P/E Leverage QuestionI was asked about this statement I made...
'Every additional $ rise in silver price goes directly to FR's EARNINGSat this point. That's the P/E leverage of the shares to the silverprice...and Ag is on a breakout run! FR's earnings will be as well'.
Could you explain how that is?
Thought that newbies might benefit from the answer...
Simple math...
Say X digs 10 million oz per year with costs of $5 per oz and and admin,exploration, maintenance costs of $13 per oz. right...so they spend $18for every oz they mine and they receive an average price of $19 per ozfor the silver.
They make $1 per oz times 10 million oz = $10 million.
If costs stay the same ($18 per oz), but average Ag price goes from $19 to $20 per oz,then X's profit rises to $20 - $18 = $2 per oz. They now make $20million. (double profit for a $1 rise in Ag)
If costs stay the same ($18 per oz), but average Ag price goes from $19 to $24 per oz,then X's profit rises to $24 - $18 = $6 per oz. They now make $60million. (six times the profit for a $6 rise in Ag)
That's the leverage U get in a junior producer. When Ag rises, profit doesn't rise proportionally to the Ag rise (in this case 20/19 or 24/19. Profit rises proportionally to difference between sales and costs!
That's why people buy juniors for fastest percentage profit increases. FR is currently in this very same ballpark as X above. FR may not keep expenses the same because they will increase exploration or buy properties to grow the company, but the principle remains. A $4 or $5 increase in Ag can make a 200 or 300 percent increase in profits. That's one reason why growing profitable juniors typically trade at very high price/earnings multiples in PM bull markets!.
lotus petals,
gildage