By Otto Rock
It’s important* to understand what just happened in this NR today that announced Gold Fields are buying 50% of Asanko Gold’s (AKG) stuff in Africa, (we quote, “…the Asanko Gold Mine (the “AGM”) and all associated properties in Ghana.”). And because your humble scribe is an inveterate nerd and numberfreak, we’ll do it this way:
Back when AKG was a U$4 stock, even when it was a U$3.50 stock at the start of 2017, the company was running a price/book of over 1X which, speaking roughly, meant that the market believed it would create wealth from its overall business. That bit works like this:
- You decide to do capitalism
- You invest one hundred dollars and buy stuff (your assets). Let’s say you buy a thousand pencils.
- You then work hard and turn that one hundred dollars of assets into two hundred dollars of cash. Let’s say you sell each pencil for 20c.
Now that doesn’t mean you get a price/book ratio of 2X, but when you start the business with a thousand pencils and a business plan, somebody else will recognize that you’re onto a winner and mark you up at over 1X (depends on how long you need to sell the pencils….let’s spitball 1.5X). That’s what the P/Bv ratio does and it’s why it matters when you’re checking a companies fundies.
Therefore, in simple but very accurate terms, what the management at AKG has done to today is say to the world “We are shit at capitalism. We bought something for $299m and sold it for $165m and now we want you to congratulate us for the deal with Gold Fields.” Of course, they use different words to present the same concept, their choice being this:
“This transaction presents a unique opportunity for Asanko to de-risk its future production targets whilst at the same time eliminating corporate debt. With a healthy balance sheet and robust operational cash flows, together with a strong technical endorsement, our Life of Mine plan is assured,” said Asanko President and CEO, Peter Breese.
And that, ladies and gentlemen, covers a lot of the things that are so wrong with the mining business today and it’s why the real world of money avoids these clownshow stocks like the plague. Asanko is run by complete idiots.
*Well, not quite as important as world peace, looking after your health, etc. But you know what I mean.