EDITORIAL Buying back shares adds liquidity

Cash is king, they say, and the truth of that homily is reaffirmed each time the stock market slumps. Those that have cash can ride out the rough times, pick up bargains and generally look after the best interests of shareholders. Those without have few options and struggle just to pay the rent. So when times get tough, shrewd investors are quick to look at a company’s working capital as well as at management and properties. Mineral exploration companies more than any other sector rely on equity financing to stay in business, and those without cash suffer when shares are out of favor.

We believe that, in general, the best place for exploration companies to spend their money is in the ground: prospecting, sampling and drilling. But there are times when that money can be put to better use.

One means is through what are called normal course issuer bids; that is, when a company buys its own shares on the open market. These days, with markets so badly depressed and investor interest at a low point, such bids may be in the best interest of shareholders.

These normal course issuer bids allow a company to enhance asset value as well as improve a stock’s liquidity.

Take for example a company with $2.5 million in the kitty and five million shares outstanding. There are not multitudes of such companies, but they are not uncommon in today’s atmosphere of undervalued stocks. Without considering any other assets, each share is worth 50 cents of that working capital. If the shares trade at less than 50 cents — and in this market it would not be unheard of for such a company to see its shares trading at about half of that — the company would do well to buy back its own shares. In effect, the company would be buying cash at a discount, obviously a good deal for shareholders.

If one considers, however, that a great many of these companies have other assets in the form of exploration properties, option agreements or even simply an astute management team, the purchase becomes even more attractive. Well-managed junior companies such as these rarely take on much debt to offset working capital simply because there is no cash flow to service it. Given a company in such a financial situation, it seems prudent to go against the conventional wisdom of today’s market and buy, not sell.

The spinoff benefit of normal course issuer bids — increased liquidity — can perhaps be even more important to the junior mining sector. Juniors need an active market to thrive because a more active market enhances investor confidence. An investor is less hesitant to buy if he is confident he can sell.

Enhancing shareholder value, improving the integrity of a market, enhancing investor confidence. For those reasons, and given the regulatory controls in place to protect shareholders from their abuse, we strongly endorse the idea of normal course issuer bids. They are not the cure-all for a sick market and in many cases they may not be the best medicine, but they can be an effective way of using corporate funds.