Dolly Varden Silver - Dilution of shares - Cash burn rate
In today’s video we perform a deep-dive into Dolly Varden Silver Corp (TSX-V: DV) (OTC: DOLLF).
Dolly Varden is an exploration company focused primarily on finding Silver resources in the Golden Triangle of British Columbia.
We start our report by stating that DV has reached a market capitalization of $310 (CAD) million which is the threshold where we like to see a company moving decisively towards production.
In other words, $300 million is where an exploration company is fully valued in our opinion. Unless the explorer is decisively moving towards production or a buyout, it is time to evaluate whether remaining invested makes sense.
Because Dolly Varden hasn’t announced any plans to go into production and it isn’t obvious that a near-term buyout is likely, we wanted to perform this deep dive and look at the company’s financial picture.
In particular, we had two questions that we wanted to answer:
- How many shares of Dolly Varden are being issued into the market? (dilution rate)
- What is the annual burn rate of cash that the company is experiencing? Because DOLLF has zero revenue at this point, the cash burn can only be paid for by selling shares (i.e., this question is closely related to the first question).
As part of determining the burn rate for cash, we took a close look at the compensation of the CEO, CFO, and Technical advisor. Performing this part of our analysis required unravelling several footnotes in the itemized expenses provided in the Management’s Discussion and Analysis reports.
Highlights from a February 14, 2024 recorded interview with the CEO
- Dolly Varden continues to be a tightly-held company with only 25 million shares available in the public float
- The company is debt free and has significant cash on hand ($9.5 million CAD at the time of the interview - $40 million CAD as of September 4, 2024)
- Having cash on hand is unique for a junior mining company at this time because financing is hard to come by
- Climate changes are causing glaciers to recede in the Golden Triangle so the potential for discovering new resources is increasing
- Because of the high-grade resources that Dolly Varden has proven through its drill programs, the company that eventually puts these resources into production will have the potential to be a low-cost producer (notice that this is a hint that the CEO, Shawn Khunkhun, does not intend to take Dolly Varden into production)
- Instead of grams per ton resources, Dolly Varden resources are measured in kilograms per ton
- When the CEO purchased the company 4 years ago it was value at $0.37 per ounce of Silver in the ground
- The current value of DV’s resources is $1.00 per ounce in the ground
- At the height of the Precious metal Bull Market in 2010, Silver companies were being valued at $3.50 per ounce in the ground
- Because of inflation, Mr. Khunkhun believes that resources will be valued at a price higher than $3.50 per ounce during the next Bull Market
- The current resources (Indicated and Inferred) are being reported based on a cutoff grade of 150 grams per ton
- The cutoff grade could be dropped to 75 grams per ton in a market environment where the Silver to Gold ratio dropped from its current value of 90 to the level reached in 2010 (approximately 30)
- At a cutoff grade of 75 grams per ton Dolly Varden’s “ounce count goes through the roof”
Research performed at Sedar.com
The legally required filings from publicly-held Canadian mining companies can be found online at the SEDAR website. These documents provide public disclosure which allows investors to dig into the details of how a company is being operated.
The primary documents of interest are the audited Annual Financial Statements and the Management’s Discussion and Analysis reports.
Comparable documents for US companies can be found at the EDGAR website published by the U.S. Securities and Exchange Commission (SEC).
When you are serious about performing due diligence on a company, it is necessary to use these legal filings. Relying on the company to provide this information is not a viable strategy.
Most mining companies prepare and publish investor presentations on their websites but these slide decks are not regulated by any external agency, so they are used to portray the company in the best light possible. To use a crude analogy, the investor presentations often show a pig dressed in fancy clothing and wearing lipstick, while the legal filings require that the pig be presented naked and without makeup.
Because companies are unable to use lipstick in their legal filings, they sometimes do their best to hide and obfuscate potentially damning information in footnotes.
If you choose to dig into these documents, it is necessary to pay close attention to the footnotes in order to get the full scope of the information being presented. A cursory examination that skips over the footnotes is likely to miss significant information.
Doing this analysis is not much fun. It is tedious and time-consuming work. Also, if you are cynical by nature, you may develop a negative impression of a company simply because they made it difficult to analyze their information.
Dolly Varden Silver Stock
Dilution of shares
By digging into multiple years of SEDAR documents we were able to assemble this table showing how outstanding shares of Dolly Varden Silver have grown since the company went public:
|
Year |
Shares Outstanding |
% Increase |
|---|---|---|
|
2018 |
49,901,528 |
n/a |
|
2019 |
68,056,458 |
36.4 |
|
2020 |
102,790,518 |
51.0 |
|
2021 |
130,720,286 |
27.2 |
|
2022 |
214,979,429 |
64.5 |
|
2023 |
257,129,652 |
19.6 |
In the video we explain that this type of share growth is not uncommon with the mining companies. This is true with exploration companies in particular because they have no revenue. The only way they can raise money is by selling additional shares of the company.
Dilution of shares can sometimes explain why the price of an exploration company’s stock remains unchanged or even declines as the company increases their Identified and Inferred resources. While they are finding more ounces in the ground they are also diluting the value of each stock share by issuing additional shares.
In the video we use two different methods to estimate how many shares of Dolly Varden stock will potentially be outstanding by the end of 2024.
Cash burn rate
By digging into several years of the Management’s Discussion and Analysis reports filed on Sedar, we assembled this table showing the rate at which Dolly Varden Silver is burning through cash:
|
Time period |
Burn rate (CAD millions) |
|---|---|
|
Q2, 2024 => Q3, 2023 |
$27.075 |
|
Q1, 2024 => Q2, 2023 |
$26.462 |
|
Q4, 2023 => Q1, 2023 |
$26.648 |
|
Q3, 2023 => Q4, 2022 |
$25.272 |
|
Q2, 2023 => Q3, 2023 |
$21.617 |
|
Q1, 2023 => Q2, 2022 |
$19.245 |
Knowing this burn rate, and the growth of the burn rate, is important because it provides insight into the level of share dilution we can expect going forward.
Because an exploration company like Dolly Varden has no choice other than to fund its operating costs by issuing stock shares, the cash burn rate shows us what the dilution rate is likely to be in the future.
As we can see in the table above, DOLLF is burning through $27 million CAD per year. At a share price of $1.02 CAD (as of 09/10/2024), this burn rate means that Dolly Varden Silver will have to issue at least 27 million shares of stock each year just to cover operating costs.
In the video we explain that the growth in burn rate can be explained by two factors:
- Inflation
- Steadily increasing levels of compensation to the company’s officers and directors
Compensation levels
In the video we walk through the process of deciphering footnotes to determine the compensation levels of the CEO, CFO, and Technical Director.
We also show how the footnotes demonstrate that these company principles each have personally-owned businesses that are receiving compensation. In other words, each of them receive direct compensation as individuals and they receive further compensation through businesses that they control.
Of most interest is Mr. Khunkhun’s total compensation in 2022, 2023, and the first quarter of 2024. Watch the video to see how a mix of cash and Dolly Varden shares increased from 2022 to 2023 and put the CEO on track for a potential compensation package of $1.6 million CAD in 2024.
Wrapup
In the conclusion of the video, we return to Dolly Varden Silver’s investor presentation and point out that there are major investors who choose to invest in DV. We suggest that these investors have done their own due diligence on the company and choose to remain invested.
Every investor must make their own decisions about putting their hard-earned money into Dolly Varden Silver (or any other mining company) and whether to remain invested after doing so. Hopefully, the deep-dive we have performed here will provide valuable information that investors can use in making these decisions.
Disclaimer: We hold shares in the company and are currently re-evaluating our investment. We may choose to sell our shares at any point, and we have no obligation to notify anyone before doing so.
https://satoritraders.com/blog/dolly-varden-silver-dilution-of-shares-cash-burn-rate/
