Metanor Resources (MTO.V) has released its financial statements for the first quarter of calendar year 2014, and these results were actually better than we expected. The main problem in the mining sector is that most investors just look at the net profit of a company, and it’s normal to be disappointed when you see Metanor’s bottom line shows a net loss of C$1.9M. However, investors should read the entire statement, and when you do so, you’ll see that the company recorded a C$4.6M depreciation charge, which as you know, is a non-cash charge. That’s why a cash flow statement of a mining company offers a better idea of what’s really going on.
So when you look at Metanor’s cash flow statement, you see that Metanor actually generated an operating cash flow of C$2.2M (before taking the working capital changes into account) and spent only C$375,000 on sustaining capital expenditures, resulting in a theoretical free cash flow of approximately C$1.8M. However, Metanor also spent C$2.2M on exploration, but it’s not really fair to deduct those costs from the operating cash flow as Metanor had to spent the flow-through money it has raised. Once the flow-through funds have been used, we expect the exploration expenses to decrease substantially so Metanor can rebuild its cash position.
As of at the end of March of this year, Metanor still had a working capital deficit of roughly C$5.9M, which should be reduced to less than C$4M as Metanor recently raised C$2.5M in a hard-dollar financing. We would prefer it if Metanor would focus on extending the mine life at Bachelor Lake and use the flow through funds exclusively for the Bachelor project. This should increase the mine life at Bachelor Lake which will likely re-value the company if an extended mine life could be confirmed and allow the company to convert its working capital deficit into a healthy cash position.
Disclosure: The author holds a long position in Metanor Resources. Metanor is a sponsor of the website. Please see our disclaimer for current positions.
