Send an Email
Favourite Sites
  • Whitney Tilson
  • Recommended Booklist

  • Favourite Blogs
  • Calculated Risk
  • Reflections on Value Investing
  • "The market can remain irrational longer than you can remain solvent" - John Maynard Keynes

    Saturday, October 25, 2008


    Purchasing Power Parity Valuation for the Australian Dollar

    With the recent, incredible, drop in the Australian dollar foreign stocks look a lot more expensive based on purchases with AUD. It's very likely that the AUD will eventually appreciate against the USD and lots of other currencies but any investment in those other currencies has an automatic headwind once that happens.

    I used the Economist Big Mac Index as published in July 2008 and updated it with the most recent exchange rates. The economist calculated that the AUD was 6% undervalued in July 2008 (at 0.97), that has now moved to 40% undervalued (at 0.62). In July there were 14 major currencies that were cheaper than the AUD, now there are only 7.The following countires fell off the list, even though they are still undervalued, just the AUD fell further

    Of the major currencies that I might invest in Those countires with even weaker, unpegged, currencies than the AUD are not exactly the most desireable investment locations!

    For example imaging buying a canadian company for $2 CAD with $2.51 AUD at today's exchange rates. If that company rises to $20 CAD but exchange rates move to purchasing power parity then that $20 CAD becomes $16.8 AUD. That is a 6.7 times return instead of the 10 times return in Canadian dollars.

    Conversely buying a Hong Kong company at $2 HKD for 41c AUD today would be $5.18 AUD if the company rose to $20 HKD and the currencies moved to PPP. A 13 times return in AUD for only a 10 times return in HKD. Unfortunately the HKD (and largely the Chinese RMB) is still pegged to the USD so it's likely to be weak in the medium term until the pegged is eventually dropped.

    The bottom line is that Australian companies with expenses in AUD have a 20%-40% appreciation advantage over other major exchanges right now. This point is unlikely to be lost on international investors for long and makes a strong case for AUD denominated accounts to remain local.

    Strathmore Groundhog Day

    See my previous posts on STM here, here and here.

    It is worth looking at the previous, savage, bear market in Strathmore's stock to understand why things will work out ok this time around. Yahoo has STM weekly price records back to late 1997. It started trading at about $3.85 in late '97.

    In March 2001 it dropped below 30c for the first time. It then bounced around reaching a low of 6c and didn't definitively break back up above 30c until October 2003. That is about 2.5 years.

    It rose to $5.18 in May 2007 and first broke 30c again in October 2008. If history repeats we could go nowhere for 2.5 years and we'd be looking at 2011 before Strathmore's stock price recovers. Though keep on reading to see why I don't think it will even take that long.

    March 2001
    In March 2001 Uranium was trading around $7 per pound. At that time STM "elected to sharply reduce its expenditures and conserve cash. The Company eliminated all exploration and pared back on the non-essential properties decreasing the number of claims held ". As of December 31st 2001 they had $119,000 cash and equivalents. They periodically sold shares to raise a few hundred thousand dollars primarily to stay in business. In the year 2000 the loss for they year was $400,000.

    By the end of 2002 they had $11,784 in cash and equivalents and used $213,735 in cash for the whole year 2002. By this point there were about 8M shares outstanding.

    By June 30th, 2003 they had $5,308 in cash and equivalents and were spending annuazlied about $300,000 a year.

    October 2008
    In October 2008 STM broke down below 30c. Spot uranium is down to $44 but according to Resource Capital Research's September 2008 review, long term contracts are still priced around $80. The spot prices in the low $40's are "driven by the emergence of distressed sellers and others driven by cash flow requirements according to TradeTech."

    This time around STM has around $11M in cash and equivalents. They may have a current burn rate of up to $800,000 a month to meet current exploration commitments.

    Future Budgets
    The CRITICAL question is what comes next. It seems obvious that once cash gets down to $4-$5M they will dramatically reduce expenses and move into maintenance mode just like they did last time. Even if maintenance costs $1M now instead of $200-$300k last time around, then they will have 4-5 years cash. When they get down to the last couple of million then they can fire everyone and pair back their claims to bring expenses down to the 0.5M level which stretches out their life even more.

    It is ridiculous to think that STM is going to keep spending $800,000 a month until all their cash runs out. They have been through exactly this experience before and they have a track record of putting the company on hold while they wait for things to improve.

    Similarities to last time
    Differences to last timeBottom Line


    April 2003   May 2003   June 2003   July 2003   August 2003   September 2003   November 2003   January 2004   February 2004   March 2004   April 2004   May 2004   June 2004   July 2004   September 2004   October 2004   February 2005   March 2005   April 2005   May 2005   June 2005   July 2005   August 2005   September 2005   December 2005   April 2006   May 2006   June 2006   January 2007   December 2007   February 2008   April 2008   May 2008   June 2008   July 2008   August 2008   September 2008   October 2008   November 2008   December 2008   January 2009   April 2009   May 2009   July 2009   August 2009   September 2009   October 2009   January 2010   February 2010   April 2010   July 2010   August 2010   October 2010   November 2010   January 2011   February 2011   April 2011   June 2011  

    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
    To reduce Spam click here for my email address.

    This page is powered by Blogger. Isn't yours?