Considerations In Leveraged Studies For Mineral Ventures (Chapter 21)

INTRODUCTION It is recognized that, for a variety of reasons, some companies in the mineral industry today are by no means cash-rich and, in fact, are reporting a growing proportion of long-term debt in their capital structures. A review of recent balance sheets of small, medium-size, and some larger companies, indicates that a fair number still have substantial positions in cash equivalents such as U.S. government issues and other short-term money market instruments. In part, this paper concerns itself with companies which have sufficient cash and equivalents and/or cash generation to internally finance mining projects or expansions but which, for some reason, choose to borrow funds. Misconceptions which appear to frequently underlie so-called "leveraging" decisions are explored in this paper. Also considered are those circumstances under which any company, including one that is cash-rich, should consider borrowing for a project in an amount beyond what would otherwise be necessary based upon its internal financing ability. I do not 'attempt to cover the raising of equity capital in public markets in this paper. OVERALL RETURN ON TOTAL POOL OF INVESTABLE CASH SHOULD INFLUENCE FINANCING DECISIONS If you approach an individual with an investment which can be financed from his savings, or by borrowing at a rate higher than he is earning on his savings, he will quickly tell you that to pay interest at a rate higher than he is earning would reduce his overall income. Assuming he is not currently considering any additional investment