suggests that we shareholders are going to get the lion’s share. This means that there is going to be a “split” in our favor. Let’s say its 80-20. If the funders are going to hit their $20 million “cap”, that means that we shareholders would be sitting with $80 million worth of cash dividends in our jeans on the day they max out, if they were to max out. The Medinah shareholders would get a little less than 24% of that $80 million. Keep in mind that Medinah needs to retire its debt by selling some of its 16+ million shares of “AUMC” prior to the allocation/distribution process.
If the “split” were 90/10, then for the funders to max out, the Auryn/Medinah shareholders would have received $180 million. We don’t know what the “split” is and we don’t know if the funders will hit their “cap” or not. All we do know is that, clearly, the funders would have to be anticipating serious profits/cash dividends prior to signing off on a deal structure like this. But, again, we don’t know all of the details yet.
Maurizio, Isac and Mark designed a “WIN-WIN”. They essentially said, “You funders are going to make a fortune IF AND ONLY IF, the shareholders make a quadruple fortune”, in the case of an 80-20 split or a 9-fold fortune, in the case of a 90-10 “split”. The funders have been issued a gigantic INCENTIVE to make Auryn super-profitable as soon as possible. A well-designed deal will spread around plenty of INCENTIVE to all concerned.
If I were a funder and I looked at that hypothetical 80-20 split and the fact that Auryn only has 70 million shares outstanding, most of which are RESTRICTED FROM RESALE BY RULE 144, and if I got ZERO common shares out of the funding deal (perhaps after they pounded the table to get some common shares but failed to do so, we don’t know) I would say to myself, I’d sure like a portion of that 80% of the dividend cash pile in addition to my 20%. I’d also like to get some exposure to the share price appreciation that might be associated with Auryn being able to declare and distribute generous cash dividends.
Why is this? It’s because if Auryn finds itself in a position to declare and distribute, let’s say, $100 million in cash dividends, then they must have locked in a minimum of, let’s say, $120 million in AFTER TAX PROFITS by then. Some profits would obviously be kept in house as retained earnings and probably put into the project to make it even more profitable. The first thing I’d spend retained earnings on would be a “jumbo” drill rig which would probably double the existing production rate.
LET’S DO SOME MATH
If, hypothetically, Auryn had profits of $120 million over 5 years, this would represent an average of $24 million per year. If Auryn made $24 million in a year, this represents 34-cents per share in earnings ($24 million divided by only 70 million shares). In the mining sector, companies trade at an average “multiple” of 30.21 times their EPS. This is from a recent survey done by the Stern School of Business at NYU. You do the math (30.21 times $0.34) is where Auryn SHOULD THEORETICALLY BE TRADING in this type of scenario. If the funders hit their max in less than 5 years, then the profits would have been even greater than that $24 million per year figure. But who is to say that the funders are going to hit their “cap”? Nobody is saying this. Counterintuitively, the Medinah and Auryn shareholders would be hoping that the funders do indeed max out. Imagine that, business partners rooting for their partners to be successful.
The funders are smart financial people. They can see that the big bucks (and the quick bucks) in this type of scenario are going to be made IN THE MARKET and not just via cash dividends. That 70 million shares outstanding figure is Auryn’s ace up their sleeve. However, it means absolutely nothing UNTIL production commences and profits are generated. Up until that time, Auryn would be looked upon by most as just one of 2,500 other junior mineral explorers/developers worldwide trying to make a discovery and get into production. As far as getting an extremely high-grade gold project into production at a time when the price of gold is near all-time-highs, well that adds a little sizzle to the equation.
On Aug. 10,2023, Kevin posted this:
“Dang. Too bad this wasn’t suitable for gravimetric processing. Goldlogic’s website and approach looks like it would have been a major win AT 2 OUNCES PER TONNE (my emphasis). Oh well. Now they’ll either finance and build the mill quickly, or bootstrap from production and take a couple of years. Either way- hitting the DL, achieving ventilation, and starting small scale production is a win. It should cash flow itself form here, even if it is slow”.
Note the “2 ounces per tonne” grade referenced. This is 62 grams per tonne. That is some extremely high-grade ore that Auryn could have been feeding into whatever type of gravity concentration plant that GoldLogic was insisting on Auryn using.
As it turns out, the DL2 Vein ore present at level 3, responds much better to the froth flotation process than to whatever type of gravity concentration device GoldLogic had in mind. That’s fine, they’re both INEXPENSIVE methodologies to recover the gold (in addition to the silver and copper) in the ore and at the same time remove impurities. The average cost worldwide for froth flotation is only $10 per tonne and that includes CAPEX and OPEX (operating costs). The average froth flotation facility pays for itself in 158 days.
Kevin also referenced, “hitting the DL, achieving ventilation, and starting small scale production is a win.” They didn’t just “hit the DL”, THEY SUCCESSFULLY INTERSECTED THE DL2 VEIN AND THE FIRST 2 GROUPINGS OF “CHANNEL SAMPLES” REVEALED GRADES OF 164 GPT GOLD AND 150 GPT GOLD. This was later corroborated by a smelting test OF THE VERY SAME ORE FOUND AT THE INTERSECTION SITE, done by the Plenge Lab in Lima, Peru that revealed 128 gpt gold NOT COUNTING THE SILVER AND COPPER CONTRIBUTIONS. Again, at a time when the price of gold is trading near or at all-time-highs.
Where Kevin referenced, “achieving ventilation”, this refers to Auryn’s successful intersection of the 7 “ventilation raises” and 5 “ventilation chimneys” that the artisanal miners at the ADL had constructed over 3 decades. With this new “ventilation/safety egress system” in operation, Auryn can now safely exploit the various sub levels underneath the current “Level 3” and thereby rapidly ramp up their production efforts. Mining investors want the potential for “DYNAMIC GROWTH PROFILES”. When these are present, the share prices of the miners with them tend to get assigned richer “multiples” of EARNINGS PER SHARE.
As you can see from Kevin’s postings, Auryn’s options are to finance the FF plant and build the mill QUICKLY OR ship the ore to Enami for a couple of years, accumulate some cash, and pay for the plant out of profits. With the current price of gold at $2,400 per ounce, you could see why FINANCING THE PLANT might make good sense because you could generate a lot of profits in that EXTRA 2 years of production associated with doing a financing.
The reality is that there’s no guarantee that $2,400 gold will last forever. Recall the approximately $5,000 per tonne “DIFFERENTIAL” between what Enami was willing to pay Auryn for “DIRECT SHIPPING” their ore to the Enami smelter (about 70 gpt “gold equivalent”) and what the Plenge smelter test results revealed (128 gpt just for the gold). Leaving that kind of money “on the table” would be a difficult pill to swallow. Why Enami would only pay 57 gpt gold (plus another 13 gpt “gold equivalent” for the silver and copper) for 128 gpt gold is a bit of a head-scratcher but it is what it is.
To most miners, Enami being willing to pay 70 gpt “gold equivalent” for their ore shipped directly to the Enami smelter (without any pre-processing), would be a godsend. For some reason, or perhaps for 5,000 reasons, the Auryn BOD said “no, thank you, we’ll do our own ore processing on-site” and sell a highly-enriched “float concentrate” to the highest bidder.
With the Enami option on the table, you’d have to think that it would take a pretty good funding offer to say “no thanks” to the Enami offer, but that $5,000 differential plus 2 extra years without an FF plant seemed to make the difference. It will be interesting to get a glimpse at that “DETAILED CASH FLOW ANALYSIS” that the funders got a view of.
Characterizing a deal structured like this as Auryn paying $20 million for a $4 million loan is absurd, without knowing all of the details. Again, we need to wait for Auryn’s detailed explanation of the exact terms of the deal. Accusing management of dealing in a “non-arm’s length” fashion (self-dealing) because of the tiny portion of the terms revealed to us, is equally absurd.
Obviously, management can’t reveal the full terms of the deal until it closes. Imagine if the details were revealed prior to closing, and the Auryn share price took off, and then there was a hiccup somewhere and Auryn had to retract the press release. Management can’t risk that. Look at the curriculum vitae of the 2 new BOD appointees. Do you really think they’d approve of a “not at arm’s length deal” on their watch?
The Medinah and Auryn shareholders get 2 separate kicks at the can i.e. CASH DIVIDENDS AND SHARE PRICE APPRECIATION. These 2 are linked. The generosity of the cash dividends will depend on profits. The level of profits, in turn, will be determined mainly by GRADE, the efficiency of the FF plant, the price of gold, and the ALL IN SUSTAINING COST (AISC) per ounce of gold produced. By definition, the AISC per ounce produced, for extremely high-grade ore is extremely low. This means that the MARGINAL PROFITS, per ounce produced, are extremely high, relative to average grade mining operations.
The amount of share price appreciation will be partly determined by the level of generosity of the cash dividends, as a percentage of the share price.
It doesn’t matter if you’re selling “widgets” or an extremely high-grade “float concentrate” containing gold, silver and copper. A situation like this might appeal to a lot more than mining investors. In the U.S., “qualified cash dividends” are treated very favorably by the IRS. What investors want to concentrate on is “after tax income”. Note that the funders opted to be paid via “cash dividends” for the role they played, not via principal and interest.
From my point of view, the key point in regards to this funding is no new common Auryn shares being issued. As Maurizio has promised in the past, that 70 million shares outstanding figure is not going anywhere. Even a moderate level of earnings can generate a robust EARNINGS PER SHARE figure. In this case, think of EARNINGS PER SHARE as potential CASH DIVIDENDS PER SHARE.
Maurizio has built a nice network of “dominos” that just need the lead domino (officially going into extremely high-grade “float concentrate” production) to be toppled. Getting SERNAGEOMIN to sign off on the new “ventilation/safety egress system” is a wonderful accomplishment. Now Auryn is in a position to RAPIDLY RAMP UP PRODUCTION LEVELS by simply developing the various sub levels under level 3. Until the FF plant is built, however, it just stands there as a nice-looking domino.
The same is true of the 70 million shares outstanding figure. It represents a wonderful accomplishment and a nice-looking domino but, again, until the lead domino is toppled (going into production), it just stands there unnoticed by anybody. When you’ve got some “EARNINGS” to put above that tiny number of “SHARES” figure in the denominator of the EARNINGS PER SHARE fraction, then people will take notice. The same holds true for the price of gold being at all-time-highs. Unless you’re producing some gold, it doesn’t matter. It’s just another good-looking domino.
The GRADES of the ore to be mined represents a gigantic domino. If your grades are in the top 5 percentile of all deposits, then your AISC will likely be in the bottom 5 percentile. Therefore, your MARGINAL PROFITS will be in the top 5 percentile. But again, nobody cares until those fancy grades get MONETIZED. Is the funding, permitting and construction of this froth flotation plant a pretty big deal? Ummmm, I kind of think so.
