Even when a business is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for O3 Mining (CVE:OIII) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.

How Long Is O3 Mining’s Cash Runway?

A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When O3 Mining last reported its balance sheet in March 2019, it had zero debt and cash worth CA$11m. Importantly, its cash burn was CA$11m over the trailing twelve months. So it had a cash runway of approximately 12 months from March 2019. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. Depicted below, you can see how its cash holdings have changed over time.

How Is O3 Mining’s Cash Burn Changing Over Time?

O3 Mining didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With cash burn dropping by 12% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Admittedly, we’re a bit cautious of O3 Mining due to its lack of significant operating revenues.

How Easily Can O3 Mining Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for O3 Mining to raise more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.

O3 Mining has a market capitalisation of CA$106m and burnt through CA$11m last year, which is 10% of the company’s market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is O3 Mining’s Cash Burn Situation?

The good news is that in our view O3 Mining’s cash burn situation gives shareholders real reason for optimism. Not only was its cash burn reduction quite good, but its cash burn relative to its market cap was a real positive. We don’t think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Notably, our data indicates that O3 Mining insiders have been trading the shares.