ARTICLE 10B (format corrected)
ARTICLE 10B - WHY IS THERE SUCH A HUGE DISCREPANCY ON VALUATION OF OTSO SINCE 2018 UNTIL TODAY?
Past behaviour of a stock price in relation to information fed to it, is rich in its memory concerning its future behaviour. Markets future discount valuation of a stock and thus its price. This memory does not change if there is no new material information that the Market would indeed want to provide the stock a new valuation point. In other words if you don’t price-out the information that markets have already priced-in, the markets will not have anything to benchmark whilst pricing-in new valuation coordinates. Future discounting could either be priced-in to fetch a higher valuation or a lower valuation basis new information coordinates.
Whilst in our Article 10A, our 5 facts on Laiva valuation against cash liquidity available in company over a 10 year period severely contradicts the visible non-performance of the stock between 2018-2020, this article would devote some time on why this severe contradiction. Lets place the contradiction again before we move on.
With 8MCAD in 2016, Laiva was valued at 93MCAD
With 30 000CAD in 2017, Laiva was valued at 25MCAD
With 21MCAD in 2018-19, Laiva was valued between 13MCAD-25MCAD (as oppose to 30 000CAD in 2017 with 25MCAD as the valuation) and in 2020, the asset is currently valued at 13MCAD (as oppose to 8MCAD in 2016 with 93MCAD as the valuation). The deviation is indeed very huge and calls out for urgent attention by shareholders.
Key Reasons:
BOTTOMLINE 1:
DRILLING RESULTS WILL HAVE ZERO BEARING ON VALUATIONS. YOU GIVE MORE OF THE SAME TO THE MARKET. YOU GET MORE OF THE SAME FROM THE MARKET.
Valuations will not go past range 0,055-0,09. There is no guidance by the Board and Management towards providing any new information to the Markets . Markets does NOT consider drilling results as NEW information as past behaviour of the stock price has priced-in all drilling related data that it now considers any drilling data to be cash-burn rather than new guidance on valuation coordinates. This started in 2018. Though the scope of the article is not to dive into how 17M was deployed, it is a very important parameter to study to understand market’s verdict and decision making points on valuation.
Inference: Since the complexity in the Orebody is known to the markets and throughput inefficiency in the mill being dependent on the quality of Ore is also known to the market, markets will not change valuation parameters in its memory unless there is new information on the ORE and the Mill that markets have not priced in. The Market’s data analytics on Quality of Ore and Throughput in the Mill are very strong, almost such that REVISITING MORE OF THE SAME WILL ONLY RESULT IN MORE OF THE SAME ON THE VALUATION FRONT. Thus more of the same will compel market to absorb more the fact that this would eventually lead to cash-burn, thus eventual bankruptcy OR very heavy dilution cost to existing shareholders (typically at the cost of toxic lending) at zero to negative benefit to shareholder and hence very depressed valuations of the type CAD 0,06 Vs Gold price of USD 2000. The seeds of such a depressed valuation has its foundation in the way the company was run between 2018-2019 before New Management and Board took over.
BOTTOMLINE 2:
MARKETS HAVE PRICED IN A LOT MORE THAN THE BOARD & MGMT MIGHT KNOW.
Markets are a highly intelligent system. Markets are supreme. You cannot fool the markets. Never! It could be possible that critical material based information important for the markets to price in new information on valuation has not been made transparent to the shareholders. In such a case for the unqualified who do not understand how equity capital markets work, it should come as a surprise that the Markets have already priced such info not shared before the provider of such info had such data with him. So supreme are markets. Make no mistake. In such cases then Market compels the particpants responsible for such info to make it public voluntarily or in a forced manner. Such assymetricity in material information transparency produces a highly non-linear impact on valuations such as CAD 0,06 per share Vs USD 2000 gold price.
BOTTOMLINE 3:
THE VALUATION IMPACT OF CORPORATE GOVERNANCE ON LIQUIDITY (This is a branch off of Bottomline 2)
Grounded in agency theory, agents being Board & Management of Laiva, efficient governance brings in transparency in financial and operational metrics and ineffcient governance brings in non-transparency in financial and operational metrics. Effective Governance reduces adverse selection and Ineffective Governance increases adverse selection. If Governance is non-transparent an increase in adverse selection brings in a situation where typically sellers would have more information than buyers about some material aspect of Laiva. This becomes then assymetric information which is taken advantage of by the seller at the cost of unsuspecting and cajoled buyers.
If adverse selection problems are lower in risk, traders contribute to more liquidity to stocks of well-governed firms. If Governance quality in Laiva increases corresponding underlining liquidity also significantly improves. Typically a rise in governance quality by one standard deviation improves the liquidity ratio by 26.19%. Coz of extremely thin trading where sellers have MORE information than buyers, there is non-linearity in information distribution which operates on assymetricity thus pumping down stock price. This without any surprise would provide (0,06 Vs. 2000) scenario.
The intersection of Bottomline 1, 2 & 3 has a massive impact on abnormal and unexplained valuation tilting on downside risks of the sort we see today (0,06 Vs 2000).