U.S. Markets open in 7 hrs 20 mins

Dilution Ahead For Adamera Minerals Corp. (CVE:ADZ) Shareholders?

Simply Wall St

Trailing twelve-month data shows us that Adamera Minerals Corp.'s (CVE:ADZ) earnings loss has accumulated to -CA$651.5k. Although some investors expected this, their belief in the path to profitability for Adamera Minerals may be wavering. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that Adamera Minerals is spending more money than it earns, it will need to fund its expenses via external sources of capital. Adamera Minerals may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.

View our latest analysis for Adamera Minerals

What is cash burn?

Adamera Minerals currently has CA$84k in the bank, with negative free cash flow of -CA$983.9k. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Furthermore, it is not uncommon to find loss-makers in an industry such as metals and mining. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.

TSXV:ADZ Income Statement, September 19th 2019

When will Adamera Minerals need to raise more cash?

One way to measure the cost to Adamera Minerals of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).

In Adamera Minerals’s case, its cash outflows fell by 18% last year, which may signal the company moving towards a more sustainable level of expenses. However, the current level of cash is not enough to sustain Adamera Minerals’s operations and the company may need to raise more capital within the year. Even though this is analysis is fairly basic, and Adamera Minerals still can cut its overhead further, or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Adamera Minerals operation is, and when things may have to change.

Next Steps:

The risks involved in investing in loss-making Adamera Minerals means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The outcome of my analysis suggests that even if the company maintains this rate of cash burn growth, it will run out of cash within the year. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. Keep in mind I haven't considered other factors such as how ADZ is expected to perform in the future. You should continue to research Adamera Minerals to get a better picture of the company by looking at:

  1. Historical Performance: What has ADZ's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Adamera Minerals’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.