Case Study: Bling or No Bling, Evaluating a Prospective Investment (No need to write a 2 page paper just include some key points to mention and general idea)
You already have a significant investment portfolio, funded in large part by proceeds of stock options received as compensation for your internship at Apple. You have recently received some additional funds and are now wondering how to invest them.
After doing some research, you decided that a good dividend-paying stock is the perfect investment for your new funds. Evaluating your options, you discovered an interesting company by the name of Bling Gold Mines. The companys stock is publicly traded under the ticker symbol: BLMS. You are particularly interested in this company given its stable history and attractive dividend. Last year BLMS paid a dividend of $3.90 per share, which at the stocks current price of $22 would give you an annual return of almost 18%. This return is over three times what you can obtain from most major gold mining stocks. In todays financial climate, a return of almost 18% is one which youd be very happy with.
Completing a Financial Accounting class has given you the skills to evaluate financial statements. Therefore, you download BLMSs latest annual report dated December 31, 2018 to evaluate it in order to make a decision on your possible investment. Relevant parts of this report are included below.
After a considerable time pouring through BLMSs annual report, you decide
Instructions:Evaluate the excerpts from BLMSs annual report (shown below) and in two pages or less state whether as a result of your evaluation you invest your funds in BLMSs shares or not and why. Be decisive! Start by stating whether you would invest in BLMS following with the reason(s) that prompt your decision. HINT: This is not an extremely subjective case or one that easily lends itself to multiple interpretations. There is one fact that is of the utmost relevance and which should drive your decision. Find it!
Note:The example used in the case is completely fictitious. Any resemblance of the data used in the case (financial amounts, names, ticker symbol, etc.) to any real company is mere coincidence. Should you find such a resemblance, please do not answer the case based on the resemblance as the case is not based on any real company or situation.
Bling Gold Mines, Inc.
Excerpts from 2018 Annual Report and Financial Statements Notes
(All dollar amounts in thousands of dollars, except per gold ounce and per share amounts)
We are a U.S.-based gold producer focused on mining our only property, the Bling gold mine, in the state of Nevada. We commenced operations on January 1, 2008.
Our operating mine, the Bling gold mine is an open-pit gold heap leach operation located in the state of Nevada. We started operations in 2008, shortly after incorporating and purchasing the Bling gold mine, which at the time had proven and probable reserves of approximately 1,000,000 ounces of gold.
Accounts receivable are shown net of reserves for uncollectible accounts of $705 for 2018 and $504 for 2017.
Inventory is calculated using the first-in-first out (FIFO) method.
The companys lenders have established covenants requiring the company to hold in an escrow account a level of cash determined by a complex formula. The company has constantly been in compliance with such covenants and shows the amount in escrow as Restricted cash on its balance sheet.
Mineral properties are depleted using the Units of Production method at a rate of $300 per gold ounce extracted.
Plant and equipment are depreciated using the straight line method.
Plant and equipment shown net of accumulated depreciation of $48,372 for 2018 and $41,778 for 2017.
Mineral properties shown net of accumulated depletion of $253,479 for 2018 and $221,836 for 2017.
The companys financial statements and system of internal controls were audited and given a favorable opinion by a leading CPA firm.
Bling Gold Mines, Inc CONSOLIDATED STATEMENTS OF CASH FLOWS (US dollars in thousands) Years Ended December 31, 2018 2017 Cash flows from operating activities: Net income Adjustments to reconcile net income for the period to 43,977 33,229 net cash (used in) provided by operating activities Depreciation and depletion Other non-cash items 38,624 (13,544 37,867 (17,374) Changes in operating assets and liabilities: Accounts receivable Inventories Prepaids and other Accounts payable Interest payable Other liabilities (6,206) (1,594)(1,479) (164) 489 14 89 (6,675) (180) 521 14 92 Net cash (used in) provided by operating activities 61,235 46,465 Cash flows from investing activities: Additions to plant and equipment Proceeds from disposal of plant and equipment Additions to mineral properties Increases in restricted cash Proceeds from other investing activities 861 148 980 140 (48) 31 (44) 31 Net cash used in investing activities 992 Cash flows from financing activities Repurchase of common stock Repayment of debt Issuance of debt Dividends paid 1,480) (76,027) 56,067 (1,374) (15,238) (39,000)(29,000 Net cash provided by financing activities (60,440) (45,612) Net increase (decrease) in cash and cash Cash and cash equivalents, beginning of year 1,787 16,145O 16,145 Cash and cash equivalents, end of year 17,932 16,145 Bling Gold Mines, Inc. CONSOLIDATED STATEMENTS OF INCOME (US dollars in thousands, except per share amounts) Years ended December 31 2017 2016 2018 152,573 134,255 124,379 Revenue Operating expenses: 16,215 38,62437.867 17,512 15,014 37,125 Production costs Depreciation and depletion 56,136 54,082 52,139 Total cost of sales 4,195 17,472 4,034 17,299 4,363 17,647 Exploration, development, and land holding Corporate general and administrative 74,427 50.907 58,506 Income from operations Other income (expense): 571 6,102 613 269 756 4,545 549 292 648 5,737 671 178 Interest income Interest expense Foreign exchange gain, net Other income, net 70,93053,59545, Income before income taxes 45,645 28951(20361 (75 43,977228 300 (17,345) 28,300 25,000 (26,953 Income tax (expense) benefit 33,229 Net income Dividends paid Addition to retained earnings 39,000 4,977 29,000 4229 3,300 Income per share: 4.40 4.20 IC 3.32 3.15 2.83 2.75 Diluted Bling Gold Mines, Inc. CONSOLIDATED BALANCE SHEETS (US dollars in thousands, except share amounts) As Of December 31, 2018 2017 Assets: 17,932 23,522 15,814 16,145 16,847 14,220 984 Cash and cash equivalents Accounts receivable, net Inventories Prepaids and other 164 58,432 48, 1 11,762 31,244 Current assets Restricted cash Other assets, non-current Plant and equipment, net Mineral properties, net 11,810 3,069 24,153 61,521 2,962 92,341 186,505 158,985 Total assets Liabilities: Accounts payable Interest payable Other liabilities, current Debt, current Deferred tax liabilities, current 5,011 4,490 978 901 2,023 989 9,381 993 1,999 1,006 10,001 Current liabilities Other liabilities, non-current Debt, non-current Deferred tax liabilities, non-current 37 54,068 1,026 11,788 74,004 976 Total liabilities 65, 132 96,149 Shareholders' Equity: Common stock, $0.001 par Shares issued and outstanding: 2012-10,000,000 and 2011 -10,000,000 Additional paid-in-capital Treasury stock Retained earnings 10 10 70,631 (2,490) 25,702 70,631 (1,010) 20,725 Total shareholders' equit 93,853 90,356 Total liabilities and shareholders' equity 158,985 186,505 Bling Gold Mines, Inc CONSOLIDATED STATEMENTS OF CASH FLOWS (US dollars in thousands) Years Ended December 31, 2018 2017 Cash flows from operating activities: Net income Adjustments to reconcile net income for the period to 43,977 33,229 net cash (used in) provided by operating activities Depreciation and depletion Other non-cash items 38,624 (13,544 37,867 (17,374) Changes in operating assets and liabilities: Accounts receivable Inventories Prepaids and other Accounts payable Interest payable Other liabilities (6,206) (1,594)(1,479) (164) 489 14 89 (6,675) (180) 521 14 92 Net cash (used in) provided by operating activities 61,235 46,465 Cash flows from investing activities: Additions to plant and equipment Proceeds from disposal of plant and equipment Additions to mineral properties Increases in restricted cash Proceeds from other investing activities 861 148 980 140 (48) 31 (44) 31 Net cash used in investing activities 992 Cash flows from financing activities Repurchase of common stock Repayment of debt Issuance of debt Dividends paid 1,480) (76,027) 56,067 (1,374) (15,238) (39,000)(29,000 Net cash provided by financing activities (60,440) (45,612) Net increase (decrease) in cash and cash Cash and cash equivalents, beginning of year 1,787 16,145O 16,145 Cash and cash equivalents, end of year 17,932 16,145 Bling Gold Mines, Inc. CONSOLIDATED STATEMENTS OF INCOME (US dollars in thousands, except per share amounts) Years ended December 31 2017 2016 2018 152,573 134,255 124,379 Revenue Operating expenses: 16,215 38,62437.867 17,512 15,014 37,125 Production costs Depreciation and depletion 56,136 54,082 52,139 Total cost of sales 4,195 17,472 4,034 17,299 4,363 17,647 Exploration, development, and land holding Corporate general and administrative 74,427 50.907 58,506 Income from operations Other income (expense): 571 6,102 613 269 756 4,545 549 292 648 5,737 671 178 Interest income Interest expense Foreign exchange gain, net Other income, net 70,93053,59545, Income before income taxes 45,645 28951(20361 (75 43,977228 300 (17,345) 28,300 25,000 (26,953 Income tax (expense) benefit 33,229 Net income Dividends paid Addition to retained earnings 39,000 4,977 29,000 4229 3,300 Income per share: 4.40 4.20 IC 3.32 3.15 2.83 2.75 Diluted Bling Gold Mines, Inc. CONSOLIDATED BALANCE SHEETS (US dollars in thousands, except share amounts) As Of December 31, 2018 2017 Assets: 17,932 23,522 15,814 16,145 16,847 14,220 984 Cash and cash equivalents Accounts receivable, net Inventories Prepaids and other 164 58,432 48, 1 11,762 31,244 Current assets Restricted cash Other assets, non-current Plant and equipment, net Mineral properties, net 11,810 3,069 24,153 61,521 2,962 92,341 186,505 158,985 Total assets Liabilities: Accounts payable Interest payable Other liabilities, current Debt, current Deferred tax liabilities, current 5,011 4,490 978 901 2,023 989 9,381 993 1,999 1,006 10,001 Current liabilities Other liabilities, non-current Debt, non-current Deferred tax liabilities, non-current 37 54,068 1,026 11,788 74,004 976 Total liabilities 65, 132 96,149 Shareholders' Equity: Common stock, $0.001 par Shares issued and outstanding: 2012-10,000,000 and 2011 -10,000,000 Additional paid-in-capital Treasury stock Retained earnings 10 10 70,631 (2,490) 25,702 70,631 (1,010) 20,725 Total shareholders' equit 93,853 90,356 Total liabilities and shareholders' equity 158,985 186,505
