Is PolyMet Mining (TSE:POM) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that PolyMet Mining Corp. (TSE:POM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for PolyMet Mining

What Is PolyMet Mining's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 PolyMet Mining had US$71.7m of debt, an increase on US$42.8m, over one year. However, it also had US$7.68m in cash, and so its net debt is US$64.0m.

How Strong Is PolyMet Mining's Balance Sheet?

We can see from the most recent balance sheet that PolyMet Mining had liabilities of US$77.1m falling due within a year, and liabilities of US$56.2m due beyond that. Offsetting these obligations, it had cash of US$7.68m as well as receivables valued at US$679.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$124.9m.

PolyMet Mining has a market capitalization of US$334.9m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since PolyMet Mining will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, investors are probably hoping that PolyMet Mining finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months PolyMet Mining produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$12m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$20m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for PolyMet Mining you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.